0000092122 so:SouthernPowerMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:ForeignExchangeContractMember 2020-03-31
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, 20192020
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. | |
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| 1-3526 | | The Southern Company (A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia 30308
(404) 506-5000
| | 58-0690070 | |
(A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia30308
(404) 506-5000
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| 1-3164 | | Alabama Power Company (An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35203
(205) 257-1000
| | 63-0004250 | |
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama35203
(205) 257-1000
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| 1-6468 | | Georgia Power Company (A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
| | 58-0257110 | |
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia30308
(404) 506-6526
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| 001-11229 | | Mississippi Power Company (A Mississippi Corporation)
2992 West Beach Boulevard
Gulfport, Mississippi 39501
(228) 864-1211
| | 64-0205820 | |
(A Mississippi Corporation)
2992 West Beach Boulevard
Gulfport, Mississippi39501
(228) 864-1211
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| 001-37803 | | Southern Power Company (A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia 30308
(404) 506-5000
| | 58-2598670 | |
(A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia30308
(404) 506-5000
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| 1-14174 | | Southern Company Gas
(A Georgia Corporation)
Ten Peachtree Place, N.E. Atlanta, Georgia 30309
(404) 584-4000
| | 58-2210952 | |
(A Georgia Corporation)
Ten Peachtree Place, N.E.
Atlanta, Georgia30309
(404) 584-4000
Securities registered pursuant to Section 12(b) of the Act:
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| Registrant | Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| The Southern Company | Common Stock, par value $5 per share | SO | New York Stock Exchange |
| (NYSE) |
| The Southern Company | Series 2015A 6.25% Junior Subordinated Notes due 2075 | SOJA | NYSE |
| The Southern Company | Series 2016A 5.25% Junior Subordinated Notes due 2076 | SOJB | NYSE |
| The Southern Company | Series 2017B 5.25% Junior Subordinated Notes due 2077 | SOJC | NYSE |
| The Southern Company | 2019 Series A Corporate Units | SOLN | NYSE |
| The Southern Company | Series 2020A 4.95% Junior Subordinated Notes due 2080 | SOJD | NYSE |
| Alabama Power Company | 5.00% Series Class A Preferred Stock | ALP PR Q | NYSE |
| Georgia Power Company | Series 2017A 5.00% Junior Subordinated Notes due 2077 | GPJA | NYSE |
| Southern Power Company | Series 2016A 1.000% Senior Notes due 2022 | SO/22B | NYSE |
| Southern Power Company | Series 2016B 1.850% Senior Notes due 2026 | SO/26A | NYSE |
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. Yesþ No ¨
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted 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 such files). Yesþ 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.
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| Registrant | | Large Accelerated Filer | | Accelerated Filer | | Non-
accelerated
Non-accelerated Filer | | Smaller Reporting Company | | Emerging Growth Company |
| The Southern Company | | X | | | | | | | | |
| Alabama Power Company | | | | | | X | | | | |
| Georgia 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, 20192020 |
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| The Southern Company | | Par Value $5 Per Share | 1,055,955,711 | 1,040,295,732 |
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| Alabama Power Company | | Par Value $40 Per Share | | 30,537,500 |
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| Georgia Power Company | | Without Par Value | | 9,261,500 |
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| Mississippi Power Company | | Without Par Value | | 1,121,000 |
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| Southern Power Company | | Par Value $0.01 Per Share | | 1,000 |
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| Southern Company Gas | | Par Value $0.01 Per Share | | 100 |
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This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia 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, 2019
TABLE OF CONTENTS
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| | PART I—FINANCIAL INFORMATION | |
Item 1. | Financial Statements (Unaudited) | |
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2019
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| PART I—FINANCIAL INFORMATION (CONTINUED) | |
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| Item 3. | | |
| Item 4. | | |
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| | PART II—OTHER INFORMATION | |
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| 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 | AlternativeAlternate Rate Plan approved by the Georgia PSC in 2013 for Georgia Power for the years 2014 through 2016 and subsequently extended through 2019 |
| 2019 ARP | Alternate Rate Plan approved by the Georgia PSC in 2019 for Georgia Power for the years 2020 through 2022 |
| 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 onin 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 hasheld a 5% ownership interest through March 24, 2020 |
| Autauga Combined Cycle Acquisition | The purchase and sale agreement entered into in September 2019 by Alabama Power to acquire all of the equity interest in Tenaska Alabama Partners, L.P., the owner and operator of an approximately 885-MW combined cycle generation facility in Autauga County, Alabama |
| 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 |
| CCR Rule | Disposal of Coal Combustion Residuals from Electric Utilities final rule published by the EPA in 2015 |
| 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 |
Cooperative EnergyCOVID-19 | Electric cooperative in Mississippi |
Customer Refunds | Refunds issued to Georgia Power customers in 2018 as orderedThe novel coronavirus disease declared a pandemic by the Georgia PSC related toWorld Health Organization and the Guarantee Settlement AgreementCenters for Disease Control and Prevention in March 2020 |
| 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 |
| 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 |
| FFB Credit Facilities | Note purchase agreements among the DOE, Georgia Power, and the FFB and related promissory notes which provide for two multi-advance term loan facilities |
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| Term | Meaning |
| Fitch | Fitch Ratings, Inc. |
| Form 10-K | Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas for the year ended December 31, 2018,2019, as applicable |
| GAAP | U.S. generally accepted accounting principles |
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Term | Meaning |
| Georgia Power | Georgia Power Company |
GHGGeorgia Power 2019 IRP | Greenhouse gasGeorgia Power's modified triennial integrated resource plan approved by the Georgia PSC in July 2019 |
| 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 |
| Gulf Power | Gulf Power Company, until January 1, 2019 a wholly-owned subsidiary of Southern Company |
| Heating Degree Days | A measure of weather, calculated when the average daily temperatures are less than 65 degrees Fahrenheit |
| Heating Season | The period from November through March when Southern Company Gas' 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 Contract |
Illinois Commission | Illinois Commerce Commission |
| ITAAC | Inspections, Tests, Analyses, and Acceptance Criteria, standards established by the NRC |
| ITC | Investment tax credit |
| JEA | Jacksonville Electric Authority |
| KWH | Kilowatt-hour |
| LIBOR | London Interbank Offered Rate |
| LIFO | Last-in, first-out |
| LOCOM | Lower of weighted average cost or current market price |
| LTSA | Long-term service agreement |
| Marketers | Marketers selling retail natural gas in Georgia and certificated by the Georgia PSC |
| MEAG Power | 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' natural gas distribution utilities (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, Elizabethtown Gas, Florida City Gas, Chattanooga Gas, and Elkton Gas as of June 30, 2018) (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, and Chattanooga Gas as of July 29, 2018)Gas) |
| NCCR | Georgia Power's Nuclear Construction Cost Recovery |
| NDR | Alabama Power's Natural Disaster Reserve |
| NextEra Energy | NextEra 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 HoldingsLNG | Pivotal Utility Holdings,LNG, Inc., until July 29, 2018through March 24, 2020 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, a wholly-owned subsidiary 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 obligationsCompany |
| 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, |
| consisting of Rate CNP New Plant, Rate CNP Compliance, | Alabama Power's Rate Certificated New Plant Compliance |
| and 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 |
registrantsRegistrants | Southern Company, Alabama Power, Georgia 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, the Southern Company system service company)company and a wholly-owned subsidiary of Southern Company |
| SEC | U.S. Securities and Exchange Commission |
| SNG | Southern Natural Gas Company, L.L.C., a pipeline system in which Southern Company Gas has a 50% ownership interest |
| 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 Dispositionspower pool | The operating arrangement whereby the integrated generating resources of the traditional electric operating companies and Southern Company Gas' disposition of Pivotal Home Solutions, Pivotal Utility Holdings' disposition of Elizabethtown GasPower (excluding subsidiaries) are subject to joint commitment and Elkton Gas, and NUI Corporation's disposition of Pivotal Utility Holdings, which primarily consisted of Florida City Gasdispatch in order to serve their combined load obligations |
| 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., a wholly-owned subsidiary of Southern Company |
| Southern Power | Southern Power Company and its subsidiaries |
| SP Solar | SP Solar Holdings I, LP, a limited partnership indirectly owning substantially all of Southern Power's solar facilities, in which Southern Power has a 67% ownership interest |
| SP Wind | SP Wind Holdings II, LLC, a holding company owning a portfolio of eight operating wind facilities, in which Southern Power is the controlling partner in a tax equity arrangement |
| Subsidiary Registrants | Alabama Power, Georgia Power, Mississippi Power, Southern Power, and Southern Company Gas |
Tax Reform Legislation | The impact of the Tax Cuts and Jobs Act, which became effective on January 1, 2018 |
| Toshiba | Toshiba Corporation, the parent company of Westinghouse |
| 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, an investment of Southern Company Gas through May 29, 2019 |
| VCM | Vogtle Construction Monitoring |
| VIE | Variable interest entity |
| Virginia Commission | Virginia State Corporation Commission |
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Term | Meaning |
| Virginia Natural Gas | Virginia Natural Gas, Inc., a wholly-owned subsidiary of Southern Company Gas |
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| Term | Meaning |
| 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, MEAG Power, and Dalton |
| Vogtle Services Agreement | The June 9, 2017 services agreement between the Vogtle Owners and the EPC Contractor, as amended and restated onin 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 |
| Xcel | Xcel Energy Inc. |
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)This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, the potential and expected effects of the COVID-19 pandemic, 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 and costs of construction projects, matters related to the abandonment of the Kemper IGCC, completion of announced acquisitions, 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, environmental, 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 potential effects of the continued COVID-19 pandemic, including, but not limited to, those described in Item 1A "Risk Factors" herein;
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 successfully operate the electric utilities' generating, transmission,complete necessary or desirable pipeline expansion or infrastructure projects, limits on pipeline capacity, and distribution facilities and Southern Company Gas'operational interruptions to natural gas distribution and storagetransmission 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 or other projects, including Plant Vogtle Units 3 and 4, which includes components based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale, and including changes in labor costs, availability, and productivity; challenges with management of contractors or vendors; subcontractor performance; adverse weather conditions; shortages, delays, increased costs, or inconsistent quality of equipment, materials, and labor; contractor or supplier delay; delays due to judicial or regulatory action; nonperformance 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, for nuclear units, the timely submittal by Southern Nuclear of the ITAAC documentation for each unit and the successful performance ofrelated reviews and approvals by the NRC necessary corporate functions;to support NRC authorization to load fuel; challenges with start-up activities, including major equipment failure, system integration, or regional transmission upgrades; and/or operational performance;
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| • | the ability to overcome or mitigate the current challenges at Plant Vogtle Units 3 and 4, including, but not limited to, those related to COVID-19, as described in Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" in Item 1 herein, that could impact the cost and schedule for the project; |
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 specified circumstances, a decision by holders of more than 10% of the ownership interests of Plant Vogtle Units 3 and 4 not to proceed with construction and the ability of other Vogtle Owners to tender a portion of their ownership interests to Georgia Power following certain construction cost increases;
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)
in the event Georgia Power becomes obligated to provide funding to MEAG Power with respect to the portion of MEAG'sMEAG Power's ownership interest in Plant Vogtle Units 3 and 4 involving JEA, any inability of Georgia Power to receive repayment of such funding;
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;
performance of counterparties under 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, additional generating capacity, and 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;
the inherent risks involved in operating and constructing nuclear generating 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 dispositions of Plant Mankato and the Nacogdoches biomass-fueled facility, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
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;
changes in the method of determining LIBOR or the replacement of LIBOR with an alternative reference rate;
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, 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 registrantsRegistrants from time to time with the SEC.
The registrantsRegistrants expressly disclaim any obligation to update any forward-looking statements.
PART I
Item 1. Financial Statements (Unaudited).
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, |
| | 2019 | | 2018 | 2020 | | 2019 |
| | (in millions) | (in millions) |
| Operating Revenues: | | | | | | |
| Retail electric revenues | $ | 3,084 |
| | $ | 3,568 |
| $ | 3,078 |
| | $ | 3,084 |
|
| Wholesale electric revenues | 499 |
| | 623 |
| 418 |
| | 499 |
|
| Other electric revenues | 168 |
| | 161 |
| 151 |
| | 168 |
|
Natural gas revenues (includes alternative revenue programs of
$(2) and $(24), respectively) | 1,474 |
| | 1,607 |
| |
Natural gas revenues (includes alternative revenue programs of
$9 and $(2), respectively) | | 1,249 |
| | 1,474 |
|
| Other revenues | 187 |
| | 413 |
| 122 |
| | 187 |
|
| Total operating revenues | 5,412 |
| | 6,372 |
| 5,018 |
| | 5,412 |
|
| Operating Expenses: | | | | | | |
| Fuel | 850 |
| | 1,101 |
| 636 |
| | 850 |
|
| Purchased power | 170 |
| | 267 |
| 181 |
| | 170 |
|
| Cost of natural gas | 686 |
| | 720 |
| 439 |
| | 686 |
|
| Cost of other sales | 118 |
| | 289 |
| 55 |
| | 118 |
|
| Other operations and maintenance | 1,312 |
| | 1,451 |
| 1,296 |
| | 1,314 |
|
| Depreciation and amortization | 751 |
| | 769 |
| 857 |
| | 751 |
|
| Taxes other than income taxes | 329 |
| | 355 |
| 330 |
| | 329 |
|
| Estimated loss on plants under construction | 2 |
| | 44 |
| |
| Gain on dispositions, net | (2,497 | ) | | — |
| |
| (Gain) loss on dispositions, net | | (39 | ) | | (2,497 | ) |
| Total operating expenses | 1,721 |
| | 4,996 |
| 3,755 |
| | 1,721 |
|
| Operating Income | 3,691 |
| | 1,376 |
| 1,263 |
| | 3,691 |
|
| Other Income and (Expense): | | | | | | |
| Allowance for equity funds used during construction | 32 |
| | 30 |
| 34 |
| | 32 |
|
| Earnings from equity method investments | 48 |
| | 41 |
| 42 |
| | 48 |
|
| Interest expense, net of amounts capitalized | (430 | ) | | (458 | ) | (456 | ) | | (430 | ) |
| Other income (expense), net | 78 |
| | 60 |
| 103 |
| | 78 |
|
| Total other income and (expense) | (272 | ) | | (327 | ) | (277 | ) | | (272 | ) |
| Earnings Before Income Taxes | 3,419 |
| | 1,049 |
| 986 |
| | 3,419 |
|
| Income taxes | 1,360 |
| | 113 |
| 145 |
| | 1,360 |
|
| Consolidated Net Income | 2,059 |
| | 936 |
| 841 |
| | 2,059 |
|
| Dividends on preferred stock of subsidiaries | 4 |
| | 4 |
| 4 |
| | 4 |
|
| Net loss attributable to noncontrolling interests | (29 | ) | | (6 | ) | (31 | ) | | (29 | ) |
Consolidated Net Income Attributable to
Southern Company | $ | 2,084 |
| | $ | 938 |
| $ | 868 |
| | $ | 2,084 |
|
| Common Stock Data: | | | | | | |
| Earnings per share - | | | | | | |
| Basic | $ | 2.01 |
| | $ | 0.93 |
| $ | 0.82 |
| | $ | 2.01 |
|
| Diluted | $ | 1.99 |
| | $ | 0.92 |
| $ | 0.81 |
| | $ | 1.99 |
|
| Average number of shares of common stock outstanding (in millions) | | | | | | |
| Basic | 1,038 |
| | 1,011 |
| 1,057 |
| | 1,038 |
|
| Diluted | 1,045 |
| | 1,016 |
| 1,067 |
| | 1,045 |
|
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, | For the Three Months Ended March 31, |
| | 2019 | | 2018 | 2020 | | 2019 |
| | (in millions) | (in millions) |
| Consolidated Net Income | $ | 2,059 |
| | $ | 936 |
| $ | 841 |
| | $ | 2,059 |
|
| 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 | ) | |
| Changes in fair value, net of tax of $(30) and $(9), respectively | | (86 | ) | | (28 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $13 and $9, respectively | | 38 |
| | 28 |
|
| Pension and other postretirement benefit plans: | | | | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | — |
| | 2 |
| |
Reclassification adjustment for amounts included in net income,
net of tax of $2 and $-, respectively | | 1 |
| | — |
|
| Total other comprehensive income (loss) | — |
| | 30 |
| (47 | ) | | — |
|
| Comprehensive Income | 2,059 |
| | 966 |
| 794 |
| | 2,059 |
|
| Dividends on preferred stock of subsidiaries | 4 |
| | 4 |
| 4 |
| | 4 |
|
| Comprehensive loss attributable to noncontrolling interests | (29 | ) | | (6 | ) | (31 | ) | | (29 | ) |
Consolidated Comprehensive Income Attributable to
Southern Company | $ | 2,084 |
| | $ | 968 |
| $ | 821 |
| | $ | 2,084 |
|
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 FLOWS (UNAUDITED)
| | | | For the Three Months
Ended March 31, | For the Three Months Ended March 31, |
| | 2019 | | 2018 | 2020 | | 2019 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Consolidated net income | $ | 2,059 |
| | $ | 936 |
| $ | 841 |
| | $ | 2,059 |
|
| Adjustments to reconcile consolidated net income to net cash provided from operating activities — | | | | | | |
| Depreciation and amortization, total | 851 |
| | 873 |
| 949 |
| | 851 |
|
| Deferred income taxes | 191 |
| | 34 |
| (58 | ) | | 191 |
|
| Allowance for equity funds used during construction | (32 | ) | | (30 | ) | (34 | ) | | (32 | ) |
| Mark-to-market adjustments | 46 |
| | (60 | ) | |
| Pension, postretirement, and other employee benefits | (53 | ) | | (27 | ) | (67 | ) | | (53 | ) |
| Settlement of asset retirement obligations | (62 | ) | | (41 | ) | (86 | ) | | (62 | ) |
| Stock based compensation expense | 64 |
| | 69 |
| 72 |
| | 64 |
|
| Estimated loss on plants under construction | 6 |
| | 37 |
| |
| Gain on dispositions, net | (2,503 | ) | | 1 |
| |
| (Gain) loss on dispositions, net | | (38 | ) | | (2,503 | ) |
| Other, net | 19 |
| | 73 |
| 111 |
| | 71 |
|
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | 378 |
| | 197 |
| 317 |
| | 378 |
|
| -Prepayments | (129 | ) | | (82 | ) | (110 | ) | | (129 | ) |
| -Natural gas for sale | 363 |
| | 413 |
| 246 |
| | 363 |
|
| -Other current assets | 17 |
| | 7 |
| (67 | ) | | 17 |
|
| -Accounts payable | (783 | ) | | (425 | ) | (504 | ) | | (783 | ) |
| -Accrued taxes | 928 |
| | (79 | ) | (102 | ) | | 928 |
|
| -Accrued compensation | (489 | ) | | (471 | ) | (473 | ) | | (489 | ) |
| -Other current liabilities | (127 | ) | | 84 |
| (103 | ) | | (127 | ) |
| Net cash provided from operating activities | 744 |
| | 1,509 |
| 894 |
| | 744 |
|
| Investing Activities: | | | | | | |
| Business acquisitions, net of cash acquired | (2 | ) | | (46 | ) | |
| Property additions | (1,678 | ) | | (1,781 | ) | (1,560 | ) | | (1,678 | ) |
| Nuclear decommissioning trust fund purchases | (197 | ) | | (306 | ) | (254 | ) | | (197 | ) |
| Nuclear decommissioning trust fund sales | 192 |
| | 301 |
| 249 |
| | 192 |
|
| Proceeds from dispositions | 4,427 |
| | 135 |
| |
| Proceeds from dispositions and asset sales | | 982 |
| | 4,427 |
|
| Cost of removal, net of salvage | (89 | ) | | (79 | ) | (69 | ) | | (89 | ) |
| Change in construction payables, net | (146 | ) | | (112 | ) | (141 | ) | | (146 | ) |
| Investment in unconsolidated subsidiaries | (10 | ) | | (30 | ) | (77 | ) | | (10 | ) |
| Payments pursuant to LTSAs | (28 | ) | | (73 | ) | (26 | ) | | (28 | ) |
| Other investing activities | (15 | ) | | (4 | ) | 7 |
| | (17 | ) |
| Net cash provided from (used for) investing activities | 2,454 |
| | (1,995 | ) | (889 | ) | | 2,454 |
|
| Financing Activities: | | | | | | |
| Increase in notes payable, net | 86 |
| | 782 |
| |
| Increase (decrease) in notes payable, net | | (685 | ) | | 86 |
|
| Proceeds — | | | | | | |
| Long-term debt | 1,220 |
| | 600 |
| 2,653 |
| | 1,220 |
|
| Common stock | 224 |
| | 113 |
| 52 |
| | 224 |
|
| Short-term borrowings | — |
| | 1,200 |
| 565 |
| | — |
|
| Redemptions and repurchases — | | | | | | |
| Long-term debt | (2,429 | ) | | (1,283 | ) | (1,481 | ) | | (2,429 | ) |
| Short-term borrowings | (1,750 | ) | | (150 | ) | (100 | ) | | (1,750 | ) |
| Distributions to noncontrolling interests | (36 | ) | | (13 | ) | (48 | ) | | (36 | ) |
| Capital contributions from noncontrolling interests | 3 |
| | 8 |
| |
| Payment of common stock dividends | (623 | ) | | (586 | ) | (655 | ) | | (623 | ) |
| Other financing activities | (48 | ) | | (42 | ) | (116 | ) | | (45 | ) |
| Net cash provided from (used for) financing activities | (3,353 | ) | | 629 |
| 185 |
| | (3,353 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (155 | ) | | 143 |
| 190 |
| | (155 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 1,519 |
| | 2,147 |
| 1,978 |
| | 1,519 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 1,364 |
| | $ | 2,290 |
| $ | 2,168 |
| | $ | 1,364 |
|
| 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 |
| |
| Interest (net of $20 and $18 capitalized for 2020 and 2019, respectively) | | $ | 490 |
| | $ | 462 |
|
| Income taxes, net | — |
| | (1 | ) | (16 | ) | | — |
|
| Noncash transactions — Accrued property additions at end of period | 899 |
| | 894 |
| |
| Noncash transactions — | | | | |
| Accrued property additions at end of period | | 733 |
| | 899 |
|
| Right-of-use assets obtained under operating leases | | 24 |
| | 15 |
|
| Right-of-use assets obtained under finance leases | | 4 |
| | 29 |
|
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)
| | | Assets | | At March 31, 2019 | | At December 31, 2018 | | At March 31, 2020 | | At December 31, 2019 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 1,361 |
| | $ | 1,396 |
| | $ | 2,164 |
| | $ | 1,975 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 1,715 |
| | 1,726 |
| | 1,603 |
| | 1,614 |
|
| Energy marketing receivables | | 529 |
| | 801 |
| | 291 |
| | 428 |
|
| Unbilled revenues | | 555 |
| | 654 |
| | 522 |
| | 599 |
|
| Under recovered fuel clause revenues | | 73 |
| | 115 |
| |
| Other accounts and notes receivable | | 863 |
| | 813 |
| | 560 |
| | 817 |
|
| Accumulated provision for uncollectible accounts | | (46 | ) | | (50 | ) | | (53 | ) | | (49 | ) |
| Materials and supplies | | 1,477 |
| | 1,465 |
| | 1,405 |
| | 1,388 |
|
| Fossil fuel for generation | | 427 |
| | 405 |
| | 577 |
| | 521 |
|
| Natural gas for sale | | 189 |
| | 524 |
| | 233 |
| | 479 |
|
| Prepaid expenses | | 786 |
| | 432 |
| | 667 |
| | 314 |
|
| Assets from risk management activities, net of collateral | | 111 |
| | 222 |
| | 134 |
| | 183 |
|
| Regulatory assets – asset retirement obligations | | | 272 |
| | 287 |
|
| Other regulatory assets | | 482 |
| | 525 |
| | 876 |
| | 885 |
|
| Assets held for sale | | 55 |
| | 393 |
| | — |
| | 188 |
|
| Other current assets | | 132 |
| | 162 |
| | 179 |
| | 188 |
|
| Total current assets | | 8,709 |
| | 9,583 |
| | 9,430 |
| | 9,817 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 102,673 |
| | 103,706 |
| | 105,931 |
| | 105,114 |
|
| Less: Accumulated depreciation | | 30,834 |
| | 31,038 |
| | 31,180 |
| | 30,765 |
|
| Plant in service, net of depreciation | | 71,839 |
| | 72,668 |
| | 74,751 |
| | 74,349 |
|
| Other utility plant, net | | 1,315 |
| | — |
| |
| Nuclear fuel, at amortized cost | | 885 |
| | 875 |
| | 854 |
| | 851 |
|
| Construction work in progress | | 7,598 |
| | 7,254 |
| | 8,360 |
| | 7,880 |
|
| Total property, plant, and equipment | | 81,637 |
| | 80,797 |
| | 83,965 |
| | 83,080 |
|
| Other Property and Investments: | | | | | | | | |
| Goodwill | | 5,284 |
| | 5,315 |
| | 5,280 |
| | 5,280 |
|
| Equity investments in unconsolidated subsidiaries | | 1,598 |
| | 1,580 |
| | 1,386 |
| | 1,303 |
|
Other intangible assets, net of amortization of $251 and $235
at March 31, 2019 and December 31, 2018, respectively | | 585 |
| | 613 |
| |
Other intangible assets, net of amortization of $292 and $280
at March 31, 2020 and December 31, 2019, respectively | | | 523 |
| | 536 |
|
| Nuclear decommissioning trusts, at fair value | | 1,875 |
| | 1,721 |
| | 1,787 |
| | 2,036 |
|
| Leveraged leases | | 806 |
| | 798 |
| | 795 |
| | 788 |
|
| Miscellaneous property and investments | | 363 |
| | 269 |
| | 407 |
| | 391 |
|
| Total other property and investments | | 10,511 |
| | 10,296 |
| | 10,178 |
| | 10,334 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Operating lease right-of-use assets, net of amortization | | 1,881 |
| | — |
| | 1,770 |
| | 1,800 |
|
| Deferred charges related to income taxes | | 794 |
| | 794 |
| | 798 |
| | 798 |
|
| Unamortized loss on reacquired debt | | 318 |
| | 323 |
| | 297 |
| | 300 |
|
| Regulatory assets – asset retirement obligations, deferred | | | 4,384 |
| | 4,094 |
|
| Other regulatory assets, deferred | | 8,191 |
| | 8,308 |
| | 6,763 |
| | 6,805 |
|
| Assets held for sale, deferred | | 763 |
| | 5,350 |
| | — |
| | 601 |
|
| Other deferred charges and assets | | 1,292 |
| | 1,463 |
| | 1,267 |
| | 1,071 |
|
| Total deferred charges and other assets | | 13,239 |
| | 16,238 |
| | 15,279 |
| | 15,469 |
|
| Total Assets | | $ | 114,096 |
| | $ | 116,914 |
| | $ | 118,852 |
| | $ | 118,700 |
|
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, 2019 | | At December 31, 2018 | | At March 31, 2020 | | At December 31, 2019 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 2,315 |
| | $ | 3,198 |
| | $ | 1,809 |
| | $ | 2,989 |
|
| Notes payable | | 1,251 |
| | 2,915 |
| | 1,710 |
| | 2,055 |
|
| Energy marketing trade payables | | 532 |
| | 856 |
| | 298 |
| | 442 |
|
| Accounts payable | | 2,037 |
| | 2,580 |
| | 1,653 |
| | 2,115 |
|
| Customer deposits | | 483 |
| | 522 |
| | 491 |
| | 496 |
|
| Accrued taxes — | | | | | | | | |
| Accrued income taxes | | 340 |
| | 21 |
| | 25 |
| | — |
|
| Other accrued taxes | | 331 |
| | 635 |
| | 338 |
| | 659 |
|
| Accrued interest | | 412 |
| | 472 |
| | 414 |
| | 474 |
|
| Accrued compensation | | 473 |
| | 1,030 |
| | 502 |
| | 992 |
|
| Asset retirement obligations | | 417 |
| | 404 |
| | 514 |
| | 504 |
|
| Other regulatory liabilities | | 310 |
| | 376 |
| | 701 |
| | 756 |
|
| Liabilities held for sale | | 38 |
| | 425 |
| | — |
| | 5 |
|
| Operating lease obligations | | 226 |
| | — |
| | 230 |
| | 229 |
|
| Other current liabilities | | 754 |
| | 852 |
| | 868 |
| | 830 |
|
| Total current liabilities | | 9,919 |
| | 14,286 |
| | 9,553 |
| | 12,546 |
|
| Long-term Debt | | 40,457 |
| | 40,736 |
| | 44,235 |
| | 41,798 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 7,937 |
| | 6,558 |
| | 8,398 |
| | 7,888 |
|
| Deferred credits related to income taxes | | 6,417 |
| | 6,460 |
| | 5,954 |
| | 6,078 |
|
| Accumulated deferred ITCs | | 2,353 |
| | 2,372 |
| | 2,271 |
| | 2,291 |
|
| Employee benefit obligations | | 2,084 |
| | 2,147 |
| | 1,778 |
| | 1,814 |
|
| Operating lease obligations, deferred | | 1,720 |
| | — |
| | 1,610 |
| | 1,615 |
|
| Asset retirement obligations, deferred | | 9,011 |
| | 8,990 |
| | 9,296 |
| | 9,282 |
|
| Accrued environmental remediation | | 261 |
| | 268 |
| | 230 |
| | 234 |
|
| Other cost of removal obligations | | 2,304 |
| | 2,297 |
| | 2,251 |
| | 2,239 |
|
| Other regulatory liabilities, deferred | | 211 |
| | 169 |
| | 368 |
| | 256 |
|
| Liabilities held for sale, deferred | | 39 |
| | 2,836 |
| |
| Other deferred credits and liabilities | | 405 |
| | 465 |
| | 701 |
| | 609 |
|
| Total deferred credits and other liabilities | | 32,742 |
| | 32,562 |
| | 32,857 |
| | 32,306 |
|
| Total Liabilities | | 83,118 |
| | 87,584 |
| | 86,645 |
| | 86,650 |
|
| Redeemable Preferred Stock of Subsidiaries | | 291 |
| | 291 |
| | 291 |
| | 291 |
|
Total Stockholders' Equity (See accompanying statements) | | 30,687 |
| | 29,039 |
| | 31,916 |
| | 31,759 |
|
| Total Liabilities and Stockholders' Equity | | $ | 114,096 |
| | $ | 116,914 |
| | $ | 118,852 |
| | $ | 118,700 |
|
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 STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
| | | | Southern Company Common Stockholders' Equity | | | | | Southern Company Common Stockholders' Equity | | | | |
| | Number of
Common Shares | | Common Stock | | | | Accumulated
Other
Comprehensive Income
(Loss) | | | | | Number of
Common Shares | | Common Stock | | | | Accumulated
Other
Comprehensive Income
(Loss) | | | | |
| | Issued | | Treasury | | Par Value | | Paid-In Capital | | Treasury | | Retained Earnings | | Noncontrolling Interests | | Total | 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 |
| |
| | | | | | | | | | | | | | | | | | | (in millions) |
| Balance at December 31, 2018 | 1,034,741 |
| | (953 | ) | | $ | 5,164 |
| | $ | 11,094 |
| | $ | (38 | ) | | $ | 8,706 |
| | $ | (203 | ) | | $ | 4,316 |
| | $ | 29,039 |
| 1,035 |
| | (1 | ) | | $ | 5,164 |
| | $ | 11,094 |
| | $ | (38 | ) | | $ | 8,706 |
| | $ | (203 | ) | | $ | 4,316 |
| | $ | 29,039 |
|
Consolidated net income attributable to
Southern Company | — |
| | — |
| | — |
| | — |
| | — |
| | 2,084 |
| | — |
| | — |
| | 2,084 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2,084 |
| | — |
| | — |
| | 2,084 |
|
| Stock issued | 6,547 |
| | — |
| | 28 |
| | 196 |
| | — |
| | — |
| | — |
| | — |
| | 224 |
| 6 |
| | — |
| | 28 |
| | 196 |
| | — |
| | — |
| | — |
| | — |
| | 224 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 24 |
| — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 24 |
|
| Cash dividends of $0.60 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (622 | ) | | — |
| | — |
| | (622 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (622 | ) | | — |
| | — |
| | (622 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41 | ) | | (41 | ) |
Net income (loss) attributable to
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
| Other | — |
| | (39 | ) | | — |
| | 7 |
| | (2 | ) | | (1 | ) | | — |
| | 1 |
| | 5 |
| — |
| | — |
| | — |
| | 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 |
| 1,041 |
| | (1 | ) | | $ | 5,192 |
| | $ | 11,321 |
| | $ | (40 | ) | | $ | 10,167 |
| | $ | (203 | ) | | $ | 4,250 |
| | $ | 30,687 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | 1,054 |
| | (1 | ) | | $ | 5,257 |
| | $ | 11,734 |
| | $ | (42 | ) | | $ | 10,877 |
| | $ | (321 | ) | | $ | 4,254 |
| | $ | 31,759 |
|
Consolidated net income attributable to
Southern Company | — |
| | — |
| | — |
| | — |
| | — |
| | 868 |
| | — |
| | — |
| | 868 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (47 | ) | | — |
| | (47 | ) |
| Stock issued | 3 |
| | — |
| | 9 |
| | 43 |
| | — |
| | — |
| | — |
| | — |
| | 52 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Cash dividends of $0.62 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (655 | ) | | — |
| | — |
| | (655 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (48 | ) | | (48 | ) |
Net income (loss) attributable to
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | 1 |
| | — |
| | (3 | ) |
| Balance at March 31, 2020 | 1,057 |
| | (1 | ) | | $ | 5,266 |
| | $ | 11,782 |
| | $ | (44 | ) | | $ | 11,088 |
| | $ | (367 | ) | | $ | 4,191 |
| | $ | 31,916 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,205 |
| | $ | 1,213 |
|
| Wholesale revenues, non-affiliates | 56 |
| | 61 |
|
| Wholesale revenues, affiliates | 19 |
| | 60 |
|
| Other revenues | 71 |
| | 74 |
|
| Total operating revenues | 1,351 |
| | 1,408 |
|
| Operating Expenses: | | | |
| Fuel | 215 |
| | 301 |
|
| Purchased power, non-affiliates | 40 |
| | 37 |
|
| Purchased power, affiliates | 18 |
| | 21 |
|
| Other operations and maintenance | 350 |
| | 409 |
|
| Depreciation and amortization | 200 |
| | 199 |
|
| Taxes other than income taxes | 106 |
| | 103 |
|
| Total operating expenses | 929 |
| | 1,070 |
|
| Operating Income | 422 |
| | 338 |
|
| Other Income and (Expense): | | | |
| Allowance for equity funds used during construction | 10 |
| | 14 |
|
| Interest expense, net of amounts capitalized | (88 | ) | | (83 | ) |
| Other income (expense), net | 24 |
| | 14 |
|
| Total other income and (expense) | (54 | ) | | (55 | ) |
| Earnings Before Income Taxes | 368 |
| | 283 |
|
| Income taxes | 84 |
| | 62 |
|
| Net Income | 284 |
| | 221 |
|
| Dividends on Preferred Stock | 4 |
| | 4 |
|
| Net Income After Dividends on Preferred Stock | $ | 280 |
| | $ | 217 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Net Income | $ | 284 |
| | $ | 221 |
|
| 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 | $ | 285 |
| | $ | 222 |
|
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, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 284 |
| | $ | 221 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 241 |
| | 244 |
|
| Deferred income taxes | 10 |
| | — |
|
| Allowance for equity funds used during construction | (10 | ) | | (14 | ) |
| Pension, postretirement, and other employee benefits | (25 | ) | | (18 | ) |
| Settlement of asset retirement obligations | (46 | ) | | (18 | ) |
| Other, net | 20 |
| | 26 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 93 |
| | 105 |
|
| -Prepayments | (80 | ) | | (78 | ) |
| -Materials and supplies | (22 | ) | | (4 | ) |
| -Other current assets | (29 | ) | | 19 |
|
| -Accounts payable | (305 | ) | | (286 | ) |
| -Accrued taxes | 100 |
| | 80 |
|
| -Accrued compensation | (111 | ) | | (122 | ) |
| -Retail fuel cost over recovery | 47 |
| | 2 |
|
| -Other current liabilities | (12 | ) | | (11 | ) |
| Net cash provided from operating activities | 155 |
| | 146 |
|
| Investing Activities: | | | |
| Property additions | (340 | ) | | (390 | ) |
| Nuclear decommissioning trust fund purchases | (81 | ) | | (68 | ) |
| Nuclear decommissioning trust fund sales | 81 |
| | 68 |
|
| Cost of removal, net of salvage | (15 | ) | | (16 | ) |
| Change in construction payables | (65 | ) | | (95 | ) |
| Other investing activities | (4 | ) | | (10 | ) |
| Net cash used for investing activities | (424 | ) | | (511 | ) |
| Financing Activities: | | | |
| Proceeds — Capital contributions from parent company | 610 |
| | 1,232 |
|
| Redemptions — | | | |
| Pollution control revenue bonds | (87 | ) | | — |
|
| Senior notes | — |
| | (200 | ) |
| Payment of common stock dividends | (239 | ) | | (211 | ) |
| Other financing activities | (11 | ) | | (10 | ) |
| Net cash provided from financing activities | 273 |
| | 811 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 4 |
| | 446 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 894 |
| | 313 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 898 |
| | $ | 759 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $3 and $5 capitalized for 2020 and 2019, respectively) | $ | 92 |
| | $ | 89 |
|
| Noncash transactions — | | | |
| Accrued property additions at end of period | 135 |
| | 176 |
|
| Right-of-use assets obtained under operating leases | 2 |
| | 2 |
|
| Right-of-use assets obtained under finance leases | 1 |
| | — |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 898 |
| | $ | 894 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 377 |
| | 425 |
|
| Unbilled revenues | | 117 |
| | 134 |
|
| Affiliated | | 40 |
| | 37 |
|
| Other accounts and notes receivable | | 41 |
| | 72 |
|
| Accumulated provision for uncollectible accounts | | (19 | ) | | (22 | ) |
| Fossil fuel stock | | 227 |
| | 212 |
|
| Materials and supplies | | 531 |
| | 512 |
|
| Prepaid expenses | | 119 |
| | 50 |
|
| Other regulatory assets | | 242 |
| | 242 |
|
| Other current assets | | 37 |
| | 30 |
|
| Total current assets | | 2,610 |
| | 2,586 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 30,348 |
| | 30,023 |
|
| Less: Accumulated provision for depreciation | | 9,608 |
| | 9,540 |
|
| Plant in service, net of depreciation | | 20,740 |
| | 20,483 |
|
| Nuclear fuel, at amortized cost | | 290 |
| | 296 |
|
| Construction work in progress | | 777 |
| | 890 |
|
| Total property, plant, and equipment | | 21,807 |
| | 21,669 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 64 |
| | 66 |
|
| Nuclear decommissioning trusts, at fair value | | 855 |
| | 1,023 |
|
| Miscellaneous property and investments | | 129 |
| | 128 |
|
| Total other property and investments | | 1,048 |
| | 1,217 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 124 |
| | 132 |
|
| Deferred charges related to income taxes | | 243 |
| | 244 |
|
| Deferred under recovered regulatory clause revenues | | 37 |
| | 40 |
|
| Regulatory assets – asset retirement obligations | | 1,224 |
| | 1,019 |
|
| Other regulatory assets, deferred | | 1,968 |
| | 1,976 |
|
| Other deferred charges and assets | | 307 |
| | 269 |
|
| Total deferred charges and other assets | | 3,903 |
| | 3,680 |
|
| Total Assets | | $ | 29,368 |
| | $ | 29,152 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 296 |
| | $ | 251 |
|
| Accounts payable — | | | | |
| Affiliated | | 212 |
| | 316 |
|
| Other | | 271 |
| | 514 |
|
| Customer deposits | | 101 |
| | 100 |
|
| Accrued taxes | | 168 |
| | 78 |
|
| Accrued interest | | 82 |
| | 92 |
|
| Accrued compensation | | 105 |
| | 216 |
|
| Asset retirement obligations | | 201 |
| | 195 |
|
| Other regulatory liabilities | | 155 |
| | 193 |
|
| Other current liabilities | | 109 |
| | 105 |
|
| Total current liabilities | | 1,700 |
| | 2,060 |
|
| Long-term Debt | | 8,141 |
| | 8,270 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 3,283 |
| | 3,260 |
|
| Deferred credits related to income taxes | | 1,946 |
| | 1,960 |
|
| Accumulated deferred ITCs | | 99 |
| | 100 |
|
| Employee benefit obligations | | 198 |
| | 206 |
|
| Operating lease obligations | | 103 |
| | 107 |
|
| Asset retirement obligations, deferred | | 3,330 |
| | 3,345 |
|
| Other cost of removal obligations | | 402 |
| | 412 |
|
| Other regulatory liabilities, deferred | | 225 |
| | 146 |
|
| Other deferred credits and liabilities | | 41 |
| | 40 |
|
| Total deferred credits and other liabilities | | 9,627 |
| | 9,576 |
|
| Total Liabilities | | 19,468 |
| | 19,906 |
|
| Redeemable Preferred Stock | | 291 |
| | 291 |
|
Common Stockholder's Equity (See accompanying statements) | | 9,609 |
| | 8,955 |
|
| Total Liabilities and Stockholder's Equity | | $ | 29,368 |
| | $ | 29,152 |
|
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, 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 | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
| Balance at March 31, 2019 | 31 |
| | $ | 1,222 |
| | $ | 4,744 |
| | $ | 2,781 |
| | $ | (27 | ) | | $ | 8,720 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2019 | 31 |
| | $ | 1,222 |
| | $ | 4,755 |
| | $ | 3,001 |
| | $ | (23 | ) | | $ | 8,955 |
|
Net income after dividends on
preferred stock | — |
| | — |
| | — |
| | 280 |
| | — |
| | 280 |
|
| Capital contributions from parent company | — |
| | — |
| | 612 |
| | — |
| | — |
| | 612 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Cash dividends on common stock | — |
| | — |
| | — |
| | (239 | ) | | — |
| | (239 | ) |
| Balance at March 31, 2020 | 31 |
| | $ | 1,222 |
| | $ | 5,367 |
| | $ | 3,042 |
| | $ | (22 | ) | | $ | 9,609 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 1,675 |
| | $ | 1,668 |
|
| Wholesale revenues | 26 |
| | 32 |
|
| Other revenues | 124 |
| | 133 |
|
| Total operating revenues | 1,825 |
| | 1,833 |
|
| Operating Expenses: | | | |
| Fuel | 231 |
| | 299 |
|
| Purchased power, non-affiliates | 129 |
| | 118 |
|
| Purchased power, affiliates | 129 |
| | 176 |
|
| Other operations and maintenance | 465 |
| | 446 |
|
| Depreciation and amortization | 352 |
| | 240 |
|
| Taxes other than income taxes | 113 |
| | 106 |
|
| Total operating expenses | 1,419 |
| | 1,385 |
|
| Operating Income | 406 |
| | 448 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (111 | ) | | (96 | ) |
| Other income (expense), net | 52 |
| | 40 |
|
| Total other income and (expense) | (59 | ) | | (56 | ) |
| Earnings Before Income Taxes | 347 |
| | 392 |
|
| Income taxes | 16 |
| | 81 |
|
| Net Income | $ | 331 |
| | $ | 311 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Net Income | $ | 331 |
| | $ | 311 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(1) and $-, respectively | (2 | ) | | — |
|
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $-, respectively | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | (1 | ) | | 1 |
|
| Comprehensive Income | $ | 330 |
| | $ | 312 |
|
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, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 331 |
| | $ | 311 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 396 |
| | 287 |
|
| Deferred income taxes | (73 | ) | | 127 |
|
| Pension, postretirement, and other employee benefits | (40 | ) | | (35 | ) |
| Settlement of asset retirement obligations | (33 | ) | | (34 | ) |
| Storm damage reserve accruals | 53 |
| | 7 |
|
| Retail fuel cost over recovery – long-term | 90 |
| | — |
|
| Other, net | (52 | ) | | (25 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 22 |
| | 91 |
|
| -Fossil fuel stock | (42 | ) | | (41 | ) |
| -Prepaid income taxes | — |
| | (73 | ) |
| -Other current assets | (15 | ) | | 33 |
|
| -Accounts payable | (69 | ) | | (166 | ) |
| -Accrued taxes | (156 | ) | | (245 | ) |
| -Accrued compensation | (87 | ) | | (67 | ) |
| -Customer refunds | (107 | ) | | 32 |
|
| -Other current liabilities | (5 | ) | | 10 |
|
| Net cash provided from operating activities | 213 |
| | 212 |
|
| Investing Activities: | | | |
| Property additions | (849 | ) | | (875 | ) |
| Nuclear decommissioning trust fund purchases | (173 | ) | | (129 | ) |
| Nuclear decommissioning trust fund sales | 167 |
| | 124 |
|
| Cost of removal, net of salvage | (34 | ) | | (58 | ) |
| Change in construction payables, net of joint owner portion | (46 | ) | | (38 | ) |
| Proceeds from dispositions and asset sales | 142 |
| | 7 |
|
| Other investing activities | (2 | ) | | (11 | ) |
| Net cash used for investing activities | (795 | ) | | (980 | ) |
| Financing Activities: | | | |
| Increase (decrease) in notes payable, net | 11 |
| | (19 | ) |
| Proceeds — | | | |
| FFB loan | — |
| | 835 |
|
| Senior notes | 1,500 |
| | — |
|
| Pollution control revenue bonds | 53 |
| | 343 |
|
| Short-term borrowings | 200 |
| | — |
|
| Capital contributions from parent company | 500 |
| | 27 |
|
| Redemptions and repurchases — | | | |
| Senior notes | (950 | ) | | — |
|
| Pollution control revenue bonds | (148 | ) | | (108 | ) |
| FFB loan | (16 | ) | | — |
|
| Payment of common stock dividends | (385 | ) | | (394 | ) |
| Other financing activities | (23 | ) | | (19 | ) |
| Net cash provided from financing activities | 742 |
| | 665 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 160 |
| | (103 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 52 |
| | 112 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 212 |
| | $ | 9 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $11 and $8 capitalized for 2020 and 2019, respectively) | $ | 122 |
| | $ | 92 |
|
| Noncash transactions — | | | |
| Accrued property additions at end of period | 472 |
| | 607 |
|
| Right-of-use assets obtained under operating leases | 10 |
| | 4 |
|
| Right-of-use assets obtained under finance leases | — |
| | 28 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 212 |
| | $ | 52 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 545 |
| | 533 |
|
| Unbilled revenues | | 195 |
| | 203 |
|
| Joint owner accounts receivable | | 129 |
| | 136 |
|
| Affiliated | | 24 |
| | 21 |
|
| Other accounts and notes receivable | | 44 |
| | 209 |
|
| Accumulated provision for uncollectible accounts | | (2 | ) | | (2 | ) |
| Fossil fuel stock | | 315 |
| | 272 |
|
| Materials and supplies | | 513 |
| | 501 |
|
| Prepaid expenses | | 38 |
| | 63 |
|
| Regulatory assets – storm damage reserves | | 213 |
| | 213 |
|
| Regulatory assets – asset retirement obligations | | 235 |
| | 254 |
|
| Other regulatory assets | | 295 |
| | 263 |
|
| Other current assets | | 69 |
| | 77 |
|
| Total current assets | | 2,825 |
| | 2,795 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 38,436 |
| | 38,137 |
|
| Less: Accumulated provision for depreciation | | 11,929 |
| | 11,753 |
|
| Plant in service, net of depreciation | | 26,507 |
| | 26,384 |
|
| Nuclear fuel, at amortized cost | | 563 |
| | 555 |
|
| Construction work in progress | | 6,187 |
| | 5,650 |
|
| Total property, plant, and equipment | | 33,257 |
| | 32,589 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 52 |
| | 52 |
|
| Nuclear decommissioning trusts, at fair value | | 932 |
| | 1,013 |
|
| Miscellaneous property and investments | | 65 |
| | 64 |
|
| Total other property and investments | | 1,049 |
| | 1,129 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 1,401 |
| | 1,428 |
|
| Deferred charges related to income taxes | | 519 |
| | 519 |
|
| Regulatory assets – asset retirement obligations, deferred | | 2,970 |
| | 2,865 |
|
| Other regulatory assets, deferred | | 2,677 |
| | 2,716 |
|
| Other deferred charges and assets | | 481 |
| | 500 |
|
| Total deferred charges and other assets | | 8,048 |
| | 8,028 |
|
| Total Assets | | $ | 45,179 |
| | $ | 44,541 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 74 |
| | $ | 1,025 |
|
| Notes payable | | 451 |
| | 365 |
|
| Accounts payable — | | | | |
| Affiliated | | 389 |
| | 512 |
|
| Other | | 723 |
| | 711 |
|
| Customer deposits | | 284 |
| | 283 |
|
| Accrued taxes | | 239 |
| | 407 |
|
| Accrued interest | | 97 |
| | 118 |
|
| Accrued compensation | | 120 |
| | 233 |
|
| Operating lease obligations | | 147 |
| | 144 |
|
| Asset retirement obligations | | 272 |
| | 265 |
|
| Other regulatory liabilities | | 342 |
| | 447 |
|
| Other current liabilities | | 233 |
| | 187 |
|
| Total current liabilities | | 3,371 |
| | 4,697 |
|
| Long-term Debt | | 12,297 |
| | 10,791 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 3,255 |
| | 3,257 |
|
| Deferred credits related to income taxes | | 2,792 |
| | 2,862 |
|
| Accumulated deferred ITCs | | 253 |
| | 255 |
|
| Employee benefit obligations | | 497 |
| | 540 |
|
| Operating lease obligations, deferred | | 1,280 |
| | 1,282 |
|
| Asset retirement obligations, deferred | | 5,547 |
| | 5,519 |
|
| Other deferred credits and liabilities | | 375 |
| | 273 |
|
| Total deferred credits and other liabilities | | 13,999 |
| | 13,988 |
|
| Total Liabilities | | 29,667 |
| | 29,476 |
|
Common Stockholder's Equity (See accompanying statements) | | 15,512 |
| | 15,065 |
|
| Total Liabilities and Stockholder's Equity | | $ | 45,179 |
| | $ | 44,541 |
|
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, 2018 | 9 |
| | $ | 398 |
| | $ | 10,322 |
| | $ | 3,612 |
| | $ | (9 | ) | | $ | 14,323 |
|
| Net income | — |
| | — |
| | — |
| | 311 |
| | — |
| | 311 |
|
| Capital contributions from parent company | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 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 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2019 | 9 |
| | $ | 398 |
| | $ | 10,962 |
| | $ | 3,756 |
| | $ | (51 | ) | | $ | 15,065 |
|
| Net income | — |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Capital contributions from parent company | — |
| | — |
| | 502 |
| | — |
| | — |
| | 502 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Cash dividends on common stock | — |
| | — |
| | — |
| | (385 | ) | | — |
| | (385 | ) |
| Balance at March 31, 2020 | 9 |
| | $ | 398 |
| | $ | 11,464 |
| | $ | 3,702 |
| | $ | (52 | ) | | $ | 15,512 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 199 |
| | $ | 203 |
|
| Wholesale revenues, non-affiliates | 51 |
| | 57 |
|
| Wholesale revenues, affiliates | 21 |
| | 22 |
|
| Other revenues | 6 |
| | 5 |
|
| Total operating revenues | 277 |
| | 287 |
|
| Operating Expenses: | | | |
| Fuel | 79 |
| | 93 |
|
| Purchased power | 5 |
| | 3 |
|
| Other operations and maintenance | 76 |
| | 61 |
|
| Depreciation and amortization | 42 |
| | 48 |
|
| Taxes other than income taxes | 29 |
| | 26 |
|
| Total operating expenses | 231 |
| | 231 |
|
| Operating Income | 46 |
| | 56 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (16 | ) | | (17 | ) |
| Other income (expense), net | 8 |
| | 5 |
|
| Total other income and (expense) | (8 | ) | | (12 | ) |
| Earnings Before Income Taxes | 38 |
| | 44 |
|
| Income taxes | 6 |
| | 7 |
|
| Net Income | $ | 32 |
| | $ | 37 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Net Income | $ | 32 |
| | $ | 37 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $- and $-, respectively | — |
| | — |
|
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | — |
| | — |
|
| Total other comprehensive income (loss) | — |
| | — |
|
| Comprehensive Income | $ | 32 |
| | $ | 37 |
|
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, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 32 |
| | $ | 37 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 44 |
| | 50 |
|
| Deferred income taxes | (4 | ) | | (8 | ) |
| Settlement of asset retirement obligations | (3 | ) | | (8 | ) |
| Other, net | 4 |
| | 4 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 14 |
| | 11 |
|
| -Other current assets | (10 | ) | | 7 |
|
| -Accounts payable | (24 | ) | | (38 | ) |
| -Accrued taxes | (54 | ) | | (62 | ) |
| -Accrued compensation | (19 | ) | | (22 | ) |
| -Other current liabilities | 3 |
| | 6 |
|
| Net cash used for operating activities | (17 | ) | | (23 | ) |
| Investing Activities: | | | |
| Property additions | (50 | ) | | (45 | ) |
| Construction payables | (10 | ) | | (8 | ) |
| Payments pursuant to LTSAs | (5 | ) | | (5 | ) |
| Other investing activities | (6 | ) | | (5 | ) |
| Net cash used for investing activities | (71 | ) | | (63 | ) |
| Financing Activities: | | | |
| Proceeds — | | | |
| Capital contributions from parent company | 75 |
| | — |
|
| Short-term borrowings | 40 |
| | — |
|
| Pollution control revenue bonds | — |
| | 43 |
|
| Other long-term debt | 100 |
| | — |
|
| Redemptions — Senior notes | (275 | ) | | — |
|
| Return of capital to parent company | (37 | ) | | (38 | ) |
| Other financing activities | (1 | ) | | — |
|
| Net cash provided from (used for) financing activities | (98 | ) | | 5 |
|
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (186 | ) | | (81 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 286 |
| | 293 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 100 |
| | $ | 212 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $- and $- capitalized for 2020 and 2019, respectively) | $ | 18 |
| | $ | 13 |
|
| Noncash transactions — Accrued property additions at end of period | 25 |
| | 27 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 100 |
| | $ | 286 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 32 |
| | 35 |
|
| Unbilled revenues | | 33 |
| | 39 |
|
| Affiliated | | 25 |
| | 27 |
|
| Other accounts and notes receivable | | 23 |
| | 26 |
|
| Fossil fuel stock | | 24 |
| | 26 |
|
| Materials and supplies | | 59 |
| | 61 |
|
| Other regulatory assets | | 85 |
| | 99 |
|
| Other current assets | | 10 |
| | 10 |
|
| Total current assets | | 391 |
| | 609 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 4,900 |
| | 4,857 |
|
| Less: Accumulated provision for depreciation | | 1,489 |
| | 1,463 |
|
| Plant in service, net of depreciation | | 3,411 |
| | 3,394 |
|
| Construction work in progress | | 127 |
| | 126 |
|
| Total property, plant, and equipment | | 3,538 |
| | 3,520 |
|
| Other Property and Investments | | 131 |
| | 131 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 32 |
| | 32 |
|
| Regulatory assets – asset retirement obligations | | 197 |
| | 210 |
|
| Other regulatory assets, deferred | | 386 |
| | 360 |
|
| Accumulated deferred income taxes | | 137 |
| | 139 |
|
| Other deferred charges and assets | | 48 |
| | 34 |
|
| Total deferred charges and other assets | | 800 |
| | 775 |
|
| Total Assets | | $ | 4,860 |
| | $ | 5,035 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 7 |
| | $ | 281 |
|
| Notes payable | | 40 |
| | — |
|
| Accounts payable — | | | | |
| Affiliated | | 62 |
| | 76 |
|
| Other | | 56 |
| | 75 |
|
| Accrued taxes | | 51 |
| | 105 |
|
| Accrued interest | | 14 |
| | 15 |
|
| Accrued compensation | | 16 |
| | 35 |
|
| Asset retirement obligations | | 28 |
| | 33 |
|
| Over recovered regulatory clause liabilities | | 32 |
| | 29 |
|
| Other regulatory liabilities | | 54 |
| | 21 |
|
| Other current liabilities | | 69 |
| | 64 |
|
| Total current liabilities | | 429 |
| | 734 |
|
| Long-term Debt | | 1,406 |
| | 1,308 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 422 |
| | 424 |
|
| Deferred credits related to income taxes | | 320 |
| | 352 |
|
| Employee benefit obligations | | 98 |
| | 99 |
|
| Asset retirement obligations, deferred | | 158 |
| | 157 |
|
| Other cost of removal obligations | | 192 |
| | 189 |
|
| Other regulatory liabilities, deferred | | 71 |
| | 76 |
|
| Other deferred credits and liabilities | | 42 |
| | 44 |
|
| Total deferred credits and other liabilities | | 1,303 |
| | 1,341 |
|
| Total Liabilities | | 3,138 |
| | 3,383 |
|
Common Stockholder's Equity (See accompanying statements) | | 1,722 |
| | 1,652 |
|
| Total Liabilities and Stockholder's Equity | | $ | 4,860 |
| | $ | 5,035 |
|
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, 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 |
|
| | | | | | | | | | | | |
| Balance at December 31, 2019 | 1 |
| | $ | 38 |
| | $ | 4,449 |
| | $ | (2,832 | ) | | $ | (3 | ) | | $ | 1,652 |
|
| Net income | — |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
| Return of capital to parent company | — |
| | — |
| | (37 | ) | | — |
| | — |
| | (37 | ) |
| Capital contributions from parent company | — |
| | — |
| | 76 |
| | — |
| | — |
| | 76 |
|
| Other | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at March 31, 2020 | 1 |
| | $ | 38 |
| | $ | 4,487 |
| | $ | (2,800 | ) | | $ | (3 | ) | | $ | 1,722 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Revenues: | | | |
| Wholesale revenues, non-affiliates | $ | 286 |
| | $ | 352 |
|
| Wholesale revenues, affiliates | 86 |
| | 87 |
|
| Other revenues | 3 |
| | 4 |
|
| Total operating revenues | 375 |
| | 443 |
|
| Operating Expenses: | | | |
| Fuel | 107 |
| | 145 |
|
| Purchased power | 14 |
| | 24 |
|
| Other operations and maintenance | 79 |
| | 83 |
|
| Depreciation and amortization | 117 |
| | 119 |
|
| Taxes other than income taxes | 9 |
| | 11 |
|
| (Gain) loss on dispositions, net | (39 | ) | | 1 |
|
| Total operating expenses | 287 |
| | 383 |
|
| Operating Income | 88 |
| | 60 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (39 | ) | | (44 | ) |
| Other income (expense), net | 2 |
| | 2 |
|
| Total other income and (expense) | (37 | ) | | (42 | ) |
| Earnings Before Income Taxes | 51 |
| | 18 |
|
| Income taxes (benefit) | 7 |
| | (9 | ) |
| Net Income | 44 |
| | 27 |
|
| Net loss attributable to noncontrolling interests | (31 | ) | | (29 | ) |
| Net Income Attributable to Southern Power | $ | 75 |
| | $ | 56 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Net Income | $ | 44 |
| | $ | 27 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(21) and $(10), respectively | (62 | ) | | (29 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $10 and $8, respectively | 28 |
| | 25 |
|
| Pension and other postretirement benefit plans: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $- and $-, respectively | 1 |
| | — |
|
| Total other comprehensive income (loss) | (33 | ) | | (4 | ) |
| Comprehensive Income | 11 |
| | 23 |
|
| Comprehensive loss attributable to noncontrolling interests | (31 | ) | | (29 | ) |
| Comprehensive Income Attributable to Southern Power | $ | 42 |
| | $ | 52 |
|
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, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 44 |
| | $ | 27 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 123 |
| | 125 |
|
| Deferred income taxes | (36 | ) | | 17 |
|
| Amortization of investment tax credits | (14 | ) | | (14 | ) |
| (Gain) loss on dispositions, net | (39 | ) | | — |
|
| Other, net | (10 | ) | | (7 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 5 |
| | 10 |
|
| -Prepaid income taxes | 51 |
| | (9 | ) |
| -Other current assets | (2 | ) | | 3 |
|
| -Accounts payable | (34 | ) | | (32 | ) |
| -Accrued taxes | 8 |
| | 5 |
|
| -Other current liabilities | (13 | ) | | (15 | ) |
| Net cash provided from operating activities | 83 |
| | 110 |
|
| Investing Activities: | | | |
| Property additions | (47 | ) | | (66 | ) |
| Proceeds from dispositions and asset sales | 660 |
| | — |
|
| Change in construction payables | (15 | ) | | (7 | ) |
| Payments pursuant to LTSAs | (15 | ) | | (15 | ) |
| Other investing activities | 17 |
| | 9 |
|
| Net cash provided from (used for) investing activities | 600 |
| | (79 | ) |
| Financing Activities: | | | |
| Increase (decrease) in notes payable, net | (449 | ) | | 5 |
|
| Redemptions — Short-term borrowings | (100 | ) | | — |
|
| Distributions to noncontrolling interests | (48 | ) | | (36 | ) |
| Capital contributions from noncontrolling interests | 16 |
| | 3 |
|
| Payment of common stock dividends | (50 | ) | | (51 | ) |
| Other financing activities | (1 | ) | | — |
|
| Net cash used for financing activities | (632 | ) | | (79 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 51 |
| | (48 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 279 |
| | 181 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 330 |
| | $ | 133 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $4 capitalized for both 2020 and 2019) | $ | 28 |
| | $ | 28 |
|
| Income taxes, net | (5 | ) | | 1 |
|
| Noncash transactions — Accrued property additions at end of period | 27 |
| | 19 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 330 |
| | $ | 279 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 109 |
| | 107 |
|
| Affiliated | | 26 |
| | 30 |
|
| Other | | 54 |
| | 73 |
|
| Materials and supplies | | 198 |
| | 191 |
|
| Prepaid income taxes | | 452 |
| | 36 |
|
| Other current assets | | 24 |
| | 43 |
|
| Total current assets | | 1,193 |
| | 759 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 13,282 |
| | 13,270 |
|
| Less: Accumulated provision for depreciation | | 2,580 |
| | 2,464 |
|
| Plant in service, net of depreciation | | 10,702 |
| | 10,806 |
|
| Construction work in progress | | 534 |
| | 515 |
|
| Total property, plant, and equipment | | 11,236 |
| | 11,321 |
|
| Other Property and Investments: | | | | |
Intangible assets, net of amortization of $74 and $69
at March 31, 2020 and December 31, 2019, respectively | | 317 |
| | 322 |
|
| Equity investments in unconsolidated subsidiaries | | 45 |
| | 28 |
|
| Total other property and investments | | 362 |
| | 350 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 368 |
| | 369 |
|
| Prepaid LTSAs | | 134 |
| | 128 |
|
| Accumulated deferred income taxes | | 129 |
| | 551 |
|
| Income taxes receivable, non-current | | 8 |
| | 5 |
|
| Assets held for sale | | — |
| | 601 |
|
| Other deferred charges and assets | | 216 |
| | 216 |
|
| Total deferred charges and other assets | | 855 |
| | 1,870 |
|
| Total Assets | | $ | 13,646 |
| | $ | 14,300 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 824 |
| | $ | 824 |
|
| Notes payable | | — |
| | 549 |
|
| Accounts payable — | | | | |
| Affiliated | | 43 |
| | 56 |
|
| Other | | 59 |
| | 85 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 9 |
| | — |
|
| Other accrued taxes | | 20 |
| | 26 |
|
| Accrued interest | | 36 |
| | 32 |
|
| Other current liabilities | | 119 |
| | 132 |
|
| Total current liabilities | | 1,110 |
| | 1,704 |
|
| Long-term Debt | | 3,545 |
| | 3,574 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 114 |
| | 115 |
|
| Accumulated deferred ITCs | | 1,717 |
| | 1,731 |
|
| Operating lease obligations | | 375 |
| | 376 |
|
| Other deferred credits and liabilities | | 234 |
| | 178 |
|
| Total deferred credits and other liabilities | | 2,440 |
| | 2,400 |
|
| Total Liabilities | | 7,095 |
| | 7,678 |
|
Total Stockholders' Equity (See accompanying statements) | | 6,551 |
| | 6,622 |
|
| Total Liabilities and Stockholders' Equity | | $ | 13,646 |
| | $ | 14,300 |
|
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, 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | $ | 909 |
| | $ | 1,485 |
| | $ | (26 | ) | | $ | 2,368 |
| | $ | 4,254 |
| | $ | 6,622 |
|
| Net income attributable to Southern Power | — |
| | 75 |
| | — |
| | 75 |
| | — |
| | 75 |
|
| Other comprehensive income (loss) | — |
| | — |
| | (33 | ) | | (33 | ) | | — |
| | (33 | ) |
| Cash dividends on common stock | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | (50 | ) |
Capital contributions from
noncontrolling interests | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (48 | ) | | (48 | ) |
Net income (loss) attributable
to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance at March 31, 2020 | $ | 909 |
| | $ | 1,510 |
| | $ | (59 | ) | | $ | 2,360 |
| | $ | 4,191 |
| | $ | 6,551 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Revenues: | | | |
| Natural gas revenues (includes revenue taxes of $47 and $55, respectively) | $ | 1,240 |
| | $ | 1,476 |
|
| Alternative revenue programs | 9 |
| | (2 | ) |
| Total operating revenues | 1,249 |
| | 1,474 |
|
| Operating Expenses: | | | |
| Cost of natural gas | 439 |
| | 686 |
|
| Other operations and maintenance | 258 |
| | 235 |
|
| Depreciation and amortization | 120 |
| | 118 |
|
| Taxes other than income taxes | 72 |
| | 82 |
|
| Total operating expenses | 889 |
| | 1,121 |
|
| Operating Income | 360 |
| | 353 |
|
| Other Income and (Expense): | | | |
| Earnings from equity method investments | 43 |
| | 48 |
|
| Interest expense, net of amounts capitalized | (58 | ) | | (59 | ) |
| Other income (expense), net | 9 |
| | 5 |
|
| Total other income and (expense) | (6 | ) | | (6 | ) |
| Earnings Before Income Taxes | 354 |
| | 347 |
|
| Income taxes | 79 |
| | 77 |
|
| Net Income | $ | 275 |
| | $ | 270 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Net Income | $ | 275 |
| | $ | 270 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(7) and $-, respectively | (20 | ) | | — |
|
Reclassification adjustment for amounts included in net income,
net of tax of $2 and $-, respectively | 5 |
| | — |
|
| Pension and other postretirement benefit plans: | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $-, respectively | — |
| | (1 | ) |
| Total other comprehensive income (loss) | (15 | ) | | (1 | ) |
| Comprehensive Income | $ | 260 |
| | $ | 269 |
|
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, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 275 |
| | $ | 270 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 120 |
| | 118 |
|
| Deferred income taxes | 22 |
| | 42 |
|
| Mark-to-market adjustments | 13 |
| | 45 |
|
| Other, net | (19 | ) | | (20 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 112 |
| | 238 |
|
| -Natural gas for sale | 246 |
| | 363 |
|
| -Other current assets | 33 |
| | 59 |
|
| -Accounts payable | (185 | ) | | (353 | ) |
| -Accrued taxes | 27 |
| | 21 |
|
| -Accrued compensation | (42 | ) | | (50 | ) |
| -Other current liabilities | 41 |
| | (50 | ) |
| Net cash provided from operating activities | 643 |
| | 683 |
|
| Investing Activities: | | | |
| Property additions | (261 | ) | | (256 | ) |
| Cost of removal, net of salvage | (15 | ) | | (12 | ) |
| Change in construction payables, net | (18 | ) | | 1 |
|
| Investment in unconsolidated subsidiaries | (77 | ) | | (10 | ) |
| Proceeds from dispositions and asset sales | 178 |
| | — |
|
| Other investing activities | — |
| | (13 | ) |
| Net cash used for investing activities | (193 | ) | | (290 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | (39 | ) | | (289 | ) |
| Payment of common stock dividends | (133 | ) | | (118 | ) |
| Other financing activities | (13 | ) | | 5 |
|
| Net cash used for financing activities | (185 | ) | | (402 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | 265 |
| | (9 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 49 |
| | 70 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 314 |
| | $ | 61 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $2 capitalized for both 2020 and 2019) | $ | 49 |
| | $ | 55 |
|
| Income taxes, net | (12 | ) | | (1 | ) |
| Noncash transactions — Accrued property additions at end of period | 104 |
| | 98 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 311 |
| | $ | 46 |
|
| Receivables — | | | | |
| Energy marketing receivables | | 291 |
| | 428 |
|
| Customer accounts receivable | | 407 |
| | 323 |
|
| Unbilled revenues | | 136 |
| | 183 |
|
| Affiliated | | 3 |
| | 5 |
|
| Other accounts and notes receivable | | 102 |
| | 114 |
|
| Accumulated provision for uncollectible accounts | | (25 | ) | | (18 | ) |
| Natural gas for sale | | 233 |
| | 479 |
|
| Prepaid expenses | | 53 |
| | 65 |
|
| Assets from risk management activities, net of collateral | | 119 |
| | 177 |
|
| Other regulatory assets | | 69 |
| | 92 |
|
| Assets held for sale | | — |
| | 171 |
|
| Other current assets | | 43 |
| | 41 |
|
| Total current assets | | 1,742 |
| | 2,106 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 16,456 |
| | 16,344 |
|
| Less: Accumulated depreciation | | 4,651 |
| | 4,650 |
|
| Plant in service, net of depreciation | | 11,805 |
| | 11,694 |
|
| Construction work in progress | | 680 |
| | 613 |
|
| Total property, plant, and equipment | | 12,485 |
| | 12,307 |
|
| Other Property and Investments: | | | | |
| Goodwill | | 5,015 |
| | 5,015 |
|
| Equity investments in unconsolidated subsidiaries | | 1,333 |
| | 1,251 |
|
Other intangible assets, net of amortization of $181 and $176
at March 31, 2020 and December 31, 2019, respectively | | 65 |
| | 70 |
|
| Miscellaneous property and investments | | 20 |
| | 20 |
|
| Total other property and investments | | 6,433 |
| | 6,356 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 91 |
| | 93 |
|
| Other regulatory assets, deferred | | 605 |
| | 618 |
|
| Other deferred charges and assets | | 261 |
| | 207 |
|
| Total deferred charges and other assets | | 957 |
| | 918 |
|
| Total Assets | | $ | 21,617 |
| | $ | 21,687 |
|
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, 2020 | | At December 31, 2019 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Notes payable | | $ | 611 |
| | $ | 650 |
|
| Energy marketing trade payables | | 298 |
| | 442 |
|
| Accounts payable — | | | | |
| Affiliated | | 39 |
| | 41 |
|
| Other | | 258 |
| | 315 |
|
| Customer deposits | | 89 |
| | 96 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 37 |
| | — |
|
| Other accrued taxes | | 61 |
| | 71 |
|
| Accrued interest | | 64 |
| | 52 |
|
| Accrued compensation | | 58 |
| | 100 |
|
| Liabilities from risk management activities, net of collateral | | 41 |
| | 21 |
|
| Other regulatory liabilities | | 149 |
| | 94 |
|
| Other current liabilities | | 121 |
| | 128 |
|
| Total current liabilities | | 1,826 |
| | 2,010 |
|
| Long-term Debt | | 5,836 |
| | 5,845 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 1,235 |
| | 1,219 |
|
| Deferred credits related to income taxes | | 867 |
| | 874 |
|
| Employee benefit obligations | | 252 |
| | 265 |
|
| Operating lease obligations | | 76 |
| | 78 |
|
| Other cost of removal obligations | | 1,625 |
| | 1,606 |
|
| Accrued environmental remediation | | 230 |
| | 233 |
|
| Other deferred credits and liabilities | | 39 |
| | 51 |
|
| Total deferred credits and other liabilities | | 4,324 |
| | 4,326 |
|
| Total Liabilities | | 11,986 |
| | 12,181 |
|
Common Stockholder's Equity (See accompanying statements) | | 9,631 |
| | 9,506 |
|
| Total Liabilities and Stockholder's Equity | | $ | 21,617 |
| | $ | 21,687 |
|
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 STOCKHOLDER'S EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Paid-In
Capital | | Retained
Earnings (Accumulated Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| | (in millions) |
| 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 |
|
| | | | | | | | |
| Balance at December 31, 2019 | $ | 9,697 |
| | $ | (198 | ) | | $ | 7 |
| | $ | 9,506 |
|
| Net income | — |
| | 275 |
| | — |
| | 275 |
|
| Return of capital to parent company | (2 | ) | | — |
| | — |
| | (2 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | (15 | ) | | (15 | ) |
| Cash dividends on common stock | — |
| | (133 | ) | | — |
| | (133 | ) |
| Balance at March 31, 2020 | $ | 9,695 |
| | $ | (56 | ) | | $ | (8 | ) | | $ | 9,631 |
|
The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSIONALABAMA POWER COMPANY
GEORGIA POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND ANALYSIS OFSUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
(UNAUDITED)
INDEX TO THE NOTES TO THE CONDENSED FINANCIAL CONDITION AND RESULTS OF OPERATIONSSTATEMENTS
FIRST QUARTER 2019 vs. FIRST QUARTER 2018
OVERVIEWINDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
Southern CompanyThe following unaudited notes to the condensed financial statements are a combined presentation; however, information contained herein relating to any individual Registrant is a holding company that owns allfiled by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants. The list below indicates the Registrants to which each footnote applies.
|
| |
| Registrant | Applicable Notes |
| Southern Company | A, B, C, D, E, F, G, H, I, J, K, L |
| Alabama Power | A, B, C, D, F, G, H, I, J, K |
| Georgia Power | A, B, C, D, F, G, H, I, J |
| Mississippi Power | A, B, C, D, F, G, H, I, J |
| Southern Power | A, C, D, E, F, G, H, I, J, K |
| Southern Company Gas | A, B, C, D, E, F, G, H, I, J, K, L |
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 common stockSEC. The Condensed Balance Sheets as of December 31, 2019 have been derived from the traditional electric operating companies andaudited financial statements of each Registrant. In the parent entitiesopinion of Southern Power and Southern Company Gas and owns other direct and indirect subsidiaries. Discussioneach 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 is focused onfor the Southern Company system's primary businesses of electricity sales byperiods ended March 31, 2020 and 2019. 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 traditional electric operating companies and Southern Power anddisclosures regarding such Registrant are adequate to make the distribution of natural gas by Southern Company Gas. The traditional electric operating companies are vertically integrated utilities providing electric service in three Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based ratesinformation presented not misleading. Disclosures which would substantially duplicate the disclosures in the wholesale market. Southern Company Gas distributes natural gas through its natural gas distribution utilitiesForm 10-K and is involveddetails which have not changed significantly in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services. The Southern Company system's other business activities include providing energy solutions, such as distributed energy infrastructure, energy efficiency products and 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 1amount or composition since the filing of the Form 10-K.
On January 1, 2019, Southern Company completed its sale of Gulf Power to 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). See Note (K) to the10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements under "Southern Company" herein for additional information.
Georgia Power and Atlanta Gas Light are required to file base rate casesshould be read in conjunction with the Georgia PSC by July 1,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 overall results of operations, financial position, or cash flows of any Registrant.
Goodwill and Other Intangible Assets
Goodwill at March 31, 2020 and December 31, 2019 and June 3, 2019, respectively. Nicor Gas filed a rate case with the Illinois Commission in November 2018. These three rate cases are expectedwas as follows: |
| | | |
| | Goodwill |
| | (in millions) |
| Southern Company | $ | 5,280 |
|
| Southern Company Gas: | |
| Gas distribution operations | $ | 4,034 |
|
| Gas marketing services | 981 |
|
| Southern Company Gas total | $ | 5,015 |
|
Goodwill is not amortized but is subject to conclude in 2019. In addition, Mississippi Power is scheduled to file a base rate case with the Mississippi PSCan annual impairment test in the fourth quarter 2019.of the year and on an interim basis as events and changes in circumstances occur, including, but not limited to, a significant change in operating performance, the business climate, legal or regulatory factors, or a planned sale or disposition of a significant portion of the business. The continued COVID-19 pandemic and related responses could continue to disrupt supply chains and capital markets, reduce labor availability and productivity, and reduce economic activity. These effects could have a variety of adverse impacts on Southern Company and its subsidiaries, including the $263 million of goodwill recorded at PowerSecure. If the impact of the COVID-19 pandemic becomes significant to the operating results of PowerSecure and its businesses, a portion of the associated goodwill may become impaired. The ultimate outcome of these mattersthis matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | At March 31, 2020 | | At December 31, 2019 |
| | Gross Carrying Amount | Accumulated Amortization | Other Intangible Assets, Net | | Gross Carrying Amount | Accumulated Amortization | Other
Intangible Assets, Net |
| | (in millions) | | (in millions) |
| Southern Company | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| Customer relationships | $ | 212 |
| $ | (121 | ) | $ | 91 |
| | $ | 212 |
| $ | (116 | ) | $ | 96 |
|
| Trade names | 64 |
| (26 | ) | 38 |
| | 64 |
| (25 | ) | 39 |
|
| Storage and transportation contracts | 64 |
| (63 | ) | 1 |
| | 64 |
| (62 | ) | 2 |
|
| PPA fair value adjustments | 390 |
| (74 | ) | 316 |
| | 390 |
| (69 | ) | 321 |
|
| Other | 10 |
| (8 | ) | 2 |
| | 11 |
| (8 | ) | 3 |
|
| Total other intangible assets subject to amortization | $ | 740 |
| $ | (292 | ) | $ | 448 |
|
| $ | 741 |
| $ | (280 | ) | $ | 461 |
|
| Other intangible assets not subject to amortization: | | | | | | | |
| Federal Communications Commission licenses | 75 |
| — |
| 75 |
| | 75 |
| — |
| 75 |
|
| Total other intangible assets | $ | 815 |
| $ | (292 | ) | $ | 523 |
| | $ | 816 |
| $ | (280 | ) | $ | 536 |
|
| | | | | | | | |
| Southern Power | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| PPA fair value adjustments | $ | 390 |
| $ | (74 | ) | $ | 316 |
| | $ | 390 |
| $ | (69 | ) | $ | 321 |
|
| | | | | | | | |
| Southern Company Gas | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| Gas marketing services | | | | | | | |
| Customer relationships | $ | 156 |
| $ | (108 | ) | $ | 48 |
| | $ | 156 |
| $ | (104 | ) | $ | 52 |
|
| Trade names | 26 |
| (10 | ) | 16 |
| | 26 |
| (10 | ) | 16 |
|
| Wholesale gas services | | | | | | | |
| Storage and transportation contracts | 64 |
| (63 | ) | 1 |
| | 64 |
| (62 | ) | 2 |
|
| Total other intangible assets subject to amortization | $ | 246 |
| $ | (181 | ) | $ | 65 |
| | $ | 246 |
| $ | (176 | ) | $ | 70 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Amortization associated with other intangible assets was as follows:
|
| | | |
| | Three Months Ended |
| | March 31, 2020 |
| | (in millions) |
Southern Company(a) | $ | 12 |
|
Southern Power(b) | $ | 5 |
|
| Southern Company Gas | |
| Gas marketing services | $ | 4 |
|
Wholesale gas services(b) | 1 |
|
| Southern Company Gas total | $ | 5 |
|
| |
| (a) | Includes $6 million for the three months ended March 31, 2020, recorded as a reduction to operating revenues. |
| |
| (b) | Recorded as a reduction to operating revenues. |
Restricted Cash
The following table provides 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, 2020 and/or December 31, 2019:
|
| | | | | | | | | | | | | | | |
| | Southern Company | | Southern Company Gas |
| | At March 31, 2020 | | At December 31, 2019 | | At March 31, 2020 | | At December 31, 2019 |
| | (in millions) | | (in millions) |
| Cash and cash equivalents | $ | 2,164 |
| | $ | 1,975 |
| | $ | 311 |
| | $ | 46 |
|
Restricted cash(a): | | | | | | | |
| Other accounts and notes receivable | — |
| | 3 |
| | — |
| | 3 |
|
| Other current assets | 3 |
| | — |
| | 3 |
| | — |
|
| Total cash, cash equivalents, and restricted cash | $ | 2,168 |
| (b) | $ | 1,978 |
| | $ | 314 |
| | $ | 49 |
|
| |
| (a) | Represents restricted cash held by Southern Company Gas as collateral for workers' compensation, life insurance, and long-term disability insurance. |
| |
| (b) | Total does not add due to rounding. |
Natural Gas for Sale
Southern Company Gas, with the exception of Nicor Gas, carries 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 0 material adjustments for 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. Nicor Gas' inventory decrement at March 31, 2020 is expected to be restored prior to year end.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Depreciation and Amortization
See FUTURE EARNINGS POTENTIALNote 5 to the financial statements under "Depreciation and Amortization – "Regulatory Matters" hereinSouthern Power" in Item 8 of the Form 10-K for additional information.
Effective January 1, 2020, Southern Power revised the depreciable lives of its natural gas generating facilities from up to 45 years to up to 50 years. This revision resulted in an immaterial decrease in depreciation for the three months ended March 31, 2020 and is expected to result in an immaterial decrease in annual depreciation for 2020.
(B) REGULATORY MATTERS
See Note 2 to the financial statements in Item 8 of the Form 10-K for additional information.information relating to regulatory matters.
The recovery balances for certain retail regulatory clauses of the traditional electric operating companies and Southern Company continuesGas at March 31, 2020 and December 31, 2019 were as follows:
|
| | | | | | | |
| Regulatory Clause | Balance Sheet Line Item | March 31,
2020 | December 31,
2019 |
| | | (in millions) |
| Alabama Power | | | |
| Rate CNP Compliance | Other regulatory liabilities, current | $ | 35 |
| $ | 55 |
|
| | Other regulatory liabilities, deferred | 17 |
| 7 |
|
| Rate CNP PPA | Deferred under recovered regulatory clause revenues | 37 |
| 40 |
|
| Retail Energy Cost Recovery | Other regulatory liabilities, current | 74 |
| 32 |
|
| | Other regulatory liabilities, deferred | 22 |
| 17 |
|
| Natural Disaster Reserve | Other regulatory liabilities, current | 27 |
| 37 |
|
| | Other regulatory liabilities, deferred | 104 |
| 113 |
|
| Georgia Power | | | |
| Fuel Cost Recovery | Other current liabilities | $ | 6 |
| $ | — |
|
| | Other deferred credits and liabilities | 163 |
| 73 |
|
| Mississippi Power | | | |
| Fuel Cost Recovery | Over recovered regulatory clause liabilities | $ | 25 |
| $ | 23 |
|
| Ad Valorem Tax | Other regulatory assets | 11 |
| 47 |
|
| | Other regulatory assets, deferred | 38 |
| — |
|
| Property Damage Reserve | Other regulatory liabilities, deferred | 53 |
| 54 |
|
| Southern Company Gas | | | |
| Natural Gas Cost Recovery | Other regulatory liabilities | $ | 84 |
| $ | 74 |
|
Alabama Power
Petition for Certificate of Convenience and Necessity
During March 2020, a hearing was held before the Alabama PSC regarding Alabama Power's petition for a certificate of convenience and necessity (CCN) 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,procure additional capacity, including 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,Autauga Combined Cycle Acquisition. On April 22, 2020, the EPC Contractor filed for bankruptcy protection under Chapter 11FERC approved the Autauga Combined Cycle Acquisition. The Autauga Combined Cycle Acquisition, as well as procurement of the U.S. Bankruptcy Code. In December 2017, the Georgia PSC approved Georgiaother resources identified in Alabama Power's recommendationCCN petition, remain subject 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
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 approvedapproval by the Georgia PSC, remain unchanged.
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.
Alabama PSC. The ultimate outcome of these mattersthis matter cannot be determined at this time.
See FUTURE EARNINGS POTENTIAL – "Construction Program – Nuclear Construction" and Note (F)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Georgia Power
Deferral of Incremental COVID-19 Costs
On April 7, 2020, in response 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) |
| $1,146 | | 122.2 |
Consolidated net income attributableCOVID-19 pandemic, the Georgia PSC approved an order directing Georgia Power to Southern Company was $2.1 billion ($2.01 per share) forcontinue its previous, voluntary suspension of customer disconnections and to defer the first quarter 2019 compared to $938 million ($0.93 per share) forresulting incremental bad debt and other incremental costs as a regulatory asset. Georgia Power and the corresponding period in 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 decrease in retail revenues due to milder weather compared to the corresponding period in 2018. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for additional information.
Retail Electric Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(484) | | (13.6) |
In the first quarter 2019, retail electric revenues were $3.1 billion compared to $3.6 billion for the corresponding period in 2018.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Detailsstaff 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 increased in the first quarter 2019 when comparedGeorgia PSC will work collaboratively to the correspondingestablish a methodology for identifying these incremental costs. The period in 2018 primarily due to increases under Rate CNP Compliance at Alabama Power and increases related to PEP and ECO Plan rate changes that became effective for the first billing cycle of September 2018 at Mississippi Power.
See Note 2 to the financial statements under "Alabama Power" and "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 decreased in the first quarter 2019 when compared to the corresponding period in 2018. In the first quarter 2019, weather-adjusted residential KWH sales increased 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 decreased 1.9% primarily due to decreased customer usage resulting from an increase in energy saving initiatives, partially offset by customer growth. Industrial KWH sales 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 paper sectors, partially offset by increased demand in the pipeline sector.
Fuel and other cost recovery revenues decreased $150 million in the first quarter 2019 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 for the traditional electric operating companies include provisions to adjust billings for fluctuations in fuelover which such 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 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(124) | | (19.9) |
Wholesale electric revenues consist of PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not
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, the ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Wholesale electric revenues at Mississippi Power include FERC-regulated 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 2019, wholesale electric revenues were $499 million compared to $623 million for the corresponding period in 2018. This decrease was related to a $106 million decrease in energy revenues and an $18 million decrease in capacity revenues. Excluding a decrease of $7 million of energy revenues related to the sale of Gulf Power, the decrease in energy revenues primarily related to Southern Power and included 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 the volume of KWHs 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 the sales of Gulf Power and Southern Power's Plant Oleander and Plant Stanton Unit A. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas Plants" in Item 8 of the Form 10-K for additional information.
Natural Gas Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(133) | | (8.3) |
In the first quarter 2019, natural gas revenues were $1.5 billion compared to $1.6 billion for the corresponding period in 2018.
Details of the changes in natural gas revenues were as follows:
|
| | | | | | | |
| | | First Quarter 2019 |
| | | (in millions) | | (% change) |
| Natural gas revenues – prior year | | $ | 1,607 |
| | |
| Estimated change resulting from – | | | | |
| Infrastructure replacement programs and base rate changes | | 32 |
| | 2.0 |
|
| Gas costs and other cost recovery | | 62 |
| | 3.9 |
|
| Weather | | 7 |
| | 0.4 |
|
| Wholesale gas services | | (80 | ) | | (5.0 | ) |
| Southern Company Gas Dispositions | | (167 | ) | | (10.4 | ) |
| Other | | 13 |
| | 0.8 |
|
| Natural gas revenues – current year | | $ | 1,474 |
| | (8.3 | )% |
Revenues attributable to infrastructure replacement programs and base rate changes at the natural gas distribution utilities increased 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 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 at Southern Company Gas' 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 the natural gas distribution 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 Note (B) to the Condensed Financial Statements herein under "Southern Company Gas" for additional information.
Other Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(226) | | (54.7) |
In the first quarter 2019, other revenues were $187 million compared to $413 million for the corresponding period in 2018. The decrease was primarily related to PowerSecure's 2018 storm restoration services in Puerto Rico.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | | First Quarter 2019
vs.
First Quarter 2018 |
| | | (change in millions) | | (% change) |
| Fuel | | $ | (251 | ) | | (22.8) |
| Purchased power | | (97 | ) | | (36.3) |
| Total fuel and purchased power expenses | | $ | (348 | ) | | |
In the first quarter 2019, total fuel and purchased power expenses were $1.0 billion compared to $1.4 billion for the corresponding period in 2018. Excluding a decrease of $121 million related to the sale of Gulf Power, the decrease was primarily the result of a $149 million decrease in the average cost of fuel and purchased 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 2019 | | First Quarter 2018(a) |
Total generation (in billions of KWHs) | | 43 | | 46 |
Total purchased power (in billions of KWHs) | | 4 | | 3 |
Sources of generation (percent) — | | | | |
| Gas | | 48 | | 45 |
| Coal | | 22 | | 29 |
| Nuclear | | 16 | | 16 |
| Hydro | | 8 | | 4 |
| Other | | 6 | | 6 |
Cost of fuel, generated (in cents per net KWH)— | | | | |
| Gas | | 2.56 | | 2.84 |
| Coal | | 2.92 | | 2.88 |
| Nuclear | | 0.79 | | 0.78 |
Average cost of fuel, generated (in cents per net KWH) | | 2.32 | | 2.47 |
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 2019, fuel expense was $850 million compared to $1.1 billion for the corresponding period in 2018. Excluding approximately $54 million related to Gulf Power in 2018, the decrease was primarily due to a 29.1% decrease in the volume of KWHs generated by coal and a 9.9% decrease in the average cost of natural gas per KWH generated.
Purchased Power
In the first quarter 2019, purchased power expense was $170 million compared to $267 million for the corresponding period in 2018. 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 29.1% decrease in the average cost per KWH purchased. See Note (K) to the Condensed Financial Statements under "Southern Company" herein for information regarding the sale of 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 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(171) | | (59.2) |
In the first quarter 2019, cost of other sales was $118 million compared to $289 million for the corresponding period in 2018. The decrease was primarily related to PowerSecure's 2018 storm restoration services in Puerto Rico.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(139) | | (9.6) |
In the first quarter 2019, other operations and maintenance expenses were $1.3 billion compared to $1.5 billion for the corresponding period in 2018. The decrease reflects approximately $76 million related to Gulf Power in 2018 and $71 million related to the Southern Company Gas Dispositions, including the $42 million goodwill impairment charge recorded in contemplation of the sale of Pivotal Home Solutions.
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(18) | | (2.3) |
In the first quarter 2019, depreciation and amortization was $751 million compared to $769 million for the corresponding period in 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 of $33 million related to additional plant in service.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(26) | | (7.3) |
In the first quarter 2019, 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.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Estimated Loss on Plants Under Construction
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(42) | | (95.5) |
In the first quarter 2019, estimated loss on plants under construction was $2 million compared to $44 million for the corresponding period in 2018. The decrease was primarily due to lower costs associated with abandonment and closure activities for the mine and gasifier-related assets of the Kemper IGCC at Mississippi Power.
See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under "Mississippi Power – Kemper County Energy Facility" for additional information.
Gain on Dispositions, Net
|
| | |
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.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(28) | | (6.1) |
In the first quarter 2019, interest expense, net of amounts capitalized was $430 million compared to $458 million in the corresponding period in 2018. Excluding a decrease of $13 million related to the sale of Gulf Power, the decrease was immaterial.
See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein, Note 8 to the financial statements in Item 8 of the Form 10-K, and Note (F) to the Condensed Financial Statements herein for additional information.
Other Income (Expense), Net
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $18 | | 30.0 |
In the first quarter 2019, other income (expense), net was $78 million compared to $60 million for the corresponding period in 2018. The increase was primarily due to an increase in interest income from a new tolling arrangement accounted for as a lease at Mississippi Power and temporary cash investments.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
|
| | |
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 sale of Gulf Power.
See Notes (G) and (K) to the Condensed Financial Statements herein for additional information.
Net Loss Attributable to Noncontrolling Interests
|
| | |
First Quarter 2019 vs. First Quarter 2018 |
(change in millions) | | (% change) |
$23 | | N/M |
N/M - Not meaningful
Substantially all noncontrolling interests relate to renewable projects at Southern Power. See Note 7 to the financial statements 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 constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and, for the traditional electric operating companies, 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 and the profitability of Southern Power's competitive wholesale business are also major factors.
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 commerce transactions, and more 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, the development or acquisition of renewable facilities and other 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 November 2018, Southern Power entered 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 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 salesrecovered is expected to closebe determined in mid-2019; however,Georgia Power's next base rate case. At March 31, 2020, the incremental costs deferred were immaterial. The ultimate outcome of these mattersthis matter cannot be determined at this time.
For additional information relatingIntegrated Resource Plan
On March 5, 2020, the Sierra Club filed a petition for judicial review in the Superior Court of Fulton County to these issues, see RISK FACTORS and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Companyappeal the Georgia PSC's decision 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 GHG strategies2019 ARP allowing Georgia Power to assess upcoming requirements andrecover 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 offor CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to the Southern Company system's transmission and distribution (electric and natural gas) systems. A major portion of these costs is expected to be recovered through retail and wholesale rates. 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 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 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, 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 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 under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.AROs. 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 mattersmatter cannot be determined at this time.
Fuel Cost Recovery
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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 byOn March 9, 2020, Georgia Power infiled a request with the two units, each withGeorgia PSC to decrease fuel rates by 16% effective June 1, 2020, which is expected to reduce annual billings by approximately 1,100 MWs). See Note 2$329 million. Georgia Power expects the Georgia PSC to the financial statements under "Georgia Power – Nuclear Construction" in Item 8make a final decision on this matter on May 28, 2020. The ultimate outcome 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.this matter cannot be determined at this time.
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 two2 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
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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.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for information on the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
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) | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
| $ | 8.2 |
|
| Construction contingency estimate | 0.4 |
| 0.2 |
|
Total project capital cost forecast(a)(b) | 8.4 |
| 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) | |
Net investment as of March 31, 2020(b) | | (6.2 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
| $ | 2.2 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million.$270 million, of which $36 million had been accrued through March 31, 2020. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds.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$2.3 billion had been incurred through March 31, 2019.2020.
As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of commodity installation, system turnovers, and workforce statistics.
During the first quarter 2020, approximately $66 million of the $366 million construction contingency estimate established in the second quarter 2018 was allocated to the base capital cost forecast for cost risks including, among other things, construction productivity, field support, subcontracts, and procurement, as well as the impacts of the April 2020 reduction in workforce described below.
Through March 31, 2020, a total of approximately $206 million of the $366 million construction contingency estimate established in the second quarter 2018 has been allocated to the base capital cost forecast for cost risks including, among other factors, construction productivity, including the April 2020 reduction in workforce described below; craft labor incentives; adding resources for supervision, field support, project management, initial test program, start-up, and operations and engineering support; subcontracts; and procurement. As and when construction contingency is spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.
In April 2019, Southern Nuclear completedestablished aggressive target values for monthly construction production and system turnover activities as part of a strategy to maintain and, where possible, build margin to the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. Through early 2020, the project faced challenges with the April 2019 aggressive strategy targets including, but not limited to, electrical and pipefitting labor productivity and closure rates for work packages, which resulted in a backlog of activities and completion percentages below the April 2019 aggressive strategy targets.
In February 2020, Southern Nuclear updated its 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 confirmedforecast, which did not change the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. Theconfirmed the expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. This update included initiatives to improve productivity while refining and extending system turnover plans and certain near-term milestone dates. Other milestone dates did not change. Achievement of the aggressive site work plan relies on meeting increased monthly production and activity target values during 2020. Through March 2020, Unit 3 mechanical, electrical, and subcontract activities started to build a backlog; however, overall production was generally consistent with the updated aggressive site work plan.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site, including worker distancing measures, isolating individuals who have tested positive for COVID-19, are showing symptoms consistent with COVID-19, are being tested for COVID-19, or have been in close contact with such persons, requiring self-quarantine, and adopting additional precautionary measures. Multiple members of the workforce have tested positive for COVID-19. The COVID-19 pandemic has impacted productivity levels and pace of activity completion.
On April 15, 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 as previously approvedexpected to total approximately 20% of the existing workforce. This reduction in workforce was a mitigation action intended to address the impact of the COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and construction site, including ongoing challenges with labor productivity that have been exacerbated by the impact of the COVID-19 pandemic. It is expected to provide operational efficiencies by increasing productivity of the remaining workforce and reducing workforce fatigue and absenteeism. It is also expected to allow for increased social distancing by the workforce and facilitate compliance with the latest recommendations from the Centers for Disease Control and Prevention.
To meet the 2020 targets in the aggressive site work plan for both Unit 3 and Unit 4, construction productivity, including subcontractors, must improve and be sustained above historical average levels. In addition, appropriate levels of craft laborers, particularly electrical and pipefitter craft labor, must be maintained. The workforce levels resulting from the April 2020 reduction are expected to last at least through the summer as Georgia PSC, remain unchanged.Power continues to monitor the impacts of the COVID-19 pandemic on the construction site. Georgia Power's proportionate share of the estimated incremental cost of this mitigation action, which is currently estimated to total approximately $20 million and is included in the first quarter 2020 contingency allocation, assumes absenteeism rates normalize and the intended productivity efficiencies are realized in the coming months. Based on these assumptions, while this mitigation action has extended and may further extend certain milestone dates in the updated aggressive site work plan, Georgia Power does not expect it to affect either the total project capital cost forecast or the ability to achieve the regulatory-approved in-service dates of November 2021 and November 2022 for Plant Vogtle Units 3 and 4, respectively. Southern Nuclear and Georgia Power continue to believe that pursuit of an aggressive site work plan is an appropriate strategy to achieve completion of the units by their regulatory-approved in-service dates.
As construction, including subcontract work, continues and testing and system turnover activities increase, challenges with management of contractors subcontractors, and vendors; subcontractor performance; supervision of craft labor and related craft labor productivity, particularly in the installation of electrical and mechanical commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only recentlywithin the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; regional transmission upgrades; or other issues could arise and change the projected schedule and estimated cost. Monthly
In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction, production targets established as parttesting, supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate impact of a strategy to maintainthe COVID-19 pandemic on the construction schedule 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 improvebudget for Plant Vogtle Units 3 and additional craft laborers must4 cannot be retained and deployed.determined at this time.
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 resolutionsubmittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, may arise, which may result in additional license amendments or require other resolution. As part of the aggressive site work plan, in January 2020,
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Southern Nuclear notified the NRC of its intent to load fuel in 2020. On April 20, 2020, Nuclear Watch South filed a request for hearing and contention with the NRC that challenges the closure of certain ITAAC. 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.
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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$10 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 thean increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report in 2018, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtlea binding term sheet (Vogtle Owner Term SheetSheet) with the other Vogtle Owners and MEAG'sMEAG Power's wholly-owned subsidiaries MEAG Power SPVJ, LLC (MEAG SPVJ), MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) thea term sheet (MEAG Term Sheet) with MEAG Term Sheet with MEAGPower and MEAG SPVJ to provide up to $300 million of funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. OnIn January 14, 2019, Georgia Power, MEAG Power, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. OnIn February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG'sMEAG Power's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.Sheet (Global Amendments).
The ultimate outcomeAs previously disclosed, pursuant to the Global Amendments: (i) each Vogtle Owner must pay its proportionate share of these matters cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certifyqualifying 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 recovered4 based on all applicable certified costs through annual adjustments to the NCCR tariffits ownership percentage up to the certified capitalestimated 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 theat 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(EAC) 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 inwhich formed 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
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. 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.
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 (netin the nineteenth VCM plus $800 million; (ii) Georgia Power will be responsible for 55.7% of $1.7actual qualifying construction costs between $800 million and $1.6 billion received underover the Guarantee Settlement Agreement and approximately $188EAC in the nineteenth VCM (resulting in $80 million in related Customer Refunds)of potential additional costs to Georgia Power), with respectthe remaining Vogtle Owners responsible for 44.3% of such costs pro rata in accordance with their respective ownership interests; and (iii) Georgia Power will be responsible for 65.7% of qualifying construction costs between $1.6 billion and $2.1 billion
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
over the EAC in the nineteenth VCM (resulting in a further $100 million of potential additional costs to Georgia Power'sPower), with the remaining Vogtle Owners responsible for 34.3% of such costs pro rata in accordance with their respective ownership interest.
As a resultinterests. If the EAC is revised and exceeds the EAC in the nineteenth VCM by more than $2.1 billion, each of the increaseother Vogtle Owners will have a one-time option at the time the project budget forecast is so revised to tender a portion of its ownership interest to Georgia Power in exchange for Georgia Power's agreement to pay 100% of such Vogtle Owner's remaining share of total construction costs in excess of the EAC in the total project capital cost forecast and Georgia Power's decision notnineteenth VCM plus $2.1 billion.
In addition, pursuant to seek rate recovery of the increase in the base capital costs,Global Amendments, 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 themust vote to continue construction if certain adverse events occur, including, among other events: (i) the bankruptcy of Toshiba; (ii) the termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement, the Bechtel Agreement, or the agency agreement with Southern Nuclear; (iii) Georgia Power entered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and certainPower's public announcement of MEAG's wholly-owned subsidiaries, including MEAG Power SPVJ, LLC (MEAG SPVJ),its intention not to take certain actions which partially mitigate potential financial exposuresubmit 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 interestrate recovery any portion of its investment 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 byor 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 intoPower's costs relating to 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,will not be recovered in retail rates, excluding any additional amounts paid by Georgia Power had a totalon behalf of $3.46 billionthe other Vogtle Owners pursuant to the Global Amendments described above and the first 6% of borrowings outstanding undercosts during any six-month VCM reporting period that are disallowed by the related multi-advance credit facilities.Georgia PSC for recovery, or for which Georgia Power elects not to seek cost recovery, through retail rates; and (iv) an incremental extension of one year or more over the most recently approved schedule.
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
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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, 2019,2020, Georgia Power had recovered approximately $1.9$2.3 billion of financing costs. Financing costs related to capital costs above $4.418 billion willare being recognized through AFUDC and are expected to be recovered through AFUDC;retail rates over the life of Plant Vogtle Units 3 and 4; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018,2019, the Georgia PSC approved Georgia Power's request to increasedecrease the NCCR tariff by $88$62 million annually, effective January 1, 2019.2020.
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)customer
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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$75 million in 20182019 and are estimated to have negative earnings impacts of approximately $75$145 million, $255 million, and $200 million in 20192020, 2021, and an aggregate of approximately $635 million from 2020 to 2022.
2022, respectively. In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
In 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 two2 appeals. OnIn January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. In October 2019, the Georgia Court of Appeals issued an opinion affirming the Fulton County Superior Court's ruling that the Georgia PSC's January 11, 2018 order was not a final, appealable decision. In addition, the Georgia Court of Appeals remanded the case to the Fulton County Superior Court to clarify its ruling as to whether the petitioners showed that review of the Georgia PSC's final order would not provide them an adequate remedy. On April 21, 2020, the Fulton County Superior Court entered an appealable order granting Georgia Power's motion to dismiss the two appeals. Georgia Power believes the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
appeal has petitions have no merit; however, an adverse outcome in the appeallitigation 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 theThe Georgia PSC which requested approval of $578 million of construction capital costs incurred from January 1, 2018has approved 21 VCM reports covering the periods 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 approvedincluding total construction capital costs incurred through June 30, 2018that date of $5.4$6.7 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds)customer refunds). In addition, the staff ofOn February 19, 2020, Georgia Power filed its twenty-second VCM report with the Georgia PSC requested, and Georgia Power agreed, to reportcovering the resultsperiod from July 1, 2019 through December 31, 2019, requesting approval 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.$674 million of construction capital costs incurred during that period.
The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
2019 Base Rate Case
On March 17, 2020, the Mississippi PSC approved a settlement agreement between Mississippi Power and the Mississippi Public Utilities Staff related to Mississippi Power's base rate case filed in November 2019 (Mississippi Power Rate Case Settlement Agreement).
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020, based on a test year period of January 1, 2020 through December 31, 2020, a 53% average equity ratio, an allowed maximum actual equity ratio of 55% by the end of 2020, and a 7.57% return on investment.
Additionally, the approved Mississippi Power Rate Case Settlement Agreement: (i) established common amortization periods of four years for regulatory assets and three years for regulatory liabilities included in the Form 10-Kapproved revenue requirement, including those related to unprotected deferred income taxes; (ii) established new depreciation rates reflecting an annual increase in depreciation of approximately $10 million; and (iii) excluded certain compensation costs totaling approximately $3.9 million. It also eliminated separate rates for a discussion of certain riskscosts associated with Plant Ratcliffe and energy efficiency initiatives and includes such costs in the licensing, construction,PEP, ECO Plan, and ad valorem tax adjustment factor, as applicable. In accordance with the previous order of the Mississippi PSC suspending the operation of nuclear generating units, including potential impacts that could resultPEP and the ECO Plan for 2018 through 2020, Mississippi Power plans to resume PEP proceedings and ECO Plan filings for 2021.
Performance Evaluation Plan
Under the Mississippi Power Rate Case Settlement Agreement, Mississippi Power is required to file with the Mississippi PSC PEP compliance rate clauses to incorporate Mississippi Power's and the Mississippi Public Utilities Staff's recommended revisions to PEP by May 18, 2020. These revisions include, but are not limited to, changing the filing date for the annual PEP rate filing from November of the immediately preceding year to March of the current year, utilizing a major incidenthistoric test year adjusted for "known and measurable" changes, using discounted cash flow and regression formulas to determine base return on equity, and moving all embedded ad valorem property taxes currently collected in PEP to the ad valorem tax adjustment clause. These revisions are subject to the approval of the Mississippi PSC. The ultimate outcome of this matter cannot be determined at this time.
Deferral of Incremental COVID-19 Costs
On April 14, 2020, in order to mitigate the economic impact of the COVID-19 pandemic on customers, the Mississippi PSC approved an order directing Mississippi Power to continue its previous, voluntary suspension of customer disconnections and to defer as a nuclear facility anywhereregulatory asset all necessary and reasonable incremental costs or expenses to plan, prepare, stage, or react to protect and keep safe its employees and customers, and to reliably operate its utility system during the COVID-19 pandemic. The period over which such costs will be recovered is expected to be determined in the world.
DOE Financing
Mississippi Power's next PEP filing. At March 31, 2019, Georgia2020, the incremental costs deferred were immaterial. The ultimate outcome of this matter cannot be determined at this time.
Municipal and Rural Associations Tariff
On April 27, 2020, Mississippi Power had borrowed $3.46 billion relatedfiled a request with the FERC for an increase in wholesale base revenues under the MRA tariff as agreed upon in a settlement agreement reached with its wholesale customers. The MRA settlement agreement provides that base rates will increase $2 million annually, effective May 1, 2020. Mississippi Power expects the FERC to Plant Vogtle Unitsrule on the request in the second quarter 2020. The ultimate outcome of this matter cannot be determined at this time.
Southern Company Gas
Rate Proceedings
On February 3, and 4 costs2020, Virginia Natural Gas filed a notice of intent with the Virginia Commission 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, subjectrequired prior to the satisfactionfiling of certain conditions. a base rate case. Virginia Natural Gas planned to file its rate case in April 2020 but, as a result of the COVID-19 pandemic, now expects to file in June 2020. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(C) CONTINGENCIES
See Note 83 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for information relating to various lawsuits 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.other contingencies.
General Litigation Matters
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
Georgia Power isRegistrants are 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 against each Registrant and any subsidiaries cannot be predicteddetermined 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.
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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 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 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 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, 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 $212 million for the first three months of 2019 compared to $373 million for the corresponding period in 2018. The decrease was primarily due to the timing of fossil fuel stock purchases and higher payments for property taxes and municipal franchise fees. Net cash used for investing activities totaled $980 million for the first three months of 2019 primarily related to installation of equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities, including approximately $360 million related to the construction of Plant Vogtle Units 3 and 4. Net cash provided from financing activities totaled $665 million for the first three months of 2019 primarily due to borrowings from the FFB for construction of Plant Vogtle Units 3 and 4 and the reoffering of pollution control revenue bonds, partially offset by payment of common stock dividends and the redemption of pollution control revenue 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 2019 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 $1.1 billion in long-term debt (including securities due within one year) primarily due to borrowings from 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 $0.7 billion in property, plant, and equipment to comply with environmental standards and the construction of generation, transmission, and distribution facilities. See Note (L) to the Condensed Financial Statements herein for additional information on the adoption of 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Georgia Power's capital requirements and contractual obligations. Approximately $973 million will be required through March 31, 2020 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; 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 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, 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,
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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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's current liabilities exceeded current assets by $1.4 billion primarily due to long-term debt that is due within one year of $973 million and notes payable of $275 million.
At March 31, 2019, Georgia Power had approximately $9 million of cash and cash equivalents. Georgia Power's committed credit arrangement with banks was $1.75 billion at March 31, 2019, 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, 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.
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 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.
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, 2019 was approximately $550 million. In addition, at March 31, 2019, Georgia Power had $345 million of pollution control 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.
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 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, 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
At March 31, 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, 2019 were as follows:
|
| | | |
| 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.
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 Georgia Power, may be negatively impacted. A settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation, 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, which is scheduled to be filed by July 1, 2019. See Note 2 to the financial statements under "Georgia Power – Rate Plans" in Item 8 of the Form 10-K for additional information.
Financing Activities
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.
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;
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.
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 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, 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.
MISSISSIPPI POWER COMPANY
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Retail revenues | $ | 203 |
| | $ | 194 |
|
| Wholesale revenues, non-affiliates | 57 |
| | 68 |
|
| Wholesale revenues, affiliates | 22 |
| | 34 |
|
| Other revenues | 5 |
| | 6 |
|
| Total operating revenues | 287 |
| | 302 |
|
| Operating Expenses: | | | |
| Fuel | 93 |
| | 98 |
|
| Purchased power | 3 |
| | 9 |
|
| Other operations and maintenance | 59 |
| | 75 |
|
| Depreciation and amortization | 48 |
| | 41 |
|
| Taxes other than income taxes | 26 |
| | 28 |
|
| Estimated loss on Kemper IGCC | 2 |
| | 44 |
|
| Total operating expenses | 231 |
| | 295 |
|
| Operating Income (Loss) | 56 |
| | 7 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (17 | ) | | (19 | ) |
| Other income (expense), net | 5 |
| | 1 |
|
| Total other income and (expense) | (12 | ) | | (18 | ) |
| Earnings (Loss) Before Income Taxes | 44 |
| | (11 | ) |
| Income taxes (benefit) | 7 |
| | (4 | ) |
| Net Income (Loss) | $ | 37 |
| | $ | (7 | ) |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income (Loss) | $ | 37 |
| | $ | (7 | ) |
| Other comprehensive income (loss): |
| |
|
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $- and $(1), respectively | — |
| | (1 | ) |
| Total other comprehensive income (loss) | — |
| | (1 | ) |
| Comprehensive Income (Loss) | $ | 37 |
| | $ | (8 | ) |
The accompanying notes as they relate to Mississippi Power are an integral part of these condensedRegistrant's financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income (loss) | $ | 37 |
| | $ | (7 | ) |
| Adjustments to reconcile net income (loss) to net cash used for operating activities — | | | |
| Depreciation and amortization, total | 50 |
| | 44 |
|
| Deferred income taxes | (8 | ) | | 155 |
|
| Estimated loss on Kemper IGCC | 6 |
| | 37 |
|
| Other, net | (10 | ) | | 3 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 11 |
| | (129 | ) |
| -Other current assets | 7 |
| | (12 | ) |
| -Accounts payable | (38 | ) | | (21 | ) |
| -Accrued taxes | (62 | ) | | (110 | ) |
| -Accrued compensation | (22 | ) | | (22 | ) |
| -Other current liabilities | 6 |
| | — |
|
| Net cash used for operating activities | (23 | ) | | (62 | ) |
| Investing Activities: | | | |
| Property additions | (45 | ) | | (33 | ) |
| Construction payables | (8 | ) | | (2 | ) |
| Other investing activities | (10 | ) | | (17 | ) |
| Net cash used for investing activities | (63 | ) | | (52 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | — |
| | (4 | ) |
| Proceeds — | | | |
| Senior notes | — |
| | 600 |
|
| Short-term borrowings | — |
| | 300 |
|
| Pollution control revenue bonds | 43 |
| | — |
|
| Redemptions — Other long-term debt | — |
| | (900 | ) |
| Return of capital | (38 | ) | | — |
|
| Other financing activities | — |
| | (5 | ) |
| Net cash provided from (used for) financing activities | 5 |
| | (9 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (81 | ) | | (123 | ) |
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 293 |
| | 248 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 212 |
| | $ | 125 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $- and $- capitalized for 2019 and 2018, respectively) | $ | 13 |
| | $ | 21 |
|
| Income taxes, net | — |
| | 19 |
|
| Noncash transactions — Accrued property additions at end of period | 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, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 212 |
| | $ | 293 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 29 |
| | 34 |
|
| Unbilled revenues | | 37 |
| | 41 |
|
| Affiliated | | 16 |
| | 21 |
|
| Other accounts and notes receivable | | 36 |
| | 31 |
|
| Fossil fuel stock | | 23 |
| | 20 |
|
| Materials and supplies | | 52 |
| | 53 |
|
| Other regulatory assets | | 102 |
| | 116 |
|
| Other current assets | | 6 |
| | 19 |
|
| Total current assets | | 513 |
| | 628 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 4,821 |
| | 4,900 |
|
| Less: Accumulated provision for depreciation | | 1,467 |
| | 1,429 |
|
| Plant in service, net of depreciation | | 3,354 |
| | 3,471 |
|
| Construction work in progress | | 110 |
| | 103 |
|
| Total property, plant, and equipment | | 3,464 |
| | 3,574 |
|
| Other Property and Investments | | 123 |
| | 24 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 33 |
| | 33 |
|
| Other regulatory assets, deferred | | 487 |
| | 474 |
|
| Accumulated deferred income taxes | | 148 |
| | 150 |
|
| Other deferred charges and assets | | 17 |
| | 3 |
|
| Total deferred charges and other assets | | 685 |
| | 660 |
|
| Total Assets | | $ | 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, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 339 |
| | $ | 40 |
|
| Accounts payable — | | | | |
| Affiliated | | 52 |
| | 60 |
|
| Other | | 50 |
| | 90 |
|
| Accrued taxes | | 33 |
| | 95 |
|
| Accrued interest | | 20 |
| | 15 |
|
| Accrued compensation | | 16 |
| | 38 |
|
| Accrued plant closure costs | | 26 |
| | 29 |
|
| Asset retirement obligations | | 28 |
| | 34 |
|
| Over recovered regulatory clause liabilities | | 14 |
| | 14 |
|
| Other current liabilities | | 55 |
| | 40 |
|
| Total current liabilities | | 633 |
| | 455 |
|
| Long-term Debt | | 1,280 |
| | 1,539 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 373 |
| | 378 |
|
| Deferred credits related to income taxes | | 367 |
| | 382 |
|
| Employee benefit obligations | | 111 |
| | 115 |
|
| Asset retirement obligations, deferred | | 127 |
| | 126 |
|
| Other cost of removal obligations | | 186 |
| | 185 |
|
| Other regulatory liabilities, deferred | | 80 |
| | 81 |
|
| Other deferred credits and liabilities | | 18 |
| | 16 |
|
| Total deferred credits and other liabilities | | 1,262 |
| | 1,283 |
|
| Total Liabilities | | 3,175 |
| | 3,277 |
|
Common Stockholder's Equity (See accompanying statements) | | 1,610 |
| | 1,609 |
|
| Total Liabilities and Stockholder's Equity | | $ | 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 2019 vs. FIRST QUARTER 2018
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located withinRegistrants believe 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 projected long-term demand growth, stringent environmental standards, including 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. Mississippi Power is scheduled to file a base rate case in the fourth 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 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. See Note 2 to the financial statements under "FERC Matters" in Item 8 of the Form 10-K 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 for the first quarter 2019 was $37 million compared to a loss of $7 million for the corresponding period in 2018. The increase in net income is primarily attributable to lower charges associated with the Kemper IGCC and a decrease in operations and maintenance expenses.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $9 | | 4.6 |
In the first quarter 2019, retail revenues were $203 million compared to $194 million 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 | $ | 194 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 15 |
| | 7.7 | % |
| Sales growth | 1 |
| | 0.5 |
|
| Weather | (9 | ) | | (4.6 | ) |
| Fuel and other cost recovery | 2 |
| | 1.0 |
|
| Retail – current year | $ | 203 |
| | 4.6 | % |
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 increases 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 April 2018 and a new tolling arrangement accounted for as a sales-type lease. See Note 2 to the financial statements under "Mississippi Power – Performance Evaluation Plan," " – Environmental Compliance Overview 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 increased in the first quarter 2019 compared to the corresponding period in 2018. Weather-adjusted residential KWH sales increased 1.5% in the first quarter 2019 due to increased customer usage. Weather-adjusted commercial KWH sales decreased 3.4% due to decreased customer usage. Industrial KWH sales decreased 3.9% primarily due to decreased customer 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 increased in the first quarter 2019 when compared to the corresponding period in 2018 primarily as a result of higher 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, 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 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
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" herein for additional information.
In the first quarter 2019, wholesale revenues from sales to non-affiliates were $57 million compared to $68 million for the corresponding period in 2018. 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 decrease in cost-based electric tariff revenues due to decreased customer usage and milder weather.
Wholesale Revenues – Affiliates
|
| | |
| 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 2019, wholesale revenues from sales to affiliates were $22 million compared to $34 million for the corresponding period in 2018. This decrease was primarily due to a $19 million decrease associated with lower natural gas prices, partially offset by a $7 million increase associated with higher KWH sales due to the dispatch of Mississippi Power's lower cost generation resources to serve the Southern Company system's territorial load.
Fuel and Purchased Power Expenses
|
| | | | | |
| | First Quarter 2019 vs. First Quarter 2018 |
| | (change in millions) | | (% change) |
| Fuel | $ | (5 | ) | | (5.1) |
| Purchased power | (6 | ) | | (66.7) |
| Total fuel and purchased power expenses | $ | (11 | ) | | |
In the first quarter 2019, total fuel and purchased power expenses were $96 million compared to $107 million for the corresponding period in 2018. The decrease was due to lower average costs of natural gas and purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through 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 2019 | | First Quarter 2018 |
Total generation (in millions of KWHs) | 3,950 | | 4,003 |
Total purchased power (in millions of KWHs) | 207 | | 194 |
Sources of generation (percent) – | | | |
| Coal | 4 | | 4 |
| Gas | 96 | | 96 |
Cost of fuel, generated (in cents per net KWH) – | | | |
| Coal | 4.42 | | 3.62 |
| Gas | 2.46 | | 2.60 |
Average cost of fuel, generated (in cents per net KWH) | 2.53 | | 2.65 |
Average cost of purchased power (in cents per net KWH) | 1.62 | | 4.74 |
Fuel
In the first quarter 2019, fuel expense was $93 million compared to $98 million for the corresponding period in 2018. The decrease was primarily due to a 5.6% decrease in the average cost of natural gas.
Purchased Power
In the first quarter 2019, purchased power expense was $3 million compared to $9 million for the corresponding period in 2018. The decrease was primarily due to a 66% decrease in the average cost per KWH purchased as a result of colder weather in the first quarter 2018 as compared to 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
Plan regulatory assets. See Note 2 to the financial statements under "Mississippi Power – Environmental Compliance Overview Plan" in Item 8 of the Form 10-K for additional information.
Estimated Loss on Kemper IGCC
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(42) | | (95.5) |
In the first quarter 2019, estimated losses on the Kemper IGCC were $2 million compared to $44 million for the corresponding period in 2018, resulting from lower charges related to abandonment and closure activities for the mine and gasifier-related assets recorded in 2019 as compared to the corresponding period in 2018.
See Note 2 to the financial statements under "Mississippi Power – Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Mississippi Power – Kemper County Energy Facility" herein for additional information.
Other Income (Expense), Net
|
| | |
First Quarter 2019 vs. First Quarter 2018 |
(change in millions) | | (% change) |
$4 | | N/M |
N/M - Not meaningful
In the first quarter 2019, other income (expense), net was $5 million compared to $1 million for the corresponding period in 2018. The increase was primarily due to higher interest income associated with a new tolling arrangement accounted for as a lease. See Note (L) to the Condensed Financial Statements herein for additional information.
Income Taxes (Benefit)
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $11 | | 275.0 |
In the first quarter 2019, income taxes were $7 million compared to an income tax benefit of $4 million for the corresponding period in 2018. This change was primarily due to higher pre-tax earnings primarily due to lower estimated losses on the Kemper IGCC, 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) 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 its ability to prevail againstpending legal challenges associated withdiscussed below have no merit; however, the Kemper County energy facility. Future earnings will be driven primarily by continued customer 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 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 Mississippi Power's transmission and distribution systems. A major portion of these costs is expected to be recovered through retail and wholesale 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.
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 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, 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 Mississippi Power in Item 7 and Note 3 to the financial statements under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
FERC Matters
See Note 2 to the financial statements under "FERC Matters" in Item 8 of the Form 10-K for additional information.
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.
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 as filed, the OATT settlement would not have a material impact on the financial statements of Mississippi 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 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. Mississippi Power is scheduled to file a base rate case in the fourth quarter 2019.
See Note 2 to the financial statements under "Mississippi Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Mississippi Power" herein for additional information.
Kemper County Energy Facility
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.
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.
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;time.
Southern Company
In January 2017, a 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 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 2018, the court issued an order dismissing certain claims against certain officers of Southern Company and Mississippi Power and dismissing the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. In 2018, the court denied the defendants' motion for reconsideration and also denied a motion to certify the issue for interlocutory appeal. In the third quarter 2019, the court certified the plaintiffs' proposed class and the defendants filed a petition for interlocutory appeal of the class certification order with the U.S. Court of Appeals for the Eleventh Circuit. In December 2019, the U.S. District Court for the Northern District of Georgia entered an order staying all deadlines in the case pending mediation. The stay automatically expired on March 31, 2020; however, they could havein light of the COVID-19 pandemic, the U.S. District Court for the Northern District of Georgia vacated all existing discovery deadlines until at least June 15, 2020.
In February 2017, Jean Vineyard and Judy Mesirov each filed a material impactshareholder 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 2 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 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 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
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
officers, and certain former Mississippi Power's financial statements.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 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 securities class action. In August 2019, the court granted a motion filed by the plaintiff in July 2019 to substitute a new named plaintiff, Martin J. Kobuck, in place of Helen E. Piper Survivor's Trust.
Other MattersGeorgia Power
In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of amounts for municipal franchise fees (which fees are paid to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state 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. Georgia Power filed a petition for writ of certiorari with the Georgia Supreme Court, which was granted in 2017. In 2018, the Georgia Supreme Court affirmed 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, in February 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 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. In October 2019, the Georgia PSC issued an order that found and concluded that Georgia Power has appropriately implemented the municipal franchise fee schedule. On March 11, 2020, the Georgia Court of Appeals vacated the Superior Court of Fulton County's February 2019 order granting conditional class certification. The Court of Appeals remanded the case to the Superior Court of Fulton County for the entry of a detailed order addressing each class certification factor. The amount of any possible losses cannot be calculated at this time because, among other factors, it is unknown whether a class will be certified, the ultimate composition of any class, and whether any losses would be subject to recovery from any municipalities.
Mississippi Power is involved in various other matters that could affect future earnings, including matters being litigated and regulatory 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 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 Mississippi 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.
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 May 2018, Southern Company and Mississippi Power received a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two2 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. A portion of the claim for damages was on behalf of Martin Transport, Inc. (Martin Transport), an affiliate of Martin. In May 2019, the first quarterarbitration panel denied Mississippi Power's and Southern Company's motions to dismiss. In September 2019, Martin Transport filed a separate complaint against Mississippi Power in the Circuit Court of Kemper County, Mississippi alleging claims of fraud, negligent misrepresentation, promissory estoppel, and equitable estoppel, each arising out of the same alleged facts and circumstances that underlie Martin's arbitration demand. Martin Transport seeks compensatory damages of $5 million and punitive damages of $50 million. In November 2019, Martin Transport's claim was combined with the Martin arbitration case and the separate court case was dismissed. In December 2019, Southern Company and Mississippi Power each filed motions for summary judgment on all claims. On February 17, 2020, the arbitration panel granted Southern Company's motion and dismissed Southern Company from the arbitration. On March 12, 2020, the arbitration panel
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
denied Mississippi Power's motions for summary judgment. An adverse outcome in this proceeding could have a material impact on Southern Company's and Mississippi Power's financial statements.
In November 2018, Ray C. Turnage and 10 other individual plaintiffs filed a putative class action complaint against Mississippi Power and the three current3 members of the Mississippi PSC in the U.S. District Court for the Southern District of Mississippi. Mississippi Power received Mississippi PSC approval in 2013 to charge a mirror CWIP rate premised upon including in its rate base pre-construction and construction costs for the Kemper IGCC prior to placing the Kemper IGCC into service. The Mississippi Supreme Court reversed that approval and ordered Mississippi Power to refund the amounts paid by customers under the previously-approved mirror CWIP rate. The plaintiffs allege that the initial approval process, and the amount approved, were improper. They also allege that Mississippi Power underpaid customers by up to $23.5 million in the refund process by applying an incorrect interest rate. The plaintiffs seek to recover, on behalf of themselves and their putative class, actual damages, punitive damages, pre-judgment interest, post-judgment interest, attorney's fees, and costs. In response to Mississippi Power and the Mississippi PSC each filing a motion to dismiss, the plaintiffs filed an amended complaint onin March 14, 2019. The amended complaint included four4 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 COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the Mississippi PSC, the Mississippi Development Authority, and Southern Company as additional defendants and add a cause of action against all defendants under a cause of action based on a dormant commerce clause theory under the U.S. Constitution. On April 9, 2020 and April 10, 2020, Mississippi Power believes these legal challenges have no merit; however, anand the Mississippi PSC, respectively, filed responses opposing the motion for leave to file a second amended complaint. Mississippi Power's motion to dismiss the first amended complaint filed in 2019 remains pending before the court. An adverse outcome in either of these proceedingsthis proceeding could have a material impact on Mississippi Power's resultsfinancial statements.
See Note 2 to the financial statements under "Mississippi Power – Kemper County Energy Facility" in Item 8 of operations, financial condition,the Form 10-K for additional information.
Environmental Remediation
The Southern Company system must comply with environmental laws and liquidity. 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 and Georgia have each 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 $15 million at both March 31, 2020 and December 31, 2019. 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.
In December 2019, Mississippi Power entered into an agreement with the Mississippi Commission on Environmental Quality related to groundwater conditions arising from the closed ash pond at Plant Watson. Mississippi Power will complete an assessment and remediation consistent with the requirements of the agreement and the CCR Rule. Potential remediation activities and related cost estimates are pending the result of further site assessment and cannot be determined at this time. Mississippi Power expects to recover the retail portion of remedial costs through the ECO Plan and the wholesale portion through MRA rates.
Southern Company Gas' environmental remediation liability was $262 million and $269 million as of March 31, 2020 and December 31, 2019, respectively, based on the estimated cost of environmental investigation and remediation associated with known current and former manufactured gas plant operating sites. These environmental
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
remediation expenditures are generally recoverable from customers through rate mechanisms approved by the applicable state regulatory agencies of the natural gas distribution utilities.
The ultimate outcome of these matters cannot be determined at this time.time; however, as a result of the regulatory treatment for environmental remediation expenses described above, the final disposition of these matters is not expected to have a material impact on the financial statements of the applicable Registrants.
ACCOUNTING POLICIESOther Matters
Application of Critical Accounting Policies and EstimatesMississippi Power prepares its
Kemper County Energy Facility
See Note 2 to the financial statements under "Mississippi Power – Kemper County Energy Facility" in accordanceItem 8 of the Form 10-K for additional information.
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 related to the lignite mine and equipment and mineral reserves located around the Kemper County energy facility site. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and is expected to be substantially completed in 2020, with GAAP. Significant accounting policies are described in Notes 1, 5, andmonitoring expected to continue through 2027. See Note 6 to the financial statements in Item 8 of the Form 10-K.10-K for additional information.
Dismantlement of the abandoned gasifier-related assets and site restoration activities are expected to be completed in 2024. The additional pre-tax period costs associated with dismantlement and site restoration activities, including related costs for compliance and safety, ARO accretion, and property taxes, are estimated to total $17 million for the remainder of 2020, $15 million to $17 million annually in 2021 through 2023, and $5 million in 2024. In addition, closure costs for the applicationmine and gasifier-related assets, currently estimated at up to $10 million pre-tax (excluding dismantlement costs, net of these policies, certain estimates are made thatsalvage), may be incurred during the remainder of 2020.
In 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received for the Kemper County energy facility. Mississippi Power expects to close out the DOE contract in 2020. In connection with the DOE closeout discussions, in April 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of this matter cannot be determined at this time; however, it could have a material impact on Southern Company's and Mississippi Power's resultsfinancial statements.
Plant Daniel
In conjunction with Southern Company's sale of operationsGulf Power, Mississippi Power and related disclosures. Different assumptionsGulf Power agreed to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On April 24, 2020, Mississippi Power and measurements could produce estimates that are significantly differentGulf Power amended the terms of the agreement to extend the deadline from those recorded inMay 1, 2020 to August 1, 2020 for Mississippi Power to notify Gulf Power of which generating unit it has selected for 100% ownership. The impacts of operating the units on an individual basis continue to be evaluated by Mississippi Power and any transfer of ownership would be subject to approval by the FERC and the Mississippi PSC. The ultimate outcome of this matter cannot be determined at this time.
Southern Company Gas
See Notes 3 and 7 to the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Mississippi Powerstatements in Item 78 of the Form 10-K under "Other Matters – Southern Company Gas" and "Southern Company Gas," respectively, and Note (E) under "Southern Company Gas" for additional information.
On March 24, 2020, Southern Company Gas completed the sale of its interest in Atlantic Coast Pipeline. See Note (K) under "Southern Company Gas" for additional information.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
On February 20, 2020, the FERC approved a two-year extension for PennEast Pipeline to complete the project by January 19, 2022. Expected project costs related to the PennEast Pipeline for Southern Company Gas total approximately $300 million, excluding financing costs.
The ultimate outcome of the PennEast construction project cannot be determined at this time; however, any work delays, whether caused by judicial or regulatory action, abnormal weather, or other conditions, may result in additional cost or schedule modifications or, ultimately, in project cancellation, any of which could result in impairment of Southern Company Gas' investment and could have a significant impact on Southern Company's financial statements and a material impact on Southern Company Gas' financial statements.
(D) REVENUE FROM CONTRACTS WITH CUSTOMERS AND LEASE INCOME
Revenue from Contracts with Customers
The Registrants generate revenues from a variety of sources, some of which are not accounted for as revenue from contracts with customers, such as leases, derivatives, and certain cost recovery mechanisms. See Note 1 to the financial statements under "Revenues" in Item 8 of the Form 10-K for additional information on the revenue policies of the Registrants. See "Lease Income" herein and Note (J) for additional information on revenue accounted for under lease and derivative accounting guidance, respectively.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following tables disaggregate revenue from contracts with customers for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Operating revenues | | | | | | |
| Retail electric revenues | | | | | | |
| Residential | $ | 1,370 |
| $ | 553 |
| $ | 760 |
| $ | 57 |
| $ | — |
| $ | — |
|
| Commercial | 1,146 |
| 364 |
| 720 |
| 62 |
| — |
| — |
|
| Industrial | 680 |
| 321 |
| 281 |
| 78 |
| — |
| — |
|
| Other | 23 |
| 5 |
| 16 |
| 2 |
| — |
| — |
|
| Total retail electric revenues | 3,219 |
| 1,243 |
| 1,777 |
| 199 |
| — |
| — |
|
| Natural gas distribution revenues | | | | | | |
| Residential | 496 |
| — |
| — |
| — |
| — |
| 496 |
|
| Commercial | 130 |
| — |
| — |
| — |
| — |
| 130 |
|
| Transportation | 264 |
| — |
| — |
| — |
| — |
| 264 |
|
| Industrial | 12 |
| — |
| — |
| — |
| — |
| 12 |
|
| Other | 97 |
| — |
| — |
| — |
| — |
| 97 |
|
| Total natural gas distribution revenues | 999 |
| — |
| — |
| — |
| — |
| 999 |
|
| Wholesale electric revenues | | | | | | |
| PPA energy revenues | 159 |
| 27 |
| 9 |
| 2 |
| 125 |
| — |
|
| PPA capacity revenues | 105 |
| 27 |
| 12 |
| 1 |
| 66 |
| — |
|
| Non-PPA revenues | 51 |
| 19 |
| 2 |
| 69 |
| 58 |
| — |
|
| Total wholesale electric revenues | 315 |
| 73 |
| 23 |
| 72 |
| 249 |
| — |
|
| Other natural gas revenues | | | | | | |
| Wholesale gas services | 396 |
| — |
| — |
| — |
| — |
| 396 |
|
| Gas marketing services | 163 |
| — |
| — |
| — |
| — |
| 163 |
|
| Other natural gas revenues | 7 |
| — |
| — |
| — |
| — |
| 7 |
|
| Total natural gas revenues | 566 |
| — |
| — |
| — |
| — |
| 566 |
|
| Other revenues | 192 |
| 37 |
| 95 |
| 5 |
| 3 |
| — |
|
| Total revenue from contracts with customers | 5,291 |
| 1,353 |
| 1,895 |
| 276 |
| 252 |
| 1,565 |
|
Other revenue sources(a) | 868 |
| (2 | ) | (70 | ) | 1 |
| 123 |
| 825 |
|
Other adjustments(b) | (1,141 | ) | — |
| — |
| — |
| — |
| (1,141 | ) |
| Total operating revenues | $ | 5,018 |
| $ | 1,351 |
| $ | 1,825 |
| $ | 277 |
| $ | 375 |
| $ | 1,249 |
|
| |
| (a) | Other revenue sources primarily relate to revenues from customers accounted for as derivatives and leases, as well as alternative revenue programs at Southern Company Gas and other cost recovery mechanisms at the traditional electric operating companies. |
| |
| (b) | Other adjustments relate to the cost of Southern Company Gas' energy and risk management activities. Wholesale gas services revenues are presented net of the related costs of those activities on the statement of income. See Note (L) under "Southern Company Gas" for additional information on the components of wholesale gas services' operating revenues. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Operating revenues | | | | | | |
| Retail electric revenues | | | | | | |
| Residential | $ | 1,327 |
| $ | 559 |
| $ | 708 |
| $ | 60 |
| $ | — |
| $ | — |
|
| Commercial | 1,125 |
| 368 |
| 692 |
| 65 |
| — |
| — |
|
| Industrial | 708 |
| 338 |
| 296 |
| 74 |
| — |
| — |
|
| Other | 21 |
| 6 |
| 11 |
| 4 |
| — |
| — |
|
| Total retail electric revenues | 3,181 |
| 1,271 |
| 1,707 |
| 203 |
| — |
| — |
|
| Natural gas distribution revenues | | | | | | |
| Residential | 601 |
| — |
| — |
| — |
| — |
| 601 |
|
| Commercial | 170 |
| — |
| — |
| — |
| — |
| 170 |
|
| Transportation | 256 |
| — |
| — |
| — |
| — |
| 256 |
|
| Industrial | 17 |
| — |
| — |
| — |
| — |
| 17 |
|
| Other | 116 |
| — |
| — |
| — |
| — |
| 116 |
|
| Total natural gas distribution revenues | 1,160 |
| — |
| — |
| — |
| — |
| 1,160 |
|
| Wholesale electric revenues | | | | | | |
| PPA energy revenues | 190 |
| 31 |
| 12 |
| 3 |
| 151 |
| — |
|
| PPA capacity revenues | 107 |
| 27 |
| 13 |
| 1 |
| 81 |
| — |
|
| Non-PPA revenues | 55 |
| 60 |
| 2 |
| 74 |
| 41 |
| — |
|
| Total wholesale electric revenues | 352 |
| 118 |
| 27 |
| 78 |
| 273 |
| — |
|
| Other natural gas revenues | | | | | | |
| Wholesale gas services | 721 |
| — |
| — |
| — |
| — |
| 721 |
|
| Gas marketing services | 221 |
| — |
| — |
| — |
| — |
| 221 |
|
| Other natural gas revenues | 10 |
| — |
| — |
| — |
| — |
| 10 |
|
| Total natural gas revenues | 952 |
| — |
| — |
| — |
| — |
| 952 |
|
| Other revenues | 266 |
| 46 |
| 92 |
| 5 |
| 4 |
| — |
|
| Total revenue from contracts with customers | 5,911 |
| 1,435 |
| 1,826 |
| 286 |
| 277 |
| 2,112 |
|
Other revenue sources(a) | 1,361 |
| (27 | ) | 7 |
| 1 |
| 166 |
| 1,222 |
|
Other adjustments(b) | (1,860 | ) | — |
| — |
| — |
| — |
| (1,860 | ) |
| Total operating revenues | $ | 5,412 |
| $ | 1,408 |
| $ | 1,833 |
| $ | 287 |
| $ | 443 |
| $ | 1,474 |
|
| |
| (a) | Other revenue sources primarily relate to revenues from customers accounted for as derivatives and leases, as well as alternative revenue programs at Southern Company Gas and other cost recovery mechanisms at the traditional electric operating companies. |
| |
| (b) | Other adjustments relate to the cost of Southern Company Gas' energy and risk management activities. Wholesale gas services revenues are presented net of the related costs of those activities on the statement of income. See Note (L) under "Southern Company Gas" for additional information on the components of wholesale gas services' operating revenues. |
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 at March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Accounts Receivables | | | | | | |
| As of March 31, 2020 | $ | 2,224 |
| $ | 518 |
| $ | 697 |
| $ | 70 |
| $ | 86 |
| $ | 696 |
|
| As of December 31, 2019 | 2,413 |
| 586 |
| 688 |
| 79 |
| 97 |
| 749 |
|
| Contract Assets | | | | | | |
| As of March 31, 2020 | $ | 100 |
| $ | — |
| $ | 53 |
| $ | 3 |
| $ | — |
| $ | — |
|
| As of December 31, 2019 | 117 |
| — |
| 69 |
| — |
| — |
| — |
|
| Contract Liabilities | | | | | | |
| As of March 31, 2020 | $ | 49 |
| $ | 7 |
| $ | 11 |
| $ | — |
| $ | 1 |
| $ | 1 |
|
| As of December 31, 2019 | 52 |
| 10 |
| 13 |
| — |
| 1 |
| 1 |
|
As of March 31, 2020 and December 31, 2019, Georgia Power had contract assets primarily related to unregulated service agreements, where payment is contingent on project completion, and fixed retail customer bill programs, where the payment is contingent upon Georgia Power's continued performance and the customer's continued participation in the program over the one-year contract term. 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 and certain levelized PPAs, respectively. Southern Company's unregulated distributed generation business had $36 million and $40 million of contract assets and $29 million and $28 million of contract liabilities at March 31, 2020 and December 31, 2019, respectively, for outstanding performance obligations.
Revenues recognized in the three months ended March 31, 2020, which were included in contract liabilities at December 31, 2019, were immaterial for the applicable Registrants.
Remaining Performance Obligations
The traditional electric operating companies and Southern Power have long-term contracts with customers in which revenues are recognized as performance obligations are satisfied over the contract term. These contracts primarily relate to PPAs whereby the traditional electric operating companies and Southern Power provide electricity and generation capacity to a complete discussioncustomer. 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. Revenue from contracts with customers related to these performance obligations remaining at March 31, 2020 are expected to be recognized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 2020 (remaining) | 2021 | 2022 | 2023 | 2024 | 2025 and Thereafter |
| | (in millions) |
| Southern Company | $ | 367 |
| $ | 416 |
| $ | 354 |
| $ | 334 |
| $ | 314 |
| $ | 2,164 |
|
| Alabama Power | 23 |
| 33 |
| 31 |
| 24 |
| 7 |
| 5 |
|
| Georgia Power | 52 |
| 66 |
| 36 |
| 34 |
| 23 |
| 61 |
|
| Southern Power | 224 |
| 285 |
| 287 |
| 277 |
| 285 |
| 2,116 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Revenue expected to be recognized for performance obligations remaining at March 31, 2020 was immaterial for Mississippi Power's critical accounting policiesPower.
Lease Income
Lease income for the three months ended March 31, 2020 and estimates.2019 is as follows:
Recently Issued Accounting Standards |
| | | | | | | | | | | | | | | | | | |
| | Southern Company | Alabama Power | Georgia Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| For the Three Months Ended March 31, 2020 | | | | | | |
| Lease income - interest income on sales-type leases | $ | 3 |
| $ | — |
| $ | — |
| $ | 3 |
| $ | — |
| $ | — |
|
| Lease income - operating leases | 51 |
| 6 |
| 16 |
| — |
| 24 |
| 9 |
|
| Variable lease income | 74 |
| — |
| — |
| — |
| 80 |
| — |
|
| Total lease income | $ | 128 |
| $ | 6 |
| $ | 16 |
| $ | 3 |
| $ | 104 |
| $ | 9 |
|
| | | | | | | |
| For the Three Months Ended March 31, 2019 | | | | | | |
| Lease income - interest income on sales-type leases | $ | 2 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | — |
|
| Lease income - operating leases | 71 |
| 7 |
| 19 |
| — |
| 46 |
| 9 |
|
| Variable lease income | 66 |
| — |
| — |
| — |
| 75 |
| — |
|
| Total lease income | $ | 139 |
| $ | 7 |
| $ | 19 |
| $ | 2 |
| $ | 121 |
| $ | 9 |
|
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.
(E) CONSOLIDATED ENTITIES AND EQUITY METHOD INVESTMENTS
See Note (A)7 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 Powerfinancial statements in Item 78 of the Form 10-K for additional information.
Southern Power
Variable Interest Entities
Southern Power has certain subsidiaries that are determined to be VIEs. Southern Power is considered the primary beneficiary of these VIEs because it controls the most significant activities of the VIEs, including operating and maintaining the respective assets, and has the obligation to absorb expected losses of these VIEs to the extent of its equity interests.
SP Solar and SP Wind
At March 31, 2020 and December 31, 2019, SP Solar had total assets of $6.3 billion and $6.4 billion, respectively, and total liabilities of $382 million and $381 million, respectively. Noncontrolling interests totaled $1.1 billion at both March 31, 2020 and December 31, 2019. 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 requirements primarilyand 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.
At March 31, 2020 and December 31, 2019, SP Wind had total assets of $2.5 billion and total liabilities of $123 million and $128 million, respectively. Noncontrolling interests totaled $45 million at both March 31, 2020 and December 31, 2019. 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 3 financial investors in accordance with the limited liability agreement.
Southern Power consolidates both SP Solar and SP Wind, as the primary beneficiary, since it controls the most significant activities of each entity, including operating and maintaining their assets. Certain transfers and sales of the assets in the VIEs are subject to partner consent and the liabilities are non-recourse to the general credit of Southern Power. Liabilities consist of funding ongoing operations, common stock dividends,customary working capital expenditures,items and debt maturities. Capital expenditures anddo not include any long-term debt.
Other Variable Interest Entities
Southern Power has other investing activities include investments to maintain existing generation facilities, to comply with environmental regulations including adding environmental modificationsconsolidated VIEs that relate to certain existing generating units and closures of ash ponds,subsidiaries that have either sold noncontrolling interests to expand and improve transmission and distribution facilities, and for restoration following major storms.
Net cash used for operating activities totaled $23 million fortax-equity investors or acquired less than a 100% interest from facility developers. These entities are considered VIEs because the first three months of 2019,arrangements are structured similar to a decrease of $39 million as compared to the corresponding period in 2018. The decrease in net cash used for operating activities is primarily related to lower income tax and ad valorem tax payments in 2019. Net cash used for investing activities totaled $63 million for the first three months of 2019 primarily due to gross property additions related to distribution and transmission facilities. Net cash provided from financing activities totaled $5 million for the first three months of 2019 primarily due to $43 million of pollution control revenue bonds reoffered to the public, partially offset by a return of capital to Southern Company. Cash flows from financing activities vary from period to period based on capital needslimited partnership and the maturitynoncontrolling members do not have substantive kick-out rights.
At March 31, 2020 and December 31, 2019, the other VIEs had total assets of $1.1 billion, total liabilities of $109 million and $104 million, respectively, and noncontrolling interests of $396 million and $409 million, respectively. Under the terms of the partnership agreements, distributions of all available cash are required each month or redemptionquarter and additional distributions require partner consent.
Equity Method Investments
At March 31, 2020 and December 31, 2019, Southern Power had equity method investments in several wind and battery storage projects totaling $45 million and $28 million, respectively.
Southern Company Gas
Equity Method Investments
On March 24, 2020, Southern Company Gas completed the sale of securities.
Significant balance sheet changes for the first three months of 2019 include a decrease of $259 millionits interests in long-term debt, primarily due to the reclassification of $300 million in unsecured senior notes to 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 payment of ad valorem taxes;Pivotal LNG and a decrease of $81 million 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.Atlantic Coast Pipeline. See Note (L) to the Condensed Financial Statements herein(K) under "Southern Company Gas" for additional information.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations"The carrying amounts of Mississippi Power in Item 7Southern Company Gas' equity method investments as of the Form 10-K for a description of Mississippi Power's capital requirements and contractual obligations. Approximately $300 million
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
will be required through March 31, 2020 to fund maturities of long-term debt. See "Sources of Capital" hereinand December 31, 2019 and related income from those investments 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 to meet its future capital needs from operating cash flows, external securities issuances, borrowings from financial institutions, including commercial paper to the extent Mississippi Power is eligible to participate, and equity contributions from Southern Company. However, the amount, type, and timing of any future financing, if needed, will depend upon 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 ofthree-month periods ended March 31, 2020 and 2019 Mississippi Power's current liabilities exceeded current assets by approximately $120 million primarilywere as a resultfollows:
|
| | | | | | |
| Investment Balance | March 31, 2020 | December 31, 2019(a) |
| | (in millions) |
SNG(b) | $ | 1,216 |
| $ | 1,137 |
|
PennEast Pipeline(c) | 85 |
| 82 |
|
| Other | 32 |
| 32 |
|
| Total | $ | 1,333 |
| $ | 1,251 |
|
| |
| (a) | Excludes investments in Atlantic Coast Pipeline and Pivotal JAX LNG classified as held for sale at December 31, 2019. See Note 15 to the financial statements under "Assets Held for Sale" in Item 8 of the Form 10-K for additional information. |
| |
| (b) | Increase primarily relates to a capital contribution, partially offset by the continued amortization of deferred tax assets established upon acquisition. |
| |
| (c) | See Note (C) under "Other Matters – Southern Company Gas" for additional information on the PennEast Pipeline. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | |
| Earnings from Equity Method Investments | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| | (in millions) |
| SNG | $ | 37 |
| $ | 42 |
|
Atlantic Coast Pipeline(*) | 3 |
| 3 |
|
PennEast Pipeline(*) | 2 |
| 2 |
|
| Other | 1 |
| 1 |
|
| Total | $ | 43 |
| $ | 48 |
|
| |
| (*) | Amounts primarily result from AFUDC equity recorded by the project entity. |
SNG
Selected financial information of long-term debt that is due within one year.
AtSNG for the three months ended March 31, 2020 and 2019 Mississippi Power had approximately $212 million of cash and cash equivalents. Mississippi Power's committed credit arrangements with banks totaled $100 million at March 31, 2019, all of which was unused. These credit arrangements expire in 2019.is as follows:
|
| | | | | | |
| Income Statement Information | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| | (in millions) |
| Revenues | $ | 158 |
| $ | 166 |
|
| Operating income | 98 |
| 106 |
|
| Net income | 75 |
| 84 |
|
(F) FINANCING
Bank Credit Arrangements
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.
All
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
At March 31, 2020, committed credit arrangements with banks were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Expires | | | |
| Company | 2020 | 2022 | 2023 | 2024 | | Total | | Unused | Due within One Year |
| | (in millions) |
| Southern Company parent | $ | — |
| $ | — |
| $ | — |
| $ | 2,000 |
| | $ | 2,000 |
| | $ | 1,999 |
| $ | — |
|
| Alabama Power | 3 |
| 525 |
| — |
| 800 |
| | 1,328 |
| | 1,328 |
| 3 |
|
| Georgia Power | — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,733 |
| — |
|
| Mississippi Power | — |
| 150 |
| 125 |
| — |
| | 275 |
| | 210 |
| — |
|
Southern Power(a) | — |
| — |
| — |
| 600 |
| | 600 |
| | 591 |
| — |
|
Southern Company Gas(b) | — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,745 |
| — |
|
| SEGCO | 30 |
| — |
| — |
| — |
| | 30 |
| | 30 |
| 30 |
|
| Southern Company | $ | 33 |
| $ | 675 |
| $ | 125 |
| $ | 6,900 |
| | $ | 7,733 |
| | $ | 7,636 |
| $ | 33 |
|
| |
| (a) | Does not include Southern Power Company's $120 million and $60 million continuing letter of credit facilities for standby letters of credit expiring in 2021 and 2023, respectively, of which $25 million and $60 million, respectively, was unused at March 31, 2020. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities. |
| |
| (b) | Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.25 billion of this arrangement. Southern Company Gas' committed credit arrangement also includes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted. |
As reflected in the table above, in March 2020, Mississippi Power entered into a $125 million revolving credit facility that matures in March 2023.
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
These bank credit arrangements, as well as the term loan arrangements of the Registrants and SEGCO, contain covenants that limit debt levels and typically contain cross-acceleration or, in the case of Southern Power, cross-default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of Mississippi Power.the individual company. Such cross-default provisions to other indebtedness would trigger an event of default if Southern Power defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Mississippi Powerthe applicable borrower defaulted on indebtedness, the payment of which was then accelerated. At March 31, 2019, Mississippi Power was2020, the Registrants, Nicor Gas, and SEGCO were in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowing.
Subject to applicable market conditions, Mississippi Power expects 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.borrowings.
A portion of the $100 million unused credit arrangements with banks is allocated to provide liquidity support to Mississippi Power's variable ratethe revenue bonds.bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2019 was approximately $40 million.
Short-term debt, including the average amount and maximum amount outstanding, was immaterial at March 31, 2020 was approximately $1.4 billion (comprised of approximately $854 million at Alabama Power, $550 million at Georgia Power, and $40 million at Mississippi Power). Subsequent to March 31, 2020, Mississippi Power purchased and held or redeemed all $40 million of its variable rate revenue bonds. In addition, at March 31, 2020, Georgia Power had approximately $188 million of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months.
Earnings per Share
For Southern Company, the only differences in computing basic and diluted earnings per share are attributable to awards outstanding under stock-based compensation plans and, as a result of stock price volatility in the first quarter 2020, the equity units issued in August 2019. Earnings per share dilution resulting from stock-based compensation
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
plans and the equity units issuance is determined using the treasury stock method. See Note 8 to the financial statements under "Equity Units" in Item 8 of the Form 10-K for information on the August 2019 equity units issuance and duringNote 12 to the three-month periodfinancial statements in Item 8 of the Form 10-K for information on stock-based compensation plans. Shares used to compute diluted earnings per share were as follows:
|
| | | | |
| | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| | (in millions) |
| As reported shares | 1,057 |
| 1,038 |
|
| Effect of stock-based compensation | 7 |
| 7 |
|
| Effect of equity units | 3 |
| — |
|
| Diluted shares | 1,067 |
| 1,045 |
|
An immaterial number of stock-based compensation awards was not included in the diluted earnings per share calculation because the awards were anti-dilutive for the three months ended March 31, 2020. There were 0 such amounts for the three months ended March 31, 2019.
Mississippi Power believes the need for working capital can be adequately met by utilizing lines of credit, short-term bank notes, commercial paper(G) INCOME TAXES
See Note 10 to the extent Mississippifinancial statements in Item 8 of the Form 10-K for additional tax information.
Current and Deferred Income Taxes
Tax Credit and Net Operating Loss Carryforwards
The utilization of each Registrants' estimated tax credit and net operating loss carryforwards and related valuation allowances could be impacted by numerous factors, including the acquisition of additional renewable projects, the purchase of rights to additional PTCs of Plant Vogtle Units 3 and 4 pursuant to certain joint ownership agreements, potential impacts of the COVID-19 pandemic, and changes in taxable income projections. See Note (B) and Note 2 to the financial statements in Item 8 of the Form 10-K under "Georgia Power – Nuclear Construction" for additional information on Plant Vogtle Units 3 and 4.
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 eligibletypically lower than the statutory rate due to participate,employee stock plans' dividend deduction, non-taxable AFUDC equity at the traditional electric operating cash flows,companies, flowback of excess deferred income taxes at the regulated utilities, and other cash.federal income tax benefits from ITCs and PTCs primarily at Southern Power.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" of MississippiGulf Power in 2019. See Note 15 to the financial statements under "Southern Company" in Item 78 of the Form 10-K for additional information.
Georgia Power
Georgia Power's effective tax rate was 4.6% for the three months ended March 31, 2020 compared to 20.8% for the corresponding period in 2019. The effective tax rate decrease was primarily due to an increase in the flowback of excess deferred income taxes in 2020 as authorized in the 2019 ARP. See Note 2 to the financial statements under "Georgia Power" in Item 8 of the Form 10-K for additional information.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Southern Power
Southern Power's effective tax rate was 13.5% for the three months ended March 31, 2020 compared to a benefit rate of (49.8)% for the corresponding period in 2019. The effective tax rate increase was primarily due to the tax impact from the sale of Plant Mankato in 2020. See Note (K) under "Southern Power" 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). NaN mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2020. The Southern Company system also provides certain non-qualified defined benefits for a select group of management and highly compensated employees, which are funded on a cash basis. In addition, the Southern Company system provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional electric operating companies fund other postretirement trusts to the extent required by their respective regulatory commissions. Southern Company Gas has a separate unfunded supplemental retirement health care plan that provides medical care and life insurance benefits to employees of discontinued businesses.
See Note 11 to the financial statements in Item 8 of the Form 10-K for additional information.
Effective January 1, 2020, Southern Company adopted a change in method of calculating the market-related value of the liability-hedging securities included in its pension plan assets. The market-related value is used to determine the expected return on plan assets component of net periodic pension cost. Southern Company previously used the calculated value approach for all plan assets, which smoothed asset returns and deferred gains and losses by amortizing them into the calculation of the market-related value over five years. Southern Company changed to the fair value approach for liability-hedging securities, which includes measuring the market-related value of that portion of the plan assets at fair value for purposes of determining the expected return on plan assets. The remaining asset classes of plan assets will continue to use the calculated value approach in determining the market-related value. Southern Company considers the fair value approach to be preferable because it results in a current reflection of changes in the value of plan assets in the measurement of net periodic pension cost. Southern Company evaluated the effect of this change in accounting method and deemed it immaterial to the historical and current financial statements of all Registrants and therefore did not account for the change retrospectively. The change in accounting principle was recorded through earnings as a prior period adjustment for the amounts related to the unregulated businesses of Southern Company and Southern Power. Amounts related to the traditional electric operating companies and the natural gas distribution utilities have been reflected as adjustments to regulatory assets as appropriate, consistent with the expected regulatory treatment.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
On each Registrant's condensed statements of income, the service cost component of net periodic benefit costs is included in other operations and maintenance expenses and all other components of net periodic benefit costs are included in other income (expense), net. Components of the net periodic benefit costs for the three months ended March 31, 2020 and 2019 are presented in the following tables.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | Southern Company | | Alabama Power | | Georgia Power | | Mississippi Power | | Southern Power | | Southern Company Gas |
| | (in millions) |
| Pension Plans |
| Service cost | $ | 94 |
| | $ | 22 |
| | $ | 24 |
| | $ | 4 |
| | $ | 2 |
| | $ | 8 |
|
| Interest cost | 108 |
| | 25 |
| | 33 |
| | 5 |
| | 1 |
| | 8 |
|
| Expected return on plan assets | (275 | ) | | (66 | ) | | (87 | ) | | (13 | ) | | (3 | ) | | (19 | ) |
| Amortization: | | | | | | | | | | | |
| Prior service costs | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
| Net (gain)/loss | 67 |
| | 18 |
| | 22 |
| | 3 |
| | 1 |
| | 2 |
|
| Net periodic pension cost (income) | $ | (5 | ) | | $ | (1 | ) | | $ | (8 | ) | | $ | (1 | ) | | $ | 1 |
| | $ | 2 |
|
| Postretirement Benefits |
| Service cost | $ | 5 |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 13 |
| | 3 |
| | 5 |
| | — |
| | — |
| | 2 |
|
| Expected return on plan assets | (18 | ) | | (7 | ) | | (7 | ) | | — |
| | — |
| | (2 | ) |
| Amortization: | | | | | | | | | | | |
| Regulatory asset | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Net (gain)/loss | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | (1 | ) |
| Net periodic postretirement benefit cost | $ | 1 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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)
(I) FAIR VALUE MEASUREMENTS
As of March 31, 2020, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2020: | 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) | $ | 328 |
| | $ | 164 |
| | $ | 87 |
| | $ | — |
| | $ | 579 |
|
| Interest rate derivatives | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Investments in trusts:(b)(c) | | | | | | | | | |
| Domestic equity | 578 |
| | 108 |
| | — |
| | — |
| | 686 |
|
| Foreign equity | 52 |
| | 171 |
| | — |
| | — |
| | 223 |
|
| U.S. Treasury and government agency securities | — |
| | 289 |
| | — |
| | — |
| | 289 |
|
| Municipal bonds | — |
| | 103 |
| | — |
| | — |
| | 103 |
|
| Pooled funds – fixed income | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
| Corporate bonds | 23 |
| | 297 |
| | — |
| | — |
| | 320 |
|
| Mortgage and asset backed securities | — |
| | 85 |
| | — |
| | — |
| | 85 |
|
| Private equity | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
| Other | 24 |
| | 5 |
| | — |
| | — |
| | 29 |
|
| Cash equivalents | 1,686 |
| | 11 |
| | — |
| | — |
| | 1,697 |
|
| Other investments | 9 |
| | 29 |
| | — |
| | — |
| | 38 |
|
| Total | $ | 2,700 |
| | $ | 1,300 |
| | $ | 87 |
| | $ | 60 |
| | $ | 4,147 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a) | $ | 426 |
| | $ | 212 |
| | $ | 11 |
| | $ | — |
| | $ | 649 |
|
| Interest rate derivatives | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
| Foreign currency derivatives | — |
| | 90 |
| | — |
| | — |
| | 90 |
|
| Contingent consideration | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Total | $ | 426 |
| | $ | 324 |
| | $ | 30 |
| | $ | — |
| | $ | 780 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2020: | 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 | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Nuclear decommissioning trusts:(b) | | | | | | | | |
|
|
| Domestic equity | 368 |
| | 99 |
| | — |
| | — |
| | 467 |
|
| Foreign equity | 52 |
| | 50 |
| | — |
| | — |
| | 102 |
|
| U.S. Treasury and government agency securities | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
| Municipal bonds | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Corporate bonds | 23 |
| | 141 |
| | — |
| | — |
| | 164 |
|
| Mortgage and asset backed securities | — |
| | 30 |
| | — |
| | — |
| | 30 |
|
| Private equity | — |
| | — |
| | — |
| | 60 |
| | 60 |
|
| Other | 7 |
| | — |
| | — |
| | — |
| | 7 |
|
| Cash equivalents | 694 |
| | 11 |
| | — |
| | — |
| | 705 |
|
| Other investments | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Total | $ | 1,144 |
| | $ | 388 |
| | $ | — |
| | $ | 60 |
| | $ | 1,592 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | 27 |
|
| | | | | | | | | | |
| Georgia Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Nuclear decommissioning trusts:(b)(c) | | | | | | | | | |
| Domestic equity | 210 |
| | 1 |
| | — |
| | — |
| | 211 |
|
| Foreign equity | — |
| | 119 |
| | — |
| | — |
| | 119 |
|
| U.S. Treasury and government agency securities | — |
| | 267 |
| | — |
| | — |
| | 267 |
|
| Municipal bonds | — |
| | 102 |
| | — |
| | — |
| | 102 |
|
| Corporate bonds | — |
| | 156 |
| | — |
| | — |
| | 156 |
|
| Mortgage and asset backed securities | — |
| | 56 |
| | — |
| | — |
| | 56 |
|
| Other | 16 |
| | 5 |
| | — |
| | — |
| | 21 |
|
| Cash equivalents | 212 |
| | — |
| | — |
| | — |
| | 212 |
|
| Total | $ | 438 |
| | $ | 712 |
| | $ | — |
| | $ | — |
| | $ | 1,150 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 61 |
| | $ | — |
| | $ | — |
| | $ | 61 |
|
| | | | | | | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
| As of March 31, 2020: | 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 | 79 |
| | — |
| | — |
| | — |
| | 79 |
|
| Total | $ | 79 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 82 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | — |
| | $ | 33 |
|
| | | | | | | | | | |
| Southern Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Cash equivalents | 166 |
| | — |
| | — |
| | — |
| | 166 |
|
| Total | $ | 166 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 168 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Foreign currency derivatives | — |
| | 90 |
| | — |
| | — |
| | 90 |
|
| Contingent consideration | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Total | $ | — |
|
| $ | 93 |
|
| $ | 19 |
|
| $ | — |
|
| $ | 112 |
|
| | | | | | | | | | |
| Southern Company Gas | | | | | | | | | |
| Assets: | | | | | | | | | |
Energy-related derivatives(a) | $ | 328 |
| | $ | 148 |
| | $ | 87 |
| | $ | — |
| | $ | 563 |
|
| Non-qualified deferred compensation trusts: | | | | | | | | | |
| Domestic equity | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
| Foreign equity | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Pooled funds – fixed income | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
| Cash equivalents and restricted cash | 270 |
| | — |
| | — |
| | — |
| | 270 |
|
| Total | $ | 598 |
|
| $ | 176 |
|
| $ | 87 |
|
| $ | — |
|
| $ | 861 |
|
| Liabilities: | | | | | | | | | |
Energy-related derivatives(a) | $ | 426 |
| | $ | 88 |
| | $ | 11 |
| | $ | — |
| | $ | 525 |
|
| Interest rate derivatives | — |
| | 21 |
| | — |
| | — |
| | 21 |
|
| Total | $ | 426 |
|
| $ | 109 |
|
| $ | 11 |
|
| $ | — |
|
| $ | 546 |
|
| |
| (a) | Energy-related derivatives exclude cash collateral of $128 million and $16 million associated with premiums and certain weather derivatives accounted for based on intrinsic value rather than fair value. |
| |
| (b) | 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. |
| |
| (c) | Includes investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of March 31, 2020, approximately $31 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 (decreased) by the amounts shown in the table below for the three months ended March 31, 2020 and 2019. The changes were recorded as a change to the regulatory assets and liabilities related to AROs for Georgia Power and Alabama Power, respectively.
|
| | | | | | |
| Fair value increases (decreases) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| | (in millions) |
| Southern Company | $ | (247 | ) | $ | 152 |
|
| Alabama Power | (167 | ) | 87 |
|
| Georgia Power | (80 | ) | 65 |
|
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. 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.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
"Other investments" include investments traded in the open market that have maturities greater than 90 days, which are categorized as Level 2 under Fair Value Measurements and are comprised of corporate bonds, bank certificates of deposit, treasury bonds, and/or agency bonds.
As of March 31, 2020, 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 $60 million and unfunded commitments related to the private equity investments totaled $73 million. Private equity investments include high-quality private equity funds across several market sectors and funds that invest in real estate assets. Private equity funds do not have redemption rights. Distributions from these funds will be received as the underlying investments in the funds are liquidated.
As of March 31, 2020, 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 | $ | 45,820 |
| $ | 8,432 |
| $ | 12,217 |
| $ | 1,413 |
| $ | 4,369 |
| $ | 5,836 |
|
| Fair value | 49,126 |
| 9,239 |
| 14,020 |
| 1,433 |
| 4,376 |
| 6,416 |
|
| |
| (*) | The long-term debt of Southern Company Gas is recorded at amortized cost, including the fair value adjustments at the effective date of the 2016 merger with Southern Company. Southern Company Gas amortizes the fair value adjustments over the 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 the Registrants.
Commodity Contracts with Level 3 Valuation Inputs
As of March 31, 2020, the fair value of Southern Company Gas' Level 3 physical natural gas forward contracts was $76 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, 2020 |
| | (in millions) |
| Beginning balance | $ | 14 |
|
| Transfers to Level 3 | 70 |
|
| Transfers from Level 3 | (3 | ) |
| Instruments realized or otherwise settled during period | (1 | ) |
| Changes in fair value | (4 | ) |
| Ending balance | $ | 76 |
|
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
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
of unobservable inputs. Observable inputs, including some forward prices used for determining fair value, reflect the best available market information. Unobservable inputs are updated using industry standard techniques such as extrapolation, combining observable forward inputs supplemented by historical market and other relevant data. Level 3 physical natural gas forward contracts include unobservable forward price inputs (ranging from $(0.84) to $0.21 per mmBtu). Forward price increases (decreases) as of March 31, 2020 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 (I) for additional fair value information. In the statements of cash flows, any cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. Any cash impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with classification of the hedged interest or principal, respectively. See Note 1 to the financial statements under "Financial Instruments" in Item 8 of the Form 10-K for additional information.
Energy-Related Derivatives
The traditional electric operating companies, Southern Power, and Southern Company Gas enter into energy-related derivatives to hedge exposures to electricity, natural gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities have limited exposure to market volatility in energy-related commodity prices. Each of the traditional electric operating companies and certain of the natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which are expected to continue to mitigate price volatility. The traditional electric operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in energy-related commodity prices because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional electric operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity. Southern Company Gas retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.
Southern Company Gas also enters into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in operating revenues.
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 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.
At March 31, 2019,2020, the net volume of energy-related derivative contracts for natural gas positions, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:
|
| | | | | |
| | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date |
| | (in millions) | | | | |
Southern Company(*) | 945 | | 2023 | | 2031 |
| Alabama Power | 88 | | 2023 | | — |
| Georgia Power | 168 | | 2023 | | — |
| Mississippi Power | 100 | | 2023 | | — |
| Southern Power | 4 | | 2020 | | 2020 |
Southern Company Gas(*) | 585 | | 2022 | | 2031 |
| |
| (*) | Southern Company Gas' derivative instruments include both long and short natural gas positions. A long position is a contract to purchase natural gas and a short position is a contract to sell natural gas. Southern Company Gas' volume represents the net of long natural gas positions of 4.6 billion mmBtu and short natural gas positions of 4.0 billion mmBtu as of March 31, 2020, which is also included in Southern Company's total volume. |
At March 31, 2020, the net volume of Southern Power's energy-related derivative contracts for power to be sold was 1 million MWHs, all of which expire in 2020.
In addition to the volumes discussed above, the traditional electric operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess natural gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 23 million mmBtu for Southern Company, which includes 6 million mmBtu for Alabama Power, 7 million mmBtu for Georgia Power, 3 million mmBtu for Mississippi Power, didand 7 million mmBtu for Southern Power.
For cash flow hedges of energy-related derivatives, the estimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to earnings for the 12-month period ending March 31, 2021 are immaterial for all Registrants.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Interest Rate Derivatives
Southern Company and certain subsidiaries may enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and presented on the same income statement line item as the earnings effect of the hedged transactions. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings on the same income statement line item. Fair value gains or losses on derivatives that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
At March 31, 2020, 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, 2020 |
| | (in millions) | | | | | | (in millions) |
| Cash Flow Hedges of Forecasted Debt | | �� | | | | |
| Southern Company Gas | $ | 200 |
| | 3-month LIBOR | 1.81% | September 2030 | | $ | (21 | ) |
| Cash Flow Hedges of Existing Debt | | | | | | |
| Mississippi Power | 60 |
| | 1-month LIBOR | 0.58% | December 2021 | | — |
|
| Fair Value Hedges of Existing Debt | | | | | | |
| Southern Company parent | 300 |
| | 2.75% | 3-month LIBOR + 0.92% | June 2020 | | 1 |
|
| Southern Company parent | 1,500 |
| | 2.35% | 1-month LIBOR + 0.87% | July 2021 | | 21 |
|
| Southern Company | $ | 2,060 |
| | | | | | $ | 1 |
|
The estimated pre-tax gains (losses) related to interest rate derivatives expected to be reclassified from accumulated OCI to interest expense for the 12-month period ending March 31, 2021 total $(25) million for Southern Company and are immaterial for all other Registrants. Deferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2046 for the Southern Company parent entity, 2035 for Alabama Power, 2044 for Georgia Power, 2028 for Mississippi Power, and 2046 for Southern Company Gas.
Foreign Currency Derivatives
Southern Company and certain subsidiaries, including Southern Power, may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates, such as that arising from the issuance of debt denominated in a currency other than U.S. dollars. Derivatives related to forecasted transactions are accounted for as cash flow hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and on the same income statement line as the earnings effect of the hedged transactions, including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
At March 31, 2020, 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, 2020 |
| | (in millions) | | (in millions) | | | (in millions) |
| Cash Flow Hedges of Existing Debt | | | | | |
| Southern Power | $ | 677 |
| 2.95% | € | 600 |
| 1.00% | June 2022 | $ | (39 | ) |
| Southern Power | 564 |
| 3.78% | 500 |
| 1.85% | June 2026 | (51 | ) |
| Total | $ | 1,241 |
| | € | 1,100 |
| | | $ | (90 | ) |
The estimated pre-tax gains (losses) related to Southern Power's foreign currency derivatives expected to be reclassified from accumulated OCI to earnings for the 12-month period ending March 31, 2021 are $(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, 2020 | As of December 31, 2019 |
| Derivative Category and Balance Sheet Location | 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 |
| $ | 100 |
| $ | 3 |
| $ | 70 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 8 |
| 40 |
| 6 |
| 44 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 15 |
| $ | 140 |
| $ | 9 |
| $ | 114 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 3 |
| $ | 6 |
| $ | 1 |
| $ | 6 |
|
| Interest rate derivatives: | | | | |
| Other current assets/Other current liabilities | 12 |
| 21 |
| 2 |
| 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 10 |
| — |
| — |
| 1 |
|
| Foreign currency derivatives: | | | | |
| Other current assets/Other current liabilities | — |
| 24 |
| — |
| 24 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 66 |
| 16 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 25 |
| $ | 117 |
| $ | 19 |
| $ | 54 |
|
| Derivatives not designated as hedging instruments | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 300 |
| $ | 297 |
| $ | 461 |
| $ | 358 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 261 |
| 206 |
| 207 |
| 225 |
|
| Total derivatives not designated as hedging instruments | $ | 561 |
| $ | 503 |
| $ | 668 |
| $ | 583 |
|
| Gross amounts recognized | $ | 601 |
| $ | 760 |
| $ | 696 |
| $ | 751 |
|
Gross amounts offset(a) | (383 | ) | (511 | ) | (463 | ) | (562 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 218 |
| $ | 249 |
| $ | 233 |
| $ | 189 |
|
| | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | |
| | As of March 31, 2020 | As of December 31, 2019 |
| Derivative Category and Balance Sheet Location | 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 | $ | 3 |
| $ | 18 |
| $ | 2 |
| $ | 14 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 2 |
| 9 |
| 2 |
| 10 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 5 |
| $ | 27 |
| $ | 4 |
| $ | 24 |
|
| Gross amounts recognized | $ | 5 |
| $ | 27 |
| $ | 4 |
| $ | 24 |
|
| Gross amounts offset | (4 | ) | (4 | ) | (2 | ) | (2 | ) |
| Net amounts recognized in the Balance Sheets | $ | 1 |
| $ | 23 |
| $ | 2 |
| $ | 22 |
|
| | | | | |
| Georgia Power | | | | |
| Derivatives designated as hedging instruments for regulatory purposes | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 3 |
| $ | 42 |
| $ | 1 |
| $ | 32 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 3 |
| 19 |
| 3 |
| 21 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 6 |
| $ | 61 |
| $ | 4 |
| $ | 53 |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | |
| Interest rate derivatives: | | | | |
| Other current assets/Other current liabilities | $ | — |
| $ | — |
| $ | — |
| $ | 17 |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | — |
| $ | — |
| $ | — |
| $ | 17 |
|
| Gross amounts recognized | $ | 6 |
| $ | 61 |
| $ | 4 |
| $ | 70 |
|
| Gross amounts offset | (6 | ) | (6 | ) | (3 | ) | (3 | ) |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 55 |
| $ | 1 |
| $ | 67 |
|
| | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | |
| | As of March 31, 2020 | As of December 31, 2019 |
| Derivative Category and Balance Sheet Location | 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 |
| $ | 21 |
| $ | — |
| $ | 15 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 2 |
| 12 |
| 1 |
| 12 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 3 |
| $ | 33 |
| $ | 1 |
| $ | 27 |
|
| Gross amounts recognized | $ | 3 |
| $ | 33 |
| $ | 1 |
| $ | 27 |
|
| Gross amounts offset | (3 | ) | (3 | ) | (1 | ) | (1 | ) |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 30 |
| $ | — |
| $ | 26 |
|
| | | | | |
| Southern Power | | | | |
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 2 |
|
| Foreign currency derivatives: | | | | |
| Other current assets/Other current liabilities | — |
| 24 |
| — |
| 24 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 66 |
| 16 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 2 |
| $ | 92 |
| $ | 17 |
| $ | 26 |
|
| Derivatives not designated as hedging instruments | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | — |
| $ | 1 |
| $ | 2 |
| $ | 1 |
|
| Total derivatives not designated as hedging instruments | $ | — |
| $ | 1 |
| $ | 2 |
| $ | 1 |
|
| Gross amounts recognized | $ | 2 |
| $ | 93 |
| $ | 19 |
| $ | 27 |
|
| Gross amounts offset | — |
| — |
| — |
| — |
|
| Net amounts recognized in the Balance Sheets | $ | 2 |
| $ | 93 |
| $ | 19 |
| $ | 27 |
|
| | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | |
| | As of March 31, 2020 | As of December 31, 2019 |
| Derivative Category and Balance Sheet Location | 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 | $ | — |
| $ | 19 |
| $ | — |
| $ | 9 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| — |
| — |
| 1 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 1 |
| $ | 19 |
| $ | — |
| $ | 10 |
|
| 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 |
| $ | 4 |
| $ | — |
| $ | 4 |
|
| Interest rate derivatives: | | | | |
| Assets from risk management activities/Liabilities from risk management activities-current | — |
| 21 |
| 2 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 1 |
| $ | 25 |
| $ | 2 |
| $ | 4 |
|
| Derivatives not designated as hedging instruments | | | | |
| Energy-related derivatives: | | | | |
| Assets from risk management activities/Liabilities from risk management activities-current | $ | 300 |
| $ | 296 |
| $ | 459 |
| $ | 357 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 261 |
| 206 |
| 207 |
| 225 |
|
| Total derivatives not designated as hedging instruments | $ | 561 |
| $ | 502 |
| $ | 666 |
| $ | 582 |
|
| Gross amounts of recognized | $ | 563 |
| $ | 546 |
| $ | 668 |
| $ | 596 |
|
Gross amounts offset(a) | (370 | ) | (498 | ) | (456 | ) | (555 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 193 |
| $ | 48 |
| $ | 212 |
| $ | 41 |
|
| |
| (a) | Gross amounts offset include cash collateral held on deposit in broker margin accounts of $128 million and $99 million as of March 31, 2020 and December 31, 2019, respectively. |
| |
| (b) | Net amounts of derivative instruments outstanding exclude premium and intrinsic value associated with weather derivatives of $16 million and $4 million as of March 31, 2020 and December 31, 2019, respectively. |
Energy-related derivatives not designated as hedging instruments were immaterial for the traditional electric operating companies at March 31, 2020 and December 31, 2019.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
At March 31, 2020 and December 31, 2019, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:
|
| | | | | | | | | | | | | | | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2020 |
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 | $ | (79 | ) | $ | (17 | ) | $ | (39 | ) | $ | (19 | ) | $ | (4 | ) |
| Other regulatory assets, deferred | (33 | ) | (7 | ) | (16 | ) | (10 | ) | — |
|
| Other regulatory liabilities, current | 5 |
| 1 |
| — |
| — |
| 4 |
|
| Total energy-related derivative gains (losses) | $ | (107 | ) | $ | (23 | ) | $ | (55 | ) | $ | (29 | ) | $ | — |
|
| |
| (*) | Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $19 million at March 31, 2020. |
|
| | | | | | | | | | | | | | | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2019 |
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 | $ | (63 | ) | $ | (14 | ) | $ | (31 | ) | $ | (15 | ) | $ | (3 | ) |
| Other regulatory assets, deferred | (37 | ) | (8 | ) | (18 | ) | (11 | ) | — |
|
| Other regulatory liabilities, current | 6 |
| 2 |
| — |
| — |
| 4 |
|
| Total energy-related derivative gains (losses) | $ | (94 | ) | $ | (20 | ) | $ | (49 | ) | $ | (26 | ) | $ | 1 |
|
| |
| (*) | Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $11 million at December 31, 2019. |
For the three months ended March 31, 2020 and 2019, the pre-tax effects of cash flow hedge accounting on accumulated OCI were as follows:
|
| | | | | | |
| Gain (Loss) Recognized in OCI on Derivative | For the Three Months Ended March 31, |
| 2020 | 2019 |
| | (in millions) |
| Southern Company | | |
| Energy-related derivatives | $ | (4 | ) | $ | — |
|
| Interest rate derivatives | (26 | ) | — |
|
| Foreign currency derivatives | (83 | ) | (39 | ) |
| Total | $ | (113 | ) | $ | (39 | ) |
| Southern Power | | |
| Foreign currency derivatives | $ | (83 | ) | $ | (39 | ) |
| Southern Company Gas | | |
| Energy-related derivatives | $ | (4 | ) | $ | — |
|
| Interest rate derivatives | (23 | ) | — |
|
| Total | $ | (27 | ) | $ | — |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
For the three months ended March 31, 2020 and 2019, 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, 2020 and 2019, 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, |
| |
| | 2020 | 2019 |
| | | (in millions) |
| | Southern Company | | |
| | Total cost of natural gas | $ | 439 |
| $ | 686 |
|
| | Gain (loss) on energy-related cash flow hedges(a) | (7 | ) | 1 |
|
| | Total depreciation and amortization | 857 |
| 751 |
|
| | Gain (loss) on energy-related cash flow hedges(a) | (1 | ) | (3 | ) |
| | Total interest expense, net of amounts capitalized | (456 | ) | (430 | ) |
| | Gain (loss) on interest rate cash flow hedges(a) | (6 | ) | (5 | ) |
| | Gain (loss) on foreign currency cash flow hedges(a) | (6 | ) | (6 | ) |
| | Gain (loss) on interest rate fair value hedges(b) | 29 |
| 14 |
|
| | Total other income (expense), net | 103 |
| 78 |
|
| | Gain (loss) on foreign currency cash flow hedges(a)(c) | (31 | ) | (24 | ) |
| | Southern Power | | |
| | Total depreciation and amortization | $ | 117 |
| $ | 119 |
|
| | Gain (loss) on energy-related cash flow hedges(a) | (1 | ) | (3 | ) |
| | Total interest expense, net of amounts capitalized | (39 | ) | (44 | ) |
| | Gain (loss) on foreign currency cash flow hedges(a) | (6 | ) | (6 | ) |
| | Total other income (expense), net | 2 |
| 2 |
|
| | Gain (loss) on foreign currency cash flow hedges(a)(c) | (31 | ) | (24 | ) |
| |
| (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, 2020 and 2019, 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.
As of March 31, 2020 and December 31, 2019, 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 |
| Balance Sheet Location of Hedged Items | As of March 31, 2020 | As of December 31, 2019 |
| As of March 31, 2020 | As of December 31, 2019 |
| (in millions) | | (in millions) |
| Southern Company | | | | | |
| Securities due within one year | $ | (600 | ) | $ | (599 | ) | | $ | (1 | ) | $ | — |
|
| Long-term debt | (1,519 | ) | (1,494 | ) | | (22 | ) | 3 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
For the three months ended March 31, 2020 and 2019, 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) |
| | | Three Months Ended March 31, |
| Derivatives in Non-Designated Hedging Relationships | Statements of Income Location | 2020 | 2019 |
| | | (in millions) |
| Energy-related derivatives: | Natural gas revenues(*) | $ | 70 |
| $ | 33 |
|
| | Cost of natural gas | 7 |
| 8 |
|
| Total derivatives in non-designated hedging relationships | $ | 77 |
| $ | 41 |
|
| |
| (*) | Excludes immaterial gains (losses) recorded in natural gas revenues associated with weather derivatives for all periods presented. |
For the three months ended March 31, 2020 and 2019, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were immaterial for all other Registrants.
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 contractsderivatives that have required or could require collateral, but not accelerated payment, in the event of avarious 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.changes of certain Southern Company subsidiaries. At March 31, 2019,2020, the Registrants had 0 collateral posted with derivative counterparties to satisfy these arrangements.
For the Registrants with interest rate derivatives at March 31, 2020, 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, equaled approximately $281 million.
Included in these amounts arewas immaterial. At March 31, 2020, the fair value of energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial for all Registrants. The maximum potential collateral requirements arising from the credit-risk-related contingent features for the traditional electric operating companies and Southern Power include certain agreements that could require collateral in the event that either Alabama Powerone or Georgia Power (affiliate companies of Mississippi Power)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. Additionally,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, 2020, cash collateral posted in these accounts was immaterial. Southern Company Gas maintains accounts with brokers or the clearing houses of certain exchanges to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Southern Company Gas may be required to deposit cash into these accounts. At March 31, 2020, cash collateral held on deposit in broker margin accounts was $128 million.
The Registrants are exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Registrants only enter into agreements and material transactions with counterparties that have
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. The Registrants have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate their exposure to counterparty credit risk. Prior to entering into a physical transaction, Southern Company Gas assigns physical wholesale counterparties an internal credit rating downgrade could impactand credit limit based on the abilitycounterparties' Moody's, S&P, and Fitch ratings, commercially available credit reports, and audited financial statements. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.
In addition, Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for the counterparty's line of Mississippi Powercredit 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 access capital marketsmitigate exposure to counterparty credit risk. When Southern Company Gas is engaged in more than one outstanding derivative transaction with the same counterparty and would be likelyit 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 impactnet certain assets and liabilities by counterparty. Southern Company Gas also nets across product lines and against cash collateral provided the cost at which it does so.master netting and cash collateral agreements include such provisions. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.
AsThe Registrants do not anticipate a material adverse effect on their respective financial statements 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 Mississippi Power, may be negatively impacted. The 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 these potential adverse impacts by allowing Mississippi Power to retain the excess deferred taxes resulting from the Tax Reform Legislation until the conclusion of the Mississippi Power 2019 Base Rate Case. See Note 2 to the financial statements under "Mississippi Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Mississippi Power" herein for additional information.
Financing Activities
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.
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, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Wholesale revenues, non-affiliates | $ | 352 |
| | $ | 424 |
|
| Wholesale revenues, affiliates | 87 |
| | 83 |
|
| Other revenues | 4 |
| | 2 |
|
| Total operating revenues | 443 |
| | 509 |
|
| Operating Expenses: | | | |
| Fuel | 145 |
| | 169 |
|
| Purchased power | 24 |
| | 61 |
|
| Other operations and maintenance | 84 |
| | 93 |
|
| Depreciation and amortization | 119 |
| | 114 |
|
| Taxes other than income taxes | 11 |
| | 12 |
|
| Total operating expenses | 383 |
| | 449 |
|
| Operating Income | 60 |
| | 60 |
|
| Other Income and (Expense): | | | |
| Interest expense, net of amounts capitalized | (44 | ) | | (47 | ) |
| Other income (expense), net | 2 |
| | 3 |
|
| Total other income and (expense) | (42 | ) | | (44 | ) |
| Earnings Before Income Taxes | 18 |
| | 16 |
|
| Income taxes (benefit) | (9 | ) | | (99 | ) |
| Net Income | 27 |
| | 115 |
|
| Net loss attributable to noncontrolling interests | (29 | ) | | (6 | ) |
| Net Income Attributable to Southern Power | $ | 56 |
| | $ | 121 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)(K) ACQUISITIONS AND DISPOSITIONS
|
| | | | | | | |
| | 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 2019 vs. FIRST QUARTER 2018
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 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 commits 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, 2019, Southern Power continued construction of the 100-MW Wildhorse Mountain wind facility, the 200-MW Reading wind facility, and the expansion of the 385-MW Mankato natural gas facility. See FUTURE EARNINGS POTENTIAL – "Construction Projects" herein for additional information.
In November 2018, Southern Power entered 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 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.
At March 31, 2019, Southern Power's average investment coverage ratio for its generating assets (including Plants Mankato and Nacogdoches), 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 93% through 2023 and 91% through 2028, with an average remaining contract duration of approximatelyNote 15 years.
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 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(65) | | (53.7) |
Net income attributable to Southern Power for the first quarter 2019 was $56 million compared to $121 million for the corresponding period in 2018. The decrease was primarily due to $50 million in state income tax benefits recorded in 2018 arising from the reorganization of Southern Power's legal entities that own and operate certain solar 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 reorganizationincluding details of assets 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 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 fromliabilities held for sale at December 31, 2019 for Southern Power's generation facilities. To the extentCompany, Southern Power, has capacity not contracted under a PPA, it may sell power into an accessible wholesale market,and Southern Company Gas. No Registrant had assets or to the extent those generation assets are part of the FERC-approved IIC, it may sell power into the power pool.
Natural Gas and Biomass Capacity and Energy Revenue
Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment.
Energy is generally soldliabilities held for sale 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 2019 | | First Quarter 2018 |
| | (in millions) |
| PPA capacity revenues | $ | 127 |
| | $ | 138 |
|
| PPA energy revenues | 227 |
| | 254 |
|
| Total PPA revenues | 354 |
| | 392 |
|
| Non-PPA revenues | 85 |
| | 115 |
|
| Other revenues | 4 |
| | 2 |
|
| Total operating revenues | $ | 443 |
| | $ | 509 |
|
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2019, total operating revenues were $443 million, reflecting a $66 million, or 13%, decrease from the corresponding period in 2018. The decrease in operating revenues was primarily due to the following:
PPA capacity revenues decreased $11 million, or 8%, primarily due to a decrease of $17 million attributable to the sale of Plant 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 facilities.
PPA energy revenues decreased $27 million, or 11%, primarily due to a $22 million decrease in sales related to natural gas facilities, driven by a $51 million decrease in the average cost of fuel and purchased power, partially offset by a $29 million increase in the volume of KWHs sold due 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, and an $8 million decrease in the market price of energy.March 31, 2020.
Fuel and PurchasedAlabama Power Expenses
Details of Southern Power's generation and purchased power were as follows:
|
| | | | |
| | First Quarter 2019 | First Quarter 2018 |
| | (in billions of KWHs) |
| Generation | 10.1 |
| 9.8 |
|
| Purchased power | 0.7 |
| 0.9 |
|
| Total generation and purchased power | 10.8 |
| 10.7 |
|
| | | |
| Total generation and purchased power, excluding solar, wind, and tolling agreements | 6.6 |
| 6.7 |
|
Southern Power's PPAs for natural gas and biomass generation generally provide thatOn April 22, 2020, the purchasers are responsible for either procuringFERC approved the fuel (tolling agreements) or reimbursing Southern Power for substantially all ofAutauga Combined Cycle Acquisition. The Autauga Combined Cycle Acquisition remains subject to approval by 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 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 2019, total fuel and purchased power expenses decreased $61 million, or 27%, compared to the corresponding period in 2018. Fuel expense decreased $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 $24
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million decrease associated with the average cost of purchased 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.Alabama PSC. See Note (C) to the Condensed Financial Statements(B) under "General Litigation Matters – Southern Power" herein for additional information.
Income 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 2019 vs. First Quarter 2018 |
(change in millions) | | (% change) |
$23 | | N/M |
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. See Note 7 to the financial statements in Item 8 of the Form 10-K under "Southern"Alabama Power" for additional information. The ultimate outcome of this matter cannot be determined at this time.
FUTURE EARNINGS POTENTIALSouthern Power
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 through the development or acquisition of renewable facilities and other energy projects.Acquisitions
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
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 working capital and timing adjustments. This transaction is subject to FERC and state commission approvals. On April 17, 2019,March 2020, Southern Power entered into an agreement to sell all of its equity interestsacquire a controlling membership interest in the Nacogdoches biomass-fueledan approximately 300-MW wind facility to Austin Energy for an aggregate purchase price of $460 million,located in South Dakota. The acquisition is subject to FERC approval and certain other customary conditions to closing, conditions and working capital adjustments. Eachincluding commercial operation of these salesthe facility, which is expected to closeoccur in mid-2019; however, the fourth quarter 2020. The facility's output is contracted under 2 long-term PPAs. The ultimate outcome of these mattersthis matter 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.
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.
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.
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 in Progress
During the three months ended March 31, 2019,2020, Southern Power continued construction of the projects set forth in the table below.Reading and Skookumchuck wind facilities. Total aggregate construction costs, excluding the acquisition costs, are expected to be between $575$490 million and $640$535 million for the Plant Mankato expansion and the Wildhorse Mountain and Reading facilities.two facilities under construction. At March 31, 2019,2020, total costs of
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
construction incurred for these projects were $347$447 million and are included in CWIP, except for the Plant Mankato expansion, which is included in assets held for sale in the financial statements.CWIP. 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 |
Mankato expansion(a)
| Natural Gas | 385 | Mankato, MN | May 2019 | Northern States Power Company | 20 yearsProjects Under Construction as of March 31, 2020 |
Wildhorse MountainReading(b)(a)
| Wind | 100 | Pushmataha County, OK | Fourth quarter 2019 | Arkansas Electric Cooperative | 20 years |
Reading(c)
| Wind | 200 | Osage and Lyon Counties, KS | Second quarterMay 2020 | Royal Caribbean Cruises LTD | 12 years |
Skookumchuck(b) | Wind | 136 | Lewis and Thurston Counties, WA | Second half of 2020 | 20 years |
| |
| (a) | In November 2018, Southern Power enteredpurchased 100% of the membership interests of the Reading facility pursuant to a joint development arrangement. Southern Power may enter into an agreement to sell alla tax equity partnership, in which case it would then own 100% 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 Class B membership interests. The ultimate outcome of this matter cannot be determined at this time. |
| |
| (b) | In May 2018,October 2019, Southern Power purchased 100% of the Wildhorse Mountain facility.membership interests of the Skookumchuck facility pursuant to a joint development arrangement. In December 2019, Southern Power may enterentered into a tax equity partnership, in which case it would then own 100%agreement as the Class B member with funding of the classtax equity amounts expected to occur upon commercial operation. Shortly after commercial operation, Southern Power may sell a noncontrolling interest in these Class B membership interests.interests to another partner. 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
Southern Power continues to evaluate and refine the deployment of the remaining wind turbine equipment purchased in 2016 and 2017 to potential joint development and construction projects as well as the amount of MW capacity to be constructed.projects. During the three months ended March 31, 2019, approximately $53 million of2020, certain wind turbine equipment was marketedsold, resulting in an immaterial gain.
Sales of Natural Gas and Biomass Plants
On January 17, 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to a subsidiary of Xcel for a purchase price of approximately $663 million, including final working capital adjustments. The sale resulted in a gain of approximately $39 million ($23 million after tax). The assets and subsequent to March 31, 2019, was sold. At March 31, 2019, the equipment wasliabilities of Plant Mankato were classified as held for sale on Southern Company's and Southern Power's balance sheet.sheets at December 31, 2019.
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"Plants Nacogdoches (sold in June 2019) and "Power Sales Agreements – General"Mankato represented individually significant components of Southern Power in Item 7Power; therefore, pre-tax income for additional information.
Southern Power is involved in various other matters that could affect future 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 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 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 other business 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 Southern Power's financial statements.
Southern Power indirectly owns a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas. Prior to the facility being placed in service in 2016, certain solar panels were damaged during installation by the construction contractor, McCarthy Building Companies, Inc. (McCarthy), and certain solar panels were damaged by a hail event that also occurred during construction. In connection therewith, Southern Power withheld payment of approximately $26 million to the construction contractor, which placed a lien on the Roserock facilitythese components for the same amount. In 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. and North American Elite Insurance Company seeking recovery from an insurance policy for damages resulting from the hail event and McCarthy's installation practices. In June 2018, the court granted Roserock's motion for partial summary judgment, finding that the insurers were in breach of contract and in violation of the Texas Insurance Code for failing to pay any monies owed for the hail claim. Separate lawsuits were filed between Roserock and McCarthy, as well as other parties, and that litigation was consolidated in the U.S. District Court for the Western District of Texas. On 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 2019). Roserock will pay $26 million to McCarthy that was withheld and included in the original construction costs and will receive funds that will cover all related legal costs and the replacement costs of certain solar panels. In addition, during the first quarter 2019, Roserock received a partial payment of approximately $5 million in insurance proceeds toward the hail event. Any additional funds received in excess of the initial replacement costs are expected to be recognized as a gain when received by Roserock in the second quarter 2019, but are not expected to have a material impact on Southern 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 Notes 1, 4, and 10 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 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 Note (A) to the Condensed Financial Statements herein for information regarding Southern Power's recently adopted accounting standards.
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, 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 tax equity partnerships, where the tax partner takes significantly all of the federal tax benefits, as a financing source. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using a HLBV methodology to allocate partnership gains and losses. During the first three months of 2019, Southern Power did not receive any material tax equity funding amounts. See Note 1 to the financial statements under "Hypothetical Liquidation at Book Value" in Item 8 of the Form 10-K for additional information on the HLBV methodology.
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. The decrease in net cash provided from operating activities was primarily due to a reduction in income tax refunds. Net cash used for investing activities totaled $79 million for the first three months of 2019 primarily due to ongoing construction 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 $79 million for the first three months of 2019 primarily due to payment of a common stock dividend and distributions to noncontrolling 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 2019 include a $1.2 billion increase in prepaid income taxes, with an offsetting $1.2 billion reduction in accumulated deferred income tax 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 HLBV income allocations to Southern Power and distributions to partners. See Note (K) under "Southern Power" and Note (L) to the Condensed Financial Statements herein for additional information on the Plant Mankato disposition and ASU No. 2016-02, respectively.
See FUTURE EARNINGS POTENTIAL – "Construction Projects" 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 $600 million will be required throughended March 31, 2020 to fund maturities of long-term 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 and2019 is subject to periodic review and revision. Actual construction costs, including acquisitions, may vary 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 – "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. 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.
Southern Power's current liabilities sometimes exceed current assets due to the use of short-term debt as a funding source and construction payables, as well as fluctuations in cash needs due to seasonality. Southern Power believes the need for working capital can be adequately met by utilizing the commercial paper program, the Facility (as defined below), borrowings from financial institutions, equity contributions from Southern Company, external securities issuances, and operating cash flows.
As of March 31, 2019, Southern Power had cash and cash equivalents of approximately $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, including 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:presented below:
|
| | | | | | | | | | | | | | | | |
| | 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 | % | | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | 2019 |
| | (in millions) |
Southern Power's earnings before income taxes:(*) | | |
| Plant Nacogdoches | N/A |
| $ | 6 |
|
| Plant Mankato | $ | 2 |
| $ | 1 |
|
| |
| (*) | AverageEarnings before income taxes for components reflect the cessation of depreciation and maximum amounts are basedamortization on the long-lived assets being sold upon daily balances during the three-month period ended March 31, 2019.classification as held for sale in November 2018 and April 2019 for Plant Mankato and Plant Nacogdoches, respectively. |
Southern Company Gas
On March 31, 2019,24, 2020, Southern Power had a committed credit facility (Facility)Company Gas completed the sale of $750its interests in Pivotal LNG and Atlantic Coast Pipeline to Dominion Modular LNG Holdings, Inc. and Dominion Atlantic Coast Pipeline, LLC, respectively, with aggregate proceeds of $178 million, of which $9 million has been used for letters of credit and $741 million remains unused. The Facility expires in 2022. Proceeds from the Facility may be used forincluding estimated working capital adjustments. The preliminary loss associated with the transactions was immaterial. Southern Company Gas may also receive 2 future payments of $5 million each, contingent upon certain milestones related to Pivotal LNG being met by Dominion Modular LNG
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Holdings, Inc. The assets and general corporate purposesliabilities of Pivotal LNG and the interest in Atlantic Coast Pipeline were classified as well as liquidity supportheld for sale at December 31, 2019. See Notes 3 and 7 under "Other Matters – 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 8 to the financial statements under "Bank Credit Arrangements"Company Gas – Gas Pipeline Projects" and "Southern Company Gas – Equity Method Investments," respectively, in Item 8 of the Form 10-K and Note (F) to the Condensed Financial StatementsNotes (C) and (E) under "Bank Credit ArrangementsOther Matters – Southern Company Gas" and "Southern Company Gas," herein for additional information.respectively.
(L) SEGMENT AND RELATED INFORMATION
Southern Company
The Facility, as well asprimary businesses of the Southern Power's term loan agreements, contains a covenant that limitsCompany system are electricity sales by the ratiotraditional electric operating companies and Southern Power and the distribution of debt to capitalization (as definednatural gas by Southern Company Gas. The traditional electric operating companies – Alabama Power, Georgia Power, and Mississippi Power – are vertically integrated utilities providing electric service in 3 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 Facility) to a maximumwholesale market. Southern Company Gas distributes natural gas through its natural gas distribution utilities and is involved in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services.
Southern Company's reportable business segments are the sale of 65%electricity by the traditional electric operating companies, the sale of electricity in the competitive wholesale market by Southern Power, and contains a cross-default provision that is restricted only to indebtednessthe sale of natural gas and other complementary products and services by Southern Power. For purposes of this definition, debt excludes any project debt incurredCompany Gas. Revenues from sales by certain subsidiaries of Southern Power to the extent such debt is non-recoursetraditional electric operating companies were $86 million for the three months ended March 31, 2020 and $87 million for the three months ended March 31, 2019. Revenues from sales of natural gas from Southern Company Gas to the traditional electric operating companies were immaterial for the three months ended March 31, 2020 and 2019. Revenues from sales of natural gas from Southern Company Gas to Southern Power were $10 million for the three months ended March 31, 2020 and capitalization excludes$17 million for the capital stock or other equity attributablethree months ended March 31, 2019. The "All Other" column includes the Southern Company parent entity, which does not allocate operating expenses to such subsidiary. Southern Power is currently in compliance with all covenantsbusiness segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include providing energy solutions to electric utilities and their customers in the Facility.areas of distributed generation, energy storage and renewables, and energy efficiency, as well as investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.
Southern Power also has a $120 million continuing letter
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Financial data for standby letters of credit. Atbusiness segments and products and services for the three months ended March 31, 2020 and 2019 $96 million has been used for letters of credit, primarily as credit support for PPA requirements, and $24 million remains unused.
In addition, at March 31, 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, 2019 werewas as follows:
|
| | | |
| Credit Ratings | Maximum Potential
Collateral
Requirements |
| | (in millions) |
| At BBB and/or Baa2 | $ | 29 |
|
| At BBB- and/or Baa3 | $ | 339 |
|
At BB+ and/or Ba1(*) | $ | 1,041 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Electric Utilities | | | | |
| | Traditional Electric Operating Companies | Southern Power | Eliminations | Total | Southern Company Gas | All Other | Eliminations | Consolidated |
| | (in millions) |
| Three Months Ended March 31, 2020 | | | |
|
| | | |
| Operating revenues | $ | 3,407 |
| $ | 375 |
| $ | (87 | ) | $ | 3,695 |
| $ | 1,249 |
| $ | 114 |
| $ | (40 | ) | $ | 5,018 |
|
Segment net income (loss)(a)(b) | 642 |
| 75 |
| — |
| 717 |
| 275 |
| (121 | ) | (3 | ) | 868 |
|
| At March 31, 2020 | | | | | | | | |
| Goodwill | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
| $ | 5,015 |
| $ | 263 |
| $ | — |
| $ | 5,280 |
|
| Total assets | 81,765 |
| 13,646 |
| (695 | ) | 94,716 |
| 21,617 |
| 3,467 |
| (948 | ) | 118,852 |
|
| 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)(c) | 565 |
| 56 |
| — |
| 621 |
| 270 |
| 1,195 |
| (2 | ) | 2,084 |
|
| At December 31, 2019 | | | | | | | | |
| Goodwill | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
| $ | 5,015 |
| $ | 263 |
| $ | — |
| $ | 5,280 |
|
| Total assets | 81,063 |
| 14,300 |
| (713 | ) | 94,650 |
| 21,687 |
| 3,511 |
| (1,148 | ) | 118,700 |
|
| |
| (a) | Attributable to Southern Company. |
| |
| (b) | Segment net income (loss) for Southern Power includes a $39 million pre-tax gain ($23 million gain after tax) on the sale of Plant Mankato for the three months ended March 31, 2020. See Note (K) under "Southern Power" 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 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company" for additional information. |
Products and Services
|
| | | | | | | | | | | | |
| | Electric Utilities' Revenues |
| | Retail | Wholesale | Other | Total |
| | (in millions) |
| Three Months Ended March 31, 2020 | $ | 3,078 |
| $ | 418 |
| $ | 199 |
| $ | 3,695 |
|
| Three Months Ended March 31, 2019 | 3,084 |
| 499 |
| 212 |
| 3,795 |
|
|
| | | | | | | | | | | | | | | |
| | Southern Company Gas' Revenues |
| | Gas
Distribution
Operations | Wholesale Gas Services(*) | Gas
Marketing
Services | Other | Total |
| | (in millions) |
| Three Months Ended March 31, 2020 | $ | 1,013 |
| $ | 51 |
| $ | 177 |
| $ | 8 |
| $ | 1,249 |
|
| Three Months Ended March 31, 2019 | 1,161 |
| 86 |
| 229 |
| (2 | ) | 1,474 |
|
| |
| (*) | AnyThe revenues for wholesale gas services are netted with costs associated with its energy and risk management activities. See "Southern Company Gas" herein for additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million.information. |
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.
Financing Activities
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Southern Power did not issue Company Gas
Southern Company Gas manages its business through 4 reportable segments – gas distribution operations, gas pipeline investments, wholesale gas services, and gas marketing services. The non-reportable segments are combined and presented as all other.
Gas distribution operations is the largest component of Southern Company Gas' business and includes natural gas local distribution utilities that construct, manage, and maintain intrastate natural gas pipelines and gas distribution facilities in 4 states.
Gas pipeline investments consists of joint ventures in natural gas pipeline investments including a 50% interest in SNG, a 20% ownership interest in the PennEast Pipeline construction project, a 50% joint ownership interest in the Dalton Pipeline, and a 5% ownership interest in the Atlantic Coast Pipeline construction project through its sale on March 24, 2020. These natural gas pipelines enable the provision of diverse sources of natural gas supplies to the customers of Southern Company Gas.
Wholesale gas services provides natural gas asset management and/or redeem any securities duringrelated logistics services for each of Southern Company Gas' utilities except Nicor Gas as well as for non-affiliated companies. Additionally, wholesale gas services engages in natural gas storage and gas pipeline arbitrage and related activities.
Gas marketing services provides natural gas marketing to end-use customers primarily in Georgia and Illinois through SouthStar Energy Services, LLC.
The all other column includes segments below the quantitative threshold for separate disclosure, including natural gas storage businesses, fuels operations through the sale of Southern Company Gas' interest in Pivotal LNG on March 24, 2020, the investment in Triton through its sale on May 29, 2019, and other subsidiaries that fall below the quantitative threshold for separate disclosure. See Notes (E) and (K) under "Southern Company Gas" for additional information.
Business segment financial data for the three months ended March 31, 2019.
In addition to any financings that may be necessary to meet capital requirements2020 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.
2019 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services(*) | Gas Marketing Services | Total | All Other | Eliminations | Consolidated |
| | (in millions) |
| Three Months Ended March 31, 2020 | | | | | | |
| Operating revenues | $ | 1,020 |
| $ | 8 |
| $ | 51 |
| $ | 177 |
| $ | 1,256 |
| $ | 8 |
| $ | (15 | ) | $ | 1,249 |
|
| Segment net income (loss) | 164 |
| 30 |
| 23 |
| 57 |
| 274 |
| 1 |
| — |
| 275 |
|
| Total assets at March 31, 2020 | 18,166 |
| 1,652 |
| 643 |
| 1,517 |
| 21,978 |
| 11,094 |
| (11,455 | ) | 21,617 |
|
| 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 December 31, 2019 | 18,204 |
| 1,678 |
| 850 |
| 1,496 |
| 22,228 |
| 10,759 |
| (11,300 | ) | 21,687 |
|
| |
| (*) | 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 |
| | (in millions) |
| Three Months Ended March 31, 2020 | $ | 1,185 |
| $ | 29 |
| $ | 1,214 |
| $ | 1,163 |
| $ | 51 |
|
| Three Months Ended March 31, 2019 | 1,926 |
| 88 |
| 2,014 |
| 1,928 |
| 86 |
|
SOUTHERN COMPANY GAS
AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
| |
| Page |
| Combined Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
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The following Management's Discussion and Analysis of Financial Condition and Results of Operations is a combined presentation; however, information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants.
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Revenues: | | | |
| Natural gas revenues (includes revenue taxes of $55 and $51, respectively) | $ | 1,476 |
| | $ | 1,631 |
|
| Alternative revenue programs | (2 | ) | | (24 | ) |
| Other revenues | — |
| | 32 |
|
| Total operating revenues | 1,474 |
| | 1,639 |
|
| Operating Expenses: | | | |
| Cost of natural gas | 686 |
| | 720 |
|
| Cost of other sales | — |
| | 7 |
|
| Other operations and maintenance | 235 |
| | 276 |
|
| Depreciation and amortization | 118 |
| | 129 |
|
| Taxes other than income taxes | 82 |
| | 77 |
|
| Goodwill impairment | — |
| | 42 |
|
| Total operating expenses | 1,121 |
| | 1,251 |
|
| Operating Income | 353 |
| | 388 |
|
| Other Income and (Expense): | | | |
| Earnings from equity method investments | 48 |
| | 42 |
|
| Interest expense, net of amounts capitalized | (59 | ) | | (59 | ) |
| Other income (expense), net | 5 |
| | 12 |
|
| Total other income and (expense) | (6 | ) | | (5 | ) |
| Earnings Before Income Taxes | 347 |
| | 383 |
|
| Income taxes | 77 |
| | 104 |
|
| Net Income | $ | 270 |
| | $ | 279 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2019 | | 2018 |
| | (in millions) |
| Net Income | $ | 270 |
| | $ | 279 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| 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 $-, respectively | (1 | ) | | (1 | ) |
| Total other comprehensive income (loss) | (1 | ) | | 2 |
|
| Comprehensive Income | $ | 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, |
| | 2019 | | 2018 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 270 |
| | $ | 279 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 118 |
| | 129 |
|
| Deferred income taxes | 42 |
| | 47 |
|
| Mark-to-market adjustments | 45 |
| | (59 | ) |
| Goodwill impairment | — |
| | 42 |
|
| Other, net | (20 | ) | | (2 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 238 |
| | 175 |
|
| -Natural gas for sale, net of temporary LIFO liquidation | 363 |
| | 413 |
|
| -Other current assets | 59 |
| | 35 |
|
| -Accounts payable | (353 | ) | | (119 | ) |
| -Accrued taxes | 21 |
| | 28 |
|
| -Accrued compensation | (50 | ) | | (38 | ) |
| -Other current liabilities | (50 | ) | | 48 |
|
| Net cash provided from operating activities | 683 |
| | 978 |
|
| Investing Activities: | | | |
| Property additions | (256 | ) | | (268 | ) |
| Cost of removal, net of salvage | (12 | ) | | (14 | ) |
| Change in construction payables, net | 1 |
| | (46 | ) |
| Investment in unconsolidated subsidiaries | (10 | ) | | (29 | ) |
| Other investing activities | (13 | ) | | (4 | ) |
| Net cash used for investing activities | (290 | ) | | (361 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | (289 | ) | | (483 | ) |
| Payment of common stock dividends | (118 | ) | | (118 | ) |
| Other financing activities | 5 |
| | 6 |
|
| Net cash used for financing activities | (402 | ) | | (595 | ) |
| Net Change in Cash, Cash Equivalents, and Restricted Cash | (9 | ) | | 22 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 70 |
| | 78 |
|
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 61 |
| | $ | 100 |
|
| Supplemental Cash Flow Information: | | | |
| 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 | 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, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 57 |
| | $ | 64 |
|
| Receivables — | | | | |
| Energy marketing receivables | | 529 |
| | 801 |
|
| Customer accounts receivable | | 472 |
| | 370 |
|
| Unbilled revenues | | 179 |
| | 213 |
|
| Affiliated | | 9 |
| | 11 |
|
| Other accounts and notes receivable | | 108 |
| | 142 |
|
| Accumulated provision for uncollectible accounts | | (27 | ) | | (30 | ) |
| Natural gas for sale | | 189 |
| | 524 |
|
| Prepaid expenses | | 99 |
| | 118 |
|
| Assets from risk management activities, net of collateral | | 108 |
| | 219 |
|
| Other regulatory assets | | 46 |
| | 73 |
|
| Other current assets | | 42 |
| | 50 |
|
| Total current assets | | 1,811 |
| | 2,555 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 15,417 |
| | 15,177 |
|
| Less: Accumulated depreciation | | 4,466 |
| | 4,400 |
|
| Plant in service, net of depreciation | | 10,951 |
| | 10,777 |
|
| Construction work in progress | | 577 |
| | 580 |
|
| Total property, plant, and equipment | | 11,528 |
| | 11,357 |
|
| Other Property and Investments: | | | | |
| Goodwill | | 5,015 |
| | 5,015 |
|
| Equity investments in unconsolidated subsidiaries | | 1,557 |
| | 1,538 |
|
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 |
| | 20 |
|
| Total other property and investments | | 6,685 |
| | 6,674 |
|
| Deferred Charges and Other Assets: | | | | |
| Operating lease right-of-use assets, net of amortization | | 86 |
| | — |
|
| Other regulatory assets, deferred | | 657 |
| | 669 |
|
| Other deferred charges and assets | | 185 |
| | 193 |
|
| Total deferred charges and other assets | | 928 |
| | 862 |
|
| Total Assets | | $ | 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, 2019 | | At December 31, 2018 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 354 |
| | $ | 357 |
|
| Notes payable | | 361 |
| | 650 |
|
| Energy marketing trade payables | | 532 |
| | 856 |
|
| Accounts payable — | | | | |
| Affiliated | | 31 |
| | 45 |
|
| Other | | 391 |
| | 402 |
|
| Customer deposits | | 91 |
| | 133 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 89 |
| | 66 |
|
| Other accrued taxes | | 72 |
| | 75 |
|
| Accrued interest | | 64 |
| | 55 |
|
| Accrued compensation | | 49 |
| | 100 |
|
| Liabilities from risk management activities, net of collateral | | 26 |
| | 76 |
|
| Other regulatory liabilities | | 86 |
| | 79 |
|
| Other current liabilities | | 160 |
| | 130 |
|
| Total current liabilities | | 2,306 |
| | 3,024 |
|
| Long-term Debt | | 5,574 |
| | 5,583 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 1,064 |
| | 1,016 |
|
| Deferred credits related to income taxes | | 926 |
| | 940 |
|
| Employee benefit obligations | | 351 |
| | 357 |
|
| Operating lease obligations | | 71 |
| | — |
|
| Other cost of removal obligations | | 1,598 |
| | 1,585 |
|
| Accrued environmental remediation | | 261 |
| | 268 |
|
| Other deferred credits and liabilities | | 63 |
| | 105 |
|
| Total deferred credits and other liabilities | | 4,334 |
| | 4,271 |
|
| Total Liabilities | | 12,214 |
| | 12,878 |
|
Common Stockholder's Equity (See accompanying statements) | | 8,738 |
| | 8,570 |
|
| Total Liabilities and Stockholder's Equity | | $ | 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 2019 vs. FIRST QUARTER 2018
OVERVIEW
Southern Company Gas is an energy servicesa holding company whosethat owns all of the common stock of three traditional electric operating companies (Alabama Power, Georgia Power, and Mississippi Power), as well as Southern Power and Southern Company Gas, and owns other direct and indirect subsidiaries. The primary business isbusinesses of the Southern Company system are electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas through utilities in four states – Nicor Gas in Illinois, Atlanta Gas Light in Georgia, Virginia Natural Gas in Virginia, and Chattanooga Gas in Tennessee.by Southern Company Gas is also involvedGas. Southern Company's reportable segments are the sale of electricity by the traditional electric operating companies, the sale of electricity in severalthe competitive wholesale market by Southern Power, and the sale of natural gas and other complementary businesses.
products and services by Southern Company Gas manages its business through fourGas. Southern Company Gas' reportable segments –are gas distribution operations, gas pipeline investments, wholesale gas services, and gas marketing services – and one non-reportable segment, all other.services. See Note (M)(L) to the Condensed Financial Statements herein and "BUSINESSfor additional information on segment reporting. For additional information on the Registrants' primary business activities, see BUSINESS – The"The Southern Company System – Southern Company Gas"System" in Item 1 of the Form 10-K for additional information.10-K.
Many factors affectThe Registrants continue to focus on several key performance indicators. For the opportunities, challenges,traditional electric operating companies and risks of Southern Company Gas' business. These factorsGas, these indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, and execution of major construction projects. For Southern Power, these indicators include, but are not limited to, the equivalent forced outage rate and contract availability to evaluate operating results and help ensure its ability to maintainmeet its contractual commitments to customers. In addition, Southern Company and the Subsidiary Registrants focus on earnings per share and net income, respectively, as a key performance indicator.
Recent Developments
COVID-19
During March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention and has spread globally, including throughout the United States. The Southern Company system provides a critical service to its customers; therefore, it is essential that Southern Company system employees are able to continue to perform their critical duties safely and effectively. The Southern Company system has implemented applicable business continuity plans, including teleworking, canceling non-essential business travel, increasing cleaning frequency at business locations, implementing applicable safety to maintain constructive regulatory environments, to maintain and grow natural gas saleshealth guidelines issued by federal and numberstate officials, and establishing protocols for required work on customer premises. To date, these procedures have been effective in maintaining the Southern Company system's critical operations. As a result of customers,the COVID-19 pandemic, there have been economic disruptions in the Registrants' operating territories. The traditional electric operating companies 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 varioustemporarily suspended disconnections for non-payment by customers and waived late fees. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters" herein for information regarding requested and/or approved deferral of certain incremental COVID-19-related costs, including bad debt, to a regulatory mechanisms that address cost recovery. Effectivelyasset by certain of the traditional electric operating pursuantcompanies and the natural gas distribution utilities. In addition, the COVID-19 pandemic has resulted in a planned reduction in workforce at Plant Vogtle Units 3 and 4, as discussed further herein, and has caused volatility in capital markets. Additional information regarding COVID-19 and its potential impacts on the Registrants is provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A herein.
Georgia Power
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 these regulatory mechanismscontinue construction. The current expected in-service dates remain November 2021 for Unit 3 and appropriately balancing required costsNovember 2022 for Unit 4.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Although Southern Nuclear began implementing policies and capital expenditures with customer prices will continueprocedures designed to challenge Southern Company Gasmitigate the risk of transmission of COVID-19 at the construction site, multiple members of the workforce have tested positive for the foreseeable future.
Nicor Gas fileddisease and the pandemic has impacted productivity levels and pace of activity completion. On April 15, 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a rate casereduction in November 2018workforce at Plant Vogtle Units 3 and Atlanta Gas Light is required to file a rate case no later than June 3, 2019. These rate cases are both4 expected to concludetotal approximately 20% of the existing workforce. The workforce levels resulting from this reduction are expected to last at least through the summer as Georgia Power continues to monitor the impacts of the COVID-19 pandemic on the construction site. Georgia Power's proportionate share of the estimated incremental cost of this mitigation action, which is currently estimated to total approximately $20 million and is included in 2019.the first quarter 2020 contingency allocation of $66 million, assumes absenteeism rates normalize and the intended productivity efficiencies are realized in the coming months. Based on these assumptions, while this mitigation action has extended and may further extend certain milestone dates in the updated aggressive site work plan, Georgia Power does not expect it to affect either the total project capital cost forecast or the ability to achieve the regulatory-approved in-service dates of November 2021 and November 2022 for Plant Vogtle Units 3 and 4, respectively.
The continuing effects of the COVID-19 pandemic could further disrupt or delay construction, testing, supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate outcomeimpact of these mattersthe COVID-19 pandemic on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time.
See FUTURE EARNINGS POTENTIAL – "Construction Programs – Nuclear Construction" for additional information.
Mississippi Power
On March 17, 2020, the Mississippi PSC approved a settlement agreement between Mississippi Power and the Mississippi Public Utilities Staff related to Mississippi Power's base rate case filed in November 2019 (Mississippi Power Rate Case Settlement Agreement). Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Mississippi Power – 2019 Base Rate Case" herein for additional information.
Southern Power
During the three months ended March 31, 2020, Southern Power continued construction of the 200-MW Reading and the 136-MW Skookumchuck wind facilities. See FUTURE EARNINGS POTENTIAL – "Construction Programs – Southern Power" herein for additional information.
On January 17, 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to a subsidiary of Xcel for a purchase price of approximately $663 million, including final working capital adjustments.
In March 2020, Southern Power entered into an agreement to acquire a controlling membership interest in an approximately 300-MW wind facility located in South Dakota. The acquisition is subject to FERC approval and certain other customary conditions to closing, including commercial operation of the facility, which is expected to occur in the fourth quarter 2020. The facility's output is contracted under two long-term PPAs. The ultimate outcome of this matter cannot be determined at this time.
At March 31, 2020, Southern Power's average investment coverage ratio for its generating assets, including those owned with various partners, based on the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount was 93% through 2024 and 91% through 2029, with an average remaining contract duration of approximately 14 years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Company Gas
On February 3, 2020, Virginia Natural Gas filed a notice of intent with the Virginia Commission as required prior to the filing of a base rate case. Virginia Natural Gas planned to file its rate case in April 2020 but, as a result of the COVID-19 pandemic, now expects to file in June 2020. The ultimate outcome of this matter cannot be determined at this time.
On March 24, 2020, Southern Company Gas completed the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline with aggregate proceeds of $178 million, including estimated working capital adjustments. See Note 2(K) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
RESULTS OF OPERATIONS
Southern Company
Net Income
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(1,216) | | (58.3) |
Consolidated net income attributable to Southern Company was $0.9 billion ($0.82 per share) for first quarter 2020 compared to $2.1 billion ($2.01 per share) for the corresponding period in 2019. The decrease was primarily due to the $2.5 billion ($1.3 billion after tax) preliminary gain on the sale of Gulf Power recorded in the first quarter 2019. See Note 15 to the financial statements under "Southern Company Gas – Rate Proceedings"Company" in Item 8 of the Form 10-K for additional information.
During 2018, Southern Company Gas completedinformation regarding 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.Gulf Power.
On July 1, 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings, completedRetail Electric Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(6) | | (0.2) |
In the salesfirst quarter 2020 and 2019, retail electric revenues were $3.1 billion.
Details of the assetschanges in retail electric revenues were as follows:
|
| | | | | | |
| | First Quarter 2020 |
| | (in millions) | | (% change) |
| Retail electric – prior year | $ | 3,084 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 143 |
| | 4.6 | % |
| Sales growth | 7 |
| | 0.2 |
|
| Weather | (26 | ) | | (0.8 | ) |
| Fuel and other cost recovery | (130 | ) | | (4.2 | ) |
| Retail electric – current year | $ | 3,078 |
| | (0.2 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to an increase in revenue recognized under the Environmental Compliance Cost Recovery (ECCR) tariff as authorized in the Georgia Power 2019 ARP, as well as the impacts of twoGeorgia Power accruals for customer refunds and Alabama Power customer bill credits in the first quarter 2019 related to Tax Reform.
On July 29, 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI Corporation, completed the stock sale of Pivotal Utility Holdings, which primarily consisted of Florida City Gas, to NextEra Energy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
See Note 152 to the financial statements under "Alabama Power" and "Georgia Power" in Item 8 of the Form 10-K under "Southern Company Gas"and Note (B) to the Condensed Financial Statements herein for additional informationinformation.
Revenues attributable to changes in sales increased in the first quarter 2020 when compared to the corresponding period in 2019. Weather-adjusted residential KWH sales increased 3.1% in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to increased customer usage and customer growth. Weather-adjusted commercial KWH sales decreased 0.7% in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to lower customer usage resulting from customer initiatives in energy savings. Industrial KWH sales decreased 1.8% in the first quarter 2020 when compared to the corresponding period in 2019 as a result of a decrease in demand resulting from changes in production levels primarily in the paper and textile sectors, partially offset by increased demand from the pipeline sector. Social distancing and shelter-in-place guidelines related to the COVID-19 pandemic, which began to be implemented in the last few weeks of the first quarter 2020, had a small impact on retail sales relative to other primary drivers. In general, COVID-19-related impacts depressed commercial sales and, to a lesser extent, industrial sales and increased residential sales.
Fuel and other cost recovery revenues decreased $130 million in the first quarter 2020 compared to the corresponding period in 2019 primarily due to decreases in generation and the average cost of fuel and purchased power. Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these dispositions.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.
Operating MetricsWholesale Electric Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(81) | | (16.2) |
Wholesale electric revenues consist of revenues from PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.
system's generation, demand for energy within the Southern Company Gas measures weathersystem's electric service territory, and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas onavailability of the Southern Company Gas' distribution system. Withsystem's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Energy sales from solar and wind PPAs do not have a capacity charge and customers either purchase the exceptionenergy output of 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,energy generated from these facilities, 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 gas marketing services customers primarily in Georgia and Illinois can be impacted by warmer- or colder-than-normal weather.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 Gas utilizes weather hedgessystem's variable cost to limitproduce the negative income impacts in the event of warmer-than-normal weather, while retaining a significant portion of the positive 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.
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, 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 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(9) | | (3.2) |
In the first quarter 2019, net income was $2702020, wholesale electric revenues were $418 million compared to $279$499 million for the corresponding period in 2018. 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.2019. This decrease was driven byrelated to a $57 million decrease in energy revenues and a $24 million decrease in capacity revenues. The decrease in energy revenues was primarily at wholesale gas servicesSouthern Power and included a decrease in PPA revenues, primarily due to significantresulting from decreased sales from natural gas price volatility duringfacilities resulting from a decrease in the first quarter 2018. Excludingvolume of KWHs sold and a decrease in the impactsaverage cost of fuel and purchased power, partially offset by increased sales primarily driven by the Southern Company Gas Dispositionsvolume of KWHs from solar and wholesale gas services, net income increased $40 million. This increase was primarily due to a $52 million increase in revenues, net of gas costs and other cost recovery, primarily from infrastructure replacement programs and base rate changeswind facilities as well as colder weathera decrease in Illinoisnon-PPA revenues primarily resulting from a decrease in the first quarter 2019 compared to the corresponding period in 2018. Partially offsetting these increases werevolume of KWHs sold through short-term sales and a $7 million contractor litigation settlement recordeddecrease in the first quarter 2018 and increased depreciation and amortization.
market price of energy. The decrease in capacity revenues was primarily related to
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Southern Power's sales of Plant Nacogdoches in the second quarter 2019 and Plant Mankato in the first quarter 2020. See Note (K) to the Condensed Financial Statements under "Southern Power" herein and Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" in Item 8 of the Form 10-K for additional information.
Other Electric Revenues including Alternative Revenue Programs
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(133) | | (8.3) |
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(17) | | (10.1) |
In the first quarter 2019,2020, other electric revenues were $151 million compared to $168 million for the corresponding period in 2019. The decrease was primarily related to pole attachment revenues at Georgia Power and transmission revenues at Alabama Power and Georgia Power.
Natural Gas Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(225) | | (15.3) |
In the first quarter 2020, natural gas revenues including alternative revenue programs, were $1.5$1.2 billion compared to $1.6$1.5 billion for the corresponding period in 2018.2019.
Details of the changes in natural gas revenues including alternative revenue programs, were as follows:
| | | | First Quarter 2019 | First Quarter 2020 |
| | (in millions) | | (% change) | (in millions) | | (% change) |
| Natural gas revenues – prior year | $ | 1,607 |
|
|
|
| $ | 1,474 |
| | |
| Estimated change resulting from – | | | | | | |
| Infrastructure replacement programs and base rate changes | 32 |
|
| 2.0 |
| 76 |
| | 5.2 | % |
| Gas costs and other cost recovery | 62 |
|
| 3.9 |
| (249 | ) | | (16.9 | ) |
| Weather | 7 |
|
| 0.4 |
| (10 | ) | | (0.7 | ) |
| Wholesale gas services | (80 | ) |
| (5.0 | ) | (35 | ) | | (2.4 | ) |
| Southern Company Gas Dispositions | (167 | ) | | (10.4 | ) | |
| Other | 13 |
|
| 0.8 |
| (7 | ) | | (0.5 | ) |
| Natural gas revenues – current year | $ | 1,474 |
| | (8.3 | )% | $ | 1,249 |
| | (15.3 | )% |
Revenues fromattributable to infrastructure replacement programs and base rate changes at the natural gas distribution utilities increased in the first quarter 20192020 compared to the corresponding period in 20182019 primarily due to a $22 million increasebase rate increases at Nicor Gas and a $9 million increase at Atlanta Gas Light. These amounts include gas distribution operations'Light and continued investments recovered through infrastructure replacement programs and base rate increases as well as the effect of revenues deferred in 2018 as a result of the Tax Reform Legislation.programs. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.
Revenues associated withattributable to gas costs and other cost recovery increaseddecreased in the first quarter 20192020 compared to the corresponding period in 20182019. The decrease in the first quarter 2020 is primarily due to higherlower natural gas prices and increaseddecreased volumes of natural gas sold for the remaining four natural gas distribution utilities in the first quarter 2019.sold. 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. See "Cost of Natural Gas" herein for additional information. Revenue impacts from weather and customer growth are described further below.utilities.
Revenues increased dueattributable to colder weather in IllinoisSouthern Company Gas' wholesale gas services business decreased in the first quarter 20192020 compared to the corresponding period in 2018. See the weather discussion herein for additional information.
Revenues from wholesale gas services decreased2019. The decrease in the first quarter 2019 compared to the corresponding period in 20182020 is primarily due to decreased commercial activity as a result of warmer weather, 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
(Continued)
During Heating Season, natural gas usageOther Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(65) | | (34.8) |
In the first quarter 2020, other revenues were $122 million compared to $187 million for the corresponding period in 2019. The decrease primarily relates to changes in PowerSecure's business, including the sale of its utility infrastructure services business in June 2019 and the wind-down of a segment of its distributed infrastructure business in the first quarter 2020.
Fuel and Purchased Power Expenses
|
| | | | | |
| | First Quarter 2020 vs. First Quarter 2019 |
| | (change in millions) | | (% change) |
| Fuel | $ | (214 | ) | | (25.2) |
| Purchased power | 11 |
| | 6.5 |
| Total fuel and purchased power expenses | $ | (203 | ) | | |
In the first quarter 2020, total fuel and purchased power expenses were $0.8 billion compared to $1.0 billion for the corresponding period in 2019. The decrease was primarily the result of a $168 million decrease in the average cost of fuel and purchased power and a $35 million net decrease in the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions at the traditional electric operating revenuescompanies are generally higher. Weather typically doesoffset by fuel revenues and do not have a significant impact on net incomeincome. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters" herein for additional information. Fuel expenses incurred under Southern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact other than duringnet income.
Details of 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.system's generation and purchased power were as follows:
|
| | | | | | | | | | | | |
| | | First Quarter | | 2019 vs. 2018 | 2019 vs. normal |
| | | Normal(*) | 2019 | 2018 | | colder (warmer) | colder (warmer) |
| Illinois | | 3,045 |
| 3,297 |
| 3,042 |
| | 8.4 | % | 8.3 | % |
| Georgia | | 1,441 |
| 1,213 |
| 1,364 |
| | (11.1 | )% | (15.8 | )% |
|
| | |
| | First Quarter 2020 | First Quarter 2019 |
Total generation (in billions of KWHs) | 42 | 43 |
Total purchased power (in billions of KWHs) | 5 | 4 |
Sources of generation (percent) — | | |
| Gas | 53 | 48 |
| Nuclear | 18 | 16 |
| Coal | 14 | 22 |
| Hydro | 8 | 8 |
| Other | 7 | 6 |
Cost of fuel, generated (in cents per net KWH)— | | |
| Gas | 1.95 | 2.56 |
| Nuclear | 0.78 | 0.79 |
| Coal | 2.88 | 2.92 |
Average cost of fuel, generated (in cents per net KWH) | 1.86 | 2.32 |
Average cost of purchased power (in cents per net KWH)(*) | 3.90 | 4.64 |
| |
| (*) | Normal representsAverage cost of purchased power includes fuel purchased by the 10-year average from January 1, 2009 through March 31, 2018Southern Company system for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained fromtolling agreements where power is generated by the National Oceanic and Atmospheric Administration, National Climatic Data Center.provider. |
Southern Company Gas hedged its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. The remaining impacts of weather on earnings are reflected in the 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, 2019 and 2018:
|
| | | | | | | | |
| | March 31, | | |
| | 2019 | | 2018 | | 2019 vs. 2018 |
| | (in thousands, except market share %) | | (% change) |
Gas distribution operations(a) | 4,276 |
| | 4,654 |
| | (8.1 | )% |
| Gas marketing services | | | | | |
Energy customers(b) | 701 |
| | 779 |
| | (10.0 | )% |
| Market share of energy customers in Georgia | 28.8 | % | | 29.2 | % | |
|
|
| |
(a) | Includes total customers of approximately 407,000 at 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" for additional information. |
| |
(b) | Gas marketing services' customers are 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 of each year. At March 31, 2019 and 2018, there were approximately 70,000 and 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
(Continued)
Other RevenuesFuel
In the first quarter 2020, fuel expense was $636 million compared to $850 million for the corresponding period in 2019. The decrease was primarily due to a 38.6% decrease in the volume of KWHs generated by coal, a 23.8% decrease in the average cost of natural gas per KWH generated, and a 1.4% decrease in the average cost of coal per KWH generated, partially offset by a 4.7% increase in the volume of KWHs generated by natural gas. |
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(32) | | (100.0) |
Other revenues relatedIn the first quarter 2020, purchased power expense was $181 million compared to Pivotal Home Solutions, which$170 million for the corresponding period in 2019. The increase was soldprimarily due to a 26.3% increase in June 2018. See Note 15the volume of KWHs purchased, partially offset by a 16.0% decrease in the average cost of KWH purchased primarily due to lower energy prices.
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 financial statements in Item 8cost of the Form 10-K under "SouthernSouthern Company Gas – Salesystem's generation, and the availability of Pivotal Home Solutions" for additional information.the Southern Company system's generation.
Cost of Natural Gas
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(34) | | (4.7) |
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(247) | | (36.0) |
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution operations.utilities. Cost of natural gas at the natural gas distribution operationsutilities represented 87% of total cost of natural gas infor the first quarter 2019. See MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Cost of Natural Gas" of Southern Company Gas in Item 7 of the Form 10-K and "Natural Gas Revenues, including Alternative Revenue Programs" herein for additional information.2020.
In the first quarter 2019,2020, cost of natural gas was $686$439 million compared to $720$686 million for the corresponding period in 2018. Excluding a $79 million2019. The 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% increase38.0% decrease in natural gas prices compared to 2019 and an increase in the volume of natural gas sold in the first quarter 2019decreased volumes primarily as a result of colderwarmer weather, as determined by Heating Degree Days, in Illinoisthe first quarter 2020 compared to the corresponding period in 2018.2019.
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) |
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(63) | | (53.4) |
CostIn the first quarter 2020, cost of other sales was $55 million compared to $118 million for the corresponding period in 2019. The decrease primarily relates to changes in PowerSecure's business, including the sale of its utility infrastructure services business in June 2019 and the wind-down of a segment of its distributed infrastructure business in the first quarter 2020.
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(18) | | (1.4) |
In the first quarter 2020, other operations and maintenance expenses were $1.30 billion compared to $1.31 billion for the corresponding period in 2019. The decrease was primarily due to decreases of $29 million in scheduled
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
generation outage and maintenance expenses, $29 million in transmission and distribution maintenance expenses, primarily related to Pivotal Home Solutions,reliability NDR credits and vegetation management expenses at Alabama Power and distribution line operating and maintenance expenses at Georgia Power, and $24 million related to nuclear property insurance refunds, partially offset by a $46 million increase in storm damage recovery at Georgia Power as authorized in the Georgia Power 2019 ARP and a $20 million increase in medical and retirement benefit expenses primarily at the traditional electric operating companies and Southern Company Gas. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and " – Rate CNP Compliance" and "Georgia Power – Storm Damage Recovery" in Item 8 of the Form 10-K for additional information.
Depreciation and Amortization
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $106 | | 14.1 |
In the first quarter 2020, depreciation and amortization was $857 million compared to $751 million for the corresponding period in 2019. The increase was primarily due to increases at Georgia Power of $51 million and $45 million resulting from the amortization of regulatory assets related to CCR AROs and higher depreciation rates, respectively, as authorized in Georgia Power's 2019 ARP. See Note 2 to the financial statements under "Georgia Power – Rate Plans" in Item 8 of the Form 10-K for additional information.
(Gain) Loss on Dispositions, Net
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(2,458) | | N/M |
N/M - Not meaningful
In the first quarter 2020, gain on dispositions, net was $39 million compared to $2.5 billion in the corresponding period in 2019. The decrease was primarily due to the $2.5 billion ($1.3 billion after tax) preliminary gain on the sale of Gulf Power recorded in the first quarter 2019 compared to the $39 million ($23 million after tax) gain recorded on the sale of Southern Power's Plant Mankato in the first quarter 2020. See Note 15 to the financial statements under "Southern Company" in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Southern Power – Sales of Natural Gas and Biomass Plants" herein for additional information.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $26 | | 6.0 |
In the first quarter 2020, interest expense, net of amounts capitalized was $456 million compared to $430 million in the corresponding period in 2019. The increase was primarily due to an increase in average outstanding long-term borrowings primarily at Georgia Power and the parent company.
See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein and Note 8 to the financial statements in Item 8 of the Form 10-K for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Income (Expense), Net
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $25 | | 32.1 |
In the first quarter 2020, other income (expense), net was $103 million compared to $78 million for the corresponding period in 2019. The increase was primarily related to an increase in non-service cost-related retirement benefits income. See Note (H) to the Condensed Financial Statements herein for additional information.
Income Taxes
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(1,215) | | (89.3) |
In the first quarter 2020, income taxes were $145 million compared to $1.4 billion for the corresponding period in 2019. The decrease was primarily due to the tax impact from the sale of Gulf Power in 2019. See Note (G) to the Condensed Financial Statements herein for additional information.
Alabama Power
Net Income
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) |
| (% change) |
| $63 | | 29.0 |
Alabama Power's net income after dividends on preferred stock for the first quarter 2020 was $280 million compared to $217 million for the corresponding period in 2019. This increase was primarily due to a decrease in operations and maintenance expenses and an increase in retail revenues associated with the impact of customer bill credits issued in 2019 related to Tax Reform. These increases to income were partially offset by decreases in retail revenues associated with milder weather in the first quarter 2020 compared to the same period in 2019 and lower customer usage. See Note 2 to the financial statements under "Alabama Power – Rate RSE" in Item 8 of the Form 10-K for additional information.
Retail Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(8) | | (0.7) |
In the first quarter 2020 and 2019, retail revenues were $1.21 billion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2020 |
| | (in millions) |
| (% change) |
| Retail – prior year | $ | 1,213 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 50 |
| | 4.1 | % |
| Sales decline | (6 | ) | | (0.5 | ) |
| Weather | (12 | ) | | (1.0 | ) |
| Fuel and other cost recovery | (40 | ) | | (3.3 | ) |
| Retail – current year | $ | 1,205 |
| | (0.7 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to customer bill credits issued in the first quarter 2019 related to Tax Reform.
Revenues attributable to changes in sales decreased in the first quarter 2020 when compared to the corresponding period in 2019. Weather-adjusted residential KWH sales increased 2.6% in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to increased customer usage and customer growth. Weather-adjusted commercial KWH sales decreased 2.0% in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to lower customer usage resulting from customer initiatives in energy savings. Industrial KWH sales decreased 1.8% in the first quarter 2020 when compared to the corresponding period in 2019 as a result of a decrease in demand resulting from changes in production levels primarily in the chemicals, air separation, and paper sectors, partially offset by the primary metals and stone, clay, and glass sectors. Social distancing and shelter-in-place guidelines related to the COVID-19 pandemic, which began to be implemented in the last few weeks of the first quarter 2020, had a small impact on retail sales relative to other primary drivers. In general, COVID-19-related impacts depressed commercial sales and, to a lesser extent, industrial sales and increased residential sales.
Revenues attributable to changes in weather decreased in the first quarter 2020 primarily due to milder weather when compared to the corresponding period in 2019. The resulting decrease for residential sales was 2.6%, partially offset by an increase to commercial sales of 0.6% due to weather having a larger negative impact on commercial sales in the first quarter 2019 when compared to the corresponding period in 2020.
Fuel and other cost recovery revenues decreased in the first quarter 2020 when compared to the corresponding period in 2019 primarily due to decreases in generation and the average cost of fuel.
Electric rates include provisions to recognize the recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the 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 – Affiliates
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(41) | | (68.3) |
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 and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In the first quarter 2020, wholesale revenues from sales to affiliates were $19 million compared to $60 million for the corresponding period in June 2018.2019. The decrease was primarily due to a 58% decrease in KWH sales as a result of decreased coal generation largely due to lower natural gas prices and a 24% decrease in the price of energy due to lower natural gas prices in 2020 compared to the corresponding period in 2019.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2020 vs. First Quarter 2019 |
| | (change in millions) | | (% change) |
| Fuel | $ | (86 | ) | | (28.6 | ) |
| Purchased power – non-affiliates | 3 |
| | 8.1 |
|
| Purchased power – affiliates | (3 | ) | | (14.3 | ) |
| Total fuel and purchased power expenses | $ | (86 | ) | | |
In the first quarter 2020, fuel and purchased power expenses were $273 million compared to $359 million for the corresponding period in 2019. The decrease was primarily due to a $56 million net decrease in the volume of KWHs generated (excluding hydro) and purchased and a $30 million decrease in the average cost of generation and purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 2 to the financial statements under "Alabama Power – Rate ECR" in Item 8 of the Form 10-K for additional information.
Details of Alabama Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2020 |
| First Quarter 2019 |
Total generation (in billions of KWHs) | 14 | | 16 |
Total purchased power (in billions of KWHs) | 1 | | 1 |
Sources of generation (percent) — | | | |
| Coal | 34 | | 43 |
| Nuclear | 28 | | 23 |
| Gas | 20 | | 19 |
| Hydro | 18 | | 15 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Coal | 2.64 | | 2.78 |
| Nuclear | 0.76 | | 0.78 |
| Gas | 2.19 | | 2.57 |
Average cost of fuel, generated (in cents per net KWH) | 1.88 | | 2.19 |
Average cost of purchased power (in cents per net KWH)(*) | 4.86 | | 5.75 |
| |
| (*) | 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 2020, fuel expense was $215 million compared to $301 million for the corresponding period in 2019. The decrease was primarily due to a 32.8% decrease in the volume of KWHs generated by coal, a 14.8% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements, and increases of 5.7% and 5.5% in the volume of KWHs generated by nuclear and hydro, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(59) | | (14.4) |
In the first quarter 2020, other operations and maintenance expenses were $350 million compared to $409 million for the corresponding period in 2019. This decrease was primarily due to decreases of $30 million in generation expenses associated with scheduled outages, the closure of Plant Gorgas in 2019, and CNP Compliance-related expenses, $19 million in transmission and distribution maintenance expenses primarily related to reliability NDR credits and vegetation management expenses, and $12 million in expenses related to nuclear property insurance refunds. These decreases were partially offset by a $6 million increase in retirement benefit expenses. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and " – Rate CNP Compliance" in Item 8 of the Form 10-K for additional information.
Other Income (Expense), Net
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $10 | | 71.4 |
In the first quarter 2020, other income (expense), net was $24 million compared to $14 million for the corresponding period in 2019. This increase was primarily due to an increase in non-service cost-related retirement benefits income. See Note (H) to the Condensed Financial Statements herein for additional information.
Income Taxes
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $22 | | 35.5 |
In the first quarter 2020, income taxes were $84 million compared to $62 million for the corresponding period in 2019. This increase was primarily due to higher pre-tax earnings in the current year.
Georgia Power
Net Income
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $20 | | 6.4 |
Georgia Power's net income for the first quarter 2020 was $331 million compared to $311 million for the corresponding period in 2019. The increase was primarily due to impacts of the 2019 ARP effective January 1, 2020, including increased retail rates and lower income tax expense, largely offset by higher depreciation and amortization. See Note 2 to the financial statements under "Georgia Power" in Item 8 of the Form 10-K for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Retail Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $7 | | 0.4 |
In the first quarter 2020, retail revenues were $1.68 billion compared to $1.67 billion for the corresponding period in 2019.
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2020 |
| | (in millions) | | (% change) |
| Retail – prior year | $ | 1,668 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | 93 |
| | 5.5 | % |
| Sales growth | 16 |
| | 1.0 |
|
| Weather | (19 | ) | | (1.1 | ) |
| Fuel cost recovery | (83 | ) | | (5.0 | ) |
| Retail – current year | $ | 1,675 |
| | 0.4 | % |
Revenues associated with changes in rates and pricing increased in the first quarter 2020 when compared to the corresponding period in 2019. The increase was primarily due to an increase in revenue recognized under the ECCR tariff effective January 1, 2020 as authorized in the 2019 ARP and the impacts of accruals for customer refunds in the first quarter 2019 related to Tax Reform. See Note 2 to the financial statements under "Georgia Power" in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales increased in the first quarter 2020 when compared to the corresponding period in 2019. Weather-adjusted residential KWH sales increased 3.6% in the first quarter 2020 due to increased average customer usage and customer growth. Weather-adjusted commercial KWH sales were flat in the first quarter 2020. Weather-adjusted industrial KWH sales decreased 3.1% in the first quarter 2020 primarily due to decreases in the paper and textile sectors, partially offset by an increase in the pipeline sector. Social distancing and shelter-in-place guidelines related to the COVID-19 pandemic, which began to be implemented in the last few weeks of the first quarter 2020, had a small impact on retail sales relative to other primary drivers. In general, COVID-19-related impacts depressed commercial sales and, to a lesser extent, industrial sales and increased residential sales.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues decreased in the first quarter 2020 when compared to the corresponding period in 2019 due to lower fuel and 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 – "Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 7 of the Form 10-K for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Fuel and Purchased Power Expenses
|
| | | | | | |
| | First Quarter 2020 vs. First Quarter 2019 |
| | (change in millions) | | (% change) |
| Fuel | $ | (68 | ) | | (22.7 | ) |
| Purchased power – non-affiliates | 11 |
| | 9.3 |
|
| Purchased power – affiliates | (47 | ) | | (26.7 | ) |
| Total fuel and purchased power expenses | $ | (104 | ) | | |
In the first quarter 2020, total fuel and purchased power expenses were $489 million compared to $593 million in the corresponding period in 2019. The decrease was due to a $96 million decrease related to the average cost of fuel and purchased power and a net decrease of $8 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 – "Regulatory Matters – Georgia Power – Fuel Cost Recovery" 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 2020 | | First Quarter 2019 |
Total generation (in billions of KWHs) | 13 | | 13 |
Total purchased power (in billions of KWHs) | 9 | | 8 |
Sources of generation (percent) — | | | |
| Gas | 58 | | 50 |
| Nuclear | 27 | | 26 |
| Coal | 8 | | 18 |
| Hydro | 7 | | 6 |
Cost of fuel, generated (in cents per net KWH) — | | | |
| Gas | 2.12 | | 2.59 |
| Nuclear | 0.80 | | 0.81 |
| Coal | 3.83 | | 3.23 |
Average cost of fuel, generated (in cents per net KWH) | 1.87 | | 2.21 |
Average cost of purchased power (in cents per net KWH)(*) | 3.17 | | 3.94 |
| |
| (*) | 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 2020, fuel expense was $231 million compared to $299 million in the corresponding period in 2019. The decrease was primarily due to a 15.4% decrease in the average cost of fuel primarily related to lower cost of natural gas and a 3.5% decrease in the volume of KWHs generated largely due to lower customer demand driven by milder weather.
Purchased Power – Non-Affiliates
In the first quarter 2020, purchased power expense from non-affiliates was $129 million compared to $118 million in the corresponding period in 2019. The increase was primarily due to a 32.4% increase in the volume of KWHs purchased primarily due to scheduled outages at Georgia Power-owned generating units, largely offset by a 17.6% decrease in the average cost per KWH purchased primarily due to lower energy prices.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 2020, purchased power expense from affiliates was $129 million compared to $176 million in the corresponding period in 2019. The decrease was primarily due to a 26.4% decrease in the average cost per KWH purchased primarily resulting from lower energy prices, a 6.7% decrease in the volume of KWHs purchased as Georgia Power units generally dispatched at a lower cost than other Southern Company system resources, and the expiration of a PPA.
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 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $19 | | 4.3 |
In the first quarter 2020, other operations and maintenance expenses were $465 million compared to $446 million in the corresponding period in 2019. The increase was primarily due to a $46 million increase in storm damage recovery as authorized in the 2019 ARP, partially offset by decreases of $12 million related to scheduled generation outages and $12 million related to nuclear property insurance refunds. See Note 2 to the financial statements under "Georgia Power – Storm Damage Recovery" in Item 8 of the Form 10-K for additional information.
Depreciation and Amortization
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $112 | | 46.7 |
In the first quarter 2020, depreciation and amortization was $352 million compared to $240 million in the corresponding period in 2019. The increase was primarily due to increases of $51 million and $45 million resulting from the amortization of regulatory assets related to CCR AROs and higher depreciation rates, respectively, as authorized in the 2019 ARP and $12 million resulting from the amortization of regulatory assets related to the retirement of certain generating plants as approved in the Georgia Power 2019 IRP. See Note 2 to the financial statements under "Georgia Power – Rate Plans" and " – Integrated Resource Plan" in Item 8 of the Form 10-K for additional information.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $15 | | 15.6 |
In the first quarter 2020, interest expense, net of amounts capitalized was $111 million compared to $96 million in the corresponding period in 2019. The increase was primarily due to a $19 million increase in interest expense associated with an increase in average outstanding long-term borrowings, partially offset by a $5 million increase in amounts capitalized associated with Plant Vogtle Units 3 and 4. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings and Note (B) to
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the Condensed Financial Statements under "Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Other Income (Expense), Net
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $12 | | 30.0 |
In the first quarter 2020, other income (expense), net was $52 million compared to $40 million in the corresponding period in 2019. The increase was primarily due to an $11 million increase in non-service cost-related retirement benefits income. See Note (H) to the Condensed Financial Statements herein for additional information.
Income Taxes
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(65) | | (80.2) |
In the first quarter 2020, income taxes were $16 million compared to $81 million in the corresponding period in 2019. The decrease was primarily due to the flowback of excess deferred income taxes as authorized in the 2019 ARP and lower pre-tax earnings. See Note 2 to the financial statements under "Georgia Power – Rate Plans – Tax Reform Settlement Agreement" in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein for additional information.
Mississippi Power
Net Income
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(5) | | (13.5) |
Mississippi Power's net income for the first quarter 2020 was $32 million compared to $37 million for the corresponding period in 2019. The decrease was primarily due to an increase in scheduled generation outage costs, partially offset by a decrease in amortization associated with ECO Plan regulatory assets. See Note 2 to the financial statements under "Mississippi Power – Environmental Compliance Overview Plan" in Item 8 of the Form 10-K for additional information.
Retail Revenues
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(4) | | (2.0) |
In the first quarter 2020, retail revenues were $199 million compared to $203 million for the corresponding period in 2019.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Details of the changes in retail revenues were as follows:
|
| | | | | | |
| | First Quarter 2020 |
| | (in millions) | | (% change) |
| Retail – prior year | $ | 203 |
| | |
| Estimated change resulting from – | | | |
| Rates and pricing | — |
| | — | % |
| Sales decline | (3 | ) | | (1.5 | ) |
| Weather | 5 |
| | 2.5 |
|
| Fuel and other cost recovery | (6 | ) | | (3.0 | ) |
| Retail – current year | $ | 199 |
| | (2.0 | )% |
Revenues attributable to changes in sales decreased in the first quarter 2020 when compared to the corresponding period in 2019. Weather-adjusted residential KWH sales decreased 0.5% in the first quarter 2020 primarily due to an increase in energy saving initiatives. Weather-adjusted commercial KWH sales decreased 3.9% in the first quarter 2020 primarily due to the temporary closure of casinos and other non-essential businesses as a result of the COVID-19 pandemic. Industrial KWH sales increased 4.7% in the first quarter 2020 primarily due to increased production by several large industrial customers. Social distancing and shelter-in-place guidelines related to the COVID-19 pandemic, which began to be implemented in the last few weeks of the first quarter 2020, had no significant impact on residential and industrial sales relative to other primary drivers.
Fuel and other cost recovery revenues decreased in the first quarter 2020 when compared to the corresponding period in 2019 primarily as a result of lower 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, 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 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(6) | | (10.5) |
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power provides service under long-term contracts with rural electric cooperative associations and municipalities located in southeastern Mississippi under cost-based electric tariffs which are subject to regulation by the FERC. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Mississippi Power" in Item 7 of the Form 10-K for additional information.
In the first quarter 2020, wholesale revenues from sales to non-affiliates were $51 million compared to $57 million for the corresponding period in 2019. This decrease was primarily due to a decrease in revenue from MRA customers as a result of lower fuel costs and milder weather.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Wholesale Revenues – Affiliates
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(1) | | (4.5) |
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 2020, wholesale revenues from sales to affiliates were $21 million compared to $22 million for the corresponding period in 2019. This decrease was primarily due to a $9 million decrease associated with lower natural gas prices, partially offset by an $8 million increase associated with higher KWH sales due to the dispatch of Mississippi Power's lower cost generation resources to serve the Southern Company system's territorial load.
Fuel and Purchased Power Expenses
|
| | | | | |
| | First Quarter 2020 vs. First Quarter 2019 |
| | (change in millions) | | (% change) |
| Fuel | $ | (14 | ) | | (15.1) |
| Purchased power | 2 |
| | 66.7 |
| Total fuel and purchased power expenses | $ | (12 | ) | | |
In the first quarter 2020, total fuel and purchased power expenses were $84 million compared to $96 million for the corresponding period in 2019. The decrease was primarily due to a $22 million decrease related to the cost of fuel and purchased power primarily due to the lower average cost of natural gas, partially offset by a $10 million increase associated with the volume of KWHs generated and purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clause.
Details of Mississippi Power's generation and purchased power were as follows:
|
| | | |
| | First Quarter 2020 | | First Quarter 2019 |
Total generation (in millions of KWHs) | 4,167 | | 3,950 |
Total purchased power (in millions of KWHs) | 188 | | 90 |
Sources of generation (percent) – | | | |
| Coal | 3 | | 4 |
| Gas | 97 | | 96 |
Cost of fuel, generated (in cents per net KWH) – | | | |
| Coal | 4.30 | | 4.42 |
| Gas | 1.95 | | 2.46 |
Average cost of fuel, generated (in cents per net KWH) | 2.02 | | 2.53 |
Average cost of purchased power (in cents per net KWH) | 2.64 | | 3.71 |
Fuel
In the first quarter 2020, fuel expense was $79 million compared to $93 million for the corresponding period in 2019. This decrease was due to a 20% decrease in the average cost of fuel per KWH generated, partially offset by a 7% increase in the volume of KWHs generated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Purchased Power
In the first quarter 2020, purchased power expense was $5 million compared to $3 million for the corresponding period in 2019. This increase was primarily the result of a 109% increase in the volume of KWHs purchased, partially offset by a 29% decrease in the average cost per KWH purchased.
Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's electric 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 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $15 | | 24.6 |
In the first quarter 2020, other operations and maintenance expenses were $76 million compared to $61 million for the corresponding period in 2019. The increase was primarily due to increases of $10 million in scheduled generation outage costs and $2 million in employee compensation and benefit expenses.
Depreciation and Amortization
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(6) | | (12.5) |
In the first quarter 2020, depreciation and amortization was $42 million compared to $48 million for the corresponding period in 2019 primarily related to a decrease in amortization associated with ECO Plan regulatory assets. See Note 2 to the financial statements under "Mississippi Power – Environmental Compliance Overview Plan" in Item 8 of the Form 10-K for additional information.
Southern Power
Net Income Attributable to Southern Power
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $19 | | 33.9 |
Net income attributable to Southern Power for the first quarter 2020 was $75 million compared to $56 million for the corresponding period in 2019. The increase was primarily due to the impacts from the dispositions of Plant Nacogdoches in the second quarter 2019 and Plant Mankato in the first quarter 2020, including a $39 million ($23 million after tax) gain on sale, partially offset by PPA capacity revenue decreases in 2020. See Note (K) to the Condensed Financial Statements herein and 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Operating Revenues
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(41) | | (14.9) |
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(68) | | (15.3) |
Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities and a biomass generating facility (through the second quarter 2019 sale of Plant Nacogdoches), and PPA energy revenues from Southern Power's generation facilities. To the extent Southern Power has capacity not contracted under a PPA, it may sell power into an accessible wholesale market, or, to the extent those generation assets are part of the FERC-approved IIC, it may sell power into the Southern Company power pool.
Natural Gas and Biomass Capacity and Energy Revenue
Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment.
Energy is generally sold at variable cost or is indexed to published natural gas indices. Energy revenues will vary depending on the energy demand of Southern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost of Southern Power's energy. Energy revenues also include fees for support services, fuel storage, and unit start charges. Increases and decreases in energy revenues under PPAs that are driven by fuel or purchased power prices are accompanied by an increase or decrease in fuel and purchased power costs and do not have a significant impact on net income.
Solar and Wind Energy Revenue
Southern Power's energy sales from solar and wind generating facilities are predominantly through long-term PPAs that do not have capacity revenue. Customers either purchase the energy output of a dedicated renewable facility through an energy charge or pay a fixed price related to the energy generated from the respective facility and sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors.
See FUTURE EARNINGS POTENTIAL – "Southern Power's Power Sales Agreements" herein for additional information regarding Southern Power's PPAs.
Operating Revenues Details
Details of Southern Power's operating revenues were as follows:
|
| | | | | | | |
| | First Quarter 2020 | | First Quarter 2019 |
| | (in millions) |
| PPA capacity revenues | $ | 90 |
| | $ | 127 |
|
| PPA energy revenues | 205 |
| | 227 |
|
| Total PPA revenues | 295 |
| | 354 |
|
| Non-PPA revenues | 77 |
| | 85 |
|
| Other revenues | 3 |
| | 4 |
|
| Total operating revenues | $ | 375 |
| | $ | 443 |
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In the first quarter 2019, other operations and maintenance expenses2020, total operating revenues were $235$375 million, compared to $276reflecting a $68 million, foror 15%, decrease from the corresponding period in 2018. Excluding2019. The decrease in operating revenues was primarily due to the following:
PPA capacity revenues decreased $37 million, or 29%, primarily due to a $29$22 million decrease related to the Southern Company Gas Dispositions, other operationssale of Plant Nacogdoches in the second quarter 2019 and maintenance expenses decreased $12 million. This decrease was primarily due to a one-time adjustmentthe sale of Plant Mankato in the first quarter 20182020. In addition, the change reflects a reduction of $14 million from the contractual expiration of an affiliate natural gas PPA.
PPA energy revenues decreased $22 million, or 10%, due to a $32 million decrease in sales from natural gas facilities resulting from a $22 million decrease in the average cost of fuel and purchased power and a $10 million decrease in the volume of KWHs sold. This decrease was partially offset by a $10 million increase in sales primarily driven by the volume of KWHs generated by solar and wind facilities.
Non-PPA revenues decreased $8 million, or 9%, due to a $32 million decrease in the market price of energy, partially offset by a $24 million increase in the volume of KWHs sold through short-term sales.
Fuel and Purchased Power Expenses
Details of Southern Power's generation and purchased power were as follows:
|
| | |
| | First Quarter 2020 | First Quarter 2019 |
| | (in billions of KWHs) |
| Generation | 10.7 | 10.1 |
| Purchased power | 0.7 | 0.7 |
| Total generation and purchased power | 11.4 | 10.8 |
| | | |
| Total generation and purchased power, excluding solar, wind, and tolling agreements | 7.2 | 6.6 |
Southern Power's PPAs for natural gas generation generally provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel relating to the energy delivered under such PPAs. Consequently, changes in such fuel costs are generally accompanied by a corresponding change in related fuel revenues and do not have a significant impact on net income. Southern Power is responsible for the adoptioncost of a new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters"fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the wholesale market or into the Southern Company power pool for capacity owned directly by Southern Power.
Purchased power expenses will vary depending on demand, availability, and the cost of generating resources throughout the Southern Company system and other contract resources. Load requirements are submitted to the Southern Company power pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is generation owned by Southern Power, an affiliate company, or external parties. Such purchased power costs are generally recovered through PPA revenues.
Details of Southern Company GasPower's fuel and purchased power expenses were as follows:
|
| | | | | |
| | First Quarter 2020 vs. First Quarter 2019 |
| | (change in millions) | | (% change) |
| Fuel | $ | (38 | ) | | (26.2) |
| Purchased power | (10 | ) | | (41.7) |
| Total fuel and purchased power expenses | $ | (48 | ) | | |
In the first quarter 2020, total fuel and purchased power expenses decreased $48 million, or 28%, compared to the corresponding period in Item 72019. Fuel expense decreased $38 million due to a $53 million decrease in the average cost of fuel per KWH generated, partially offset by a $15 million increase associated with the Form 10-K for additional information.
volume of KWHs
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Depreciation and Amortization
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(11) | | (8.5) |
In the first quarter 2019, depreciation and amortization was $118generated. Purchased power expense decreased $10 million compareddue to $129 million for the corresponding period in 2018. Excluding a $16$7 million decrease related toassociated with the Southern Company Gas Dispositions, depreciationaverage cost of purchased power and amortization increased $5 million. This increase was primarily due to continued infrastructure investments at gas distribution operations.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $5 | | 6.5 |
In the first quarter 2019, taxes other than income taxes were $82 million compared to $77 million for the corresponding period in 2018. Excluding a $3 million decrease related toassociated with the Southern Company Gasvolume of KWHs purchased.
(Gain) Loss on Dispositions, taxes other than income taxes increased $8 million. This increase primarily reflects increases in Nicor Gas' invested capital tax and revenue tax expenses as a result of higher natural gas revenues at Nicor Gas, both of which are passed through directly to customers.
Goodwill ImpairmentNet
|
| | |
First Quarter 20192020 vs. First Quarter 20182019 |
| (change in millions) | | (% change) |
$(42)(40) | | N/M |
N/M - Not meaningful
In the first quarter 2018, a goodwill impairment charge of $42 million was recorded in contemplation of2020, the sale of Pivotal Home Solutions.Plant Mankato resulted in a $39 million gain. See Note 15(K) to the Condensed Financial Statements under "Southern Power – Sales of Natural Gas and Biomass Plants" herein for additional information.
Income Taxes (Benefit)
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $16 | | 177.8 |
In the first quarter 2020, income tax expense was $7 million compared to a $9 million benefit for the corresponding period in 2019. This change was primarily due to the tax impact from the sale of Plant Mankato in the first quarter 2020. See Notes (G) and (K) to the Condensed Financial Statements herein for additional information.
Southern Company Gas
Operating Metrics
Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.
Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas on Southern Company Gas' distribution system. Southern Company Gas has various regulatory mechanisms, such as weather and revenue normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utility's respective service territory, including Nicor Gas following the approval of a revenue decoupling mechanism for residential customers in its recent rate case. Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather.
The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations and gas marketing services' customers are primarily located in Georgia, 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.
Seasonality of Results
During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Thus, Southern Company Gas' operating results for the interim periods presented are not necessarily indicative of annual results and can vary significantly from quarter to quarter.
Net Income
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $5 | | 1.9 |
In the first quarter 2020, net income was $275 million compared to $270 million for the corresponding period in 2019. This increase in net income was primarily due to a $31 million increase at gas distribution operations primarily due to base rate increases for Nicor Gas and Atlanta Gas Light and continued investment in infrastructure replacement programs, partially offset by a $24 million decrease at wholesale gas services primarily due to reduced natural gas price volatility compared to the prior year. See Note 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K under "Southern Company Gas – Sale of Pivotal Home Solutions" for additional information.
Earnings from Equity Method InvestmentsNatural Gas Revenues, including Alternative Revenue Programs
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $6 | | 14.3 |
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(225) | | (15.3) |
In the first quarter 2019, earnings from equity method investments2020, natural gas revenues, including alternative revenue programs, were $48 million$1.2 billion compared to $42 million$1.5 billion for the corresponding period in 2018. This increase was primarily due to higher earnings from SNG2019.
Details of the changes in natural gas revenues, including alternative revenue programs, were as a result of rate increases implemented by SNG that became effective September 2018. See Note (E) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
Other Income (Expense), Netfollows:
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(7) | | (58.3) |
|
| | | | | | |
| | First Quarter 2020 |
| | (in millions) | | (% change) |
| Natural gas revenues – prior year | $ | 1,474 |
|
|
|
|
| Estimated change resulting from – | | | |
| Infrastructure replacement programs and base rate changes | 76 |
|
| 5.2 | % |
| Gas costs and other cost recovery | (249 | ) |
| (16.9 | ) |
| Weather | (10 | ) |
| (0.7 | ) |
| Wholesale gas services | (35 | ) |
| (2.4 | ) |
| Other | (7 | ) |
| (0.5 | ) |
| Natural gas revenues – current year | $ | 1,249 |
| | (15.3 | )% |
InRevenues from infrastructure replacement programs and base rate changes increased in the first quarter 2019, other income (expense), net was $5 million2020 compared to $12 million for the corresponding period in 2018. This decrease was2019 primarily due to a contractor litigation settlement in the first quarter 2018.base rate increases at Nicor Gas and Atlanta Gas Light and continued investments recovered through infrastructure replacement programs. See
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Atlanta Gas Light – PRP"Rate Proceedings" in Item 8 of the Form 10-K for additional information.
Income TaxesRevenues associated with gas costs and other cost recovery decreased in the first quarter 2020 compared to the corresponding period in 2019 primarily due to lower natural gas prices and decreased volumes of natural gas sold. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Revenues from wholesale gas services decreased in the first quarter 2020 compared to the corresponding period in 2019 primarily due to decreased commercial activity as a result of warmer weather, partially offset by derivative gains. See "Segment Information – Wholesale Gas Services" herein for additional information.
Southern Company Gas hedged the majority of its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. See Heating Degree Days information below.
During Heating Season, natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the Heating Season. The following table presents Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather.
|
| | |
| First Quarter 2019 vs. First Quarter 2018 |
| (change in millions) | | (% change) |
| $(27) | | (26.0)% |
|
| | | | | | | | | | | |
| | First Quarter | | 2020 vs. normal | 2020 vs. 2019 |
| | Normal(a) | 2020 | 2019 | | colder (warmer) | colder (warmer) |
| | (in thousands) | | | |
Illinois(b) | 3,053 |
| 2,759 |
| 3,297 |
| | (9.6 | )% | (16.3 | )% |
| Georgia | 1,427 |
| 1,091 |
| 1,213 |
| | (23.5 | )% | (10.1 | )% |
| |
| (a) | Normal represents the 10-year average from January 1, 2010 through March 31, 2019 for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center. |
| |
| (b) | Heating Degree Days in Illinois are expected to have a limited financial impact in future years. In October 2019, Nicor Gas received approval for a volume balancing adjustment, a revenue decoupling mechanism for residential customers that provides a monthly benchmark level of revenue per rate class for recovery. |
The following table provides the number of customers served by Southern Company Gas at March 31, 2020 and 2019:
|
| | | | | | | | |
| | March 31, | | |
| | 2020 | | 2019 | | 2020 vs. 2019 |
| | (in thousands, except market share %) | | (% change) |
| Gas distribution operations | 4,298 |
| | 4,276 |
| | 0.5 | % |
| Gas marketing services | | | | | |
Energy customers(*) | 638 |
| | 701 |
| | (9.0 | )% |
| Market share of energy customers in Georgia | 28.8 | % | | 28.8 | % | |
|
|
| |
| (*) | Gas marketing services' customers are primarily located in Georgia and Illinois. Also included as of March 31, 2019 were approximately 70,000 customers in Ohio contracted through an annual auction process to serve for 12 months beginning April 1, 2018. |
Southern Company Gas anticipates overall customer growth trends in gas distribution operations to continue as it expects continued low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to attract new customers and to retain existing customers.
Cost of Natural Gas
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(247) | | (36.0) |
Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 87% of total cost of natural
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
gas for the first quarter 2020. See MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Southern Company Gas – Cost of Natural Gas" in Item 7 of the Form 10-K and "Natural Gas Revenues, including Alternative Revenue Programs" herein for additional information.
In the first quarter 2019, income taxes were $772020, cost of natural gas was $439 million compared to $104$686 million for the corresponding period in 2018. Excluding2019. This decrease reflects a $1338.0% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather in the first quarter 2020 compared to 2019.
The following table details the volumes of natural gas sold during all periods presented.
|
| | | | | | |
| | First Quarter | 2020 vs. 2019 |
| | 2020 | 2019 |
Gas distribution operations (mmBtu in millions) | | | |
| Firm | 258 |
| 296 |
| (12.8 | )% |
| Interruptible | 24 |
| 25 |
| (4.0 | ) |
| Total | 282 |
| 321 |
| (12.1 | )% |
Wholesale gas services (mmBtu in millions/day) | | | |
| Daily physical sales | 6.9 |
| 7.0 |
| (1.4 | )% |
Gas marketing services (mmBtu in millions) | | |
|
| Firm: | | |
|
|
| Georgia | 14 |
| 15 |
| (6.7 | )% |
| Illinois | 5 |
| 6 |
| (16.7 | ) |
| Other | 5 |
| 8 |
| (37.5 | ) |
| Interruptible large commercial and industrial | 4 |
| 4 |
| — |
|
| Total | 28 |
| 33 |
| (15.2 | )% |
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $23 | | 9.8 |
In the first quarter 2020, other operations and maintenance expenses were $258 million decrease relatedcompared to $235 million for the Southern Company Gas Dispositions, income taxes decreased $14 million.corresponding period in 2019. This decreaseincrease was primarily due to lower pre-tax earnings compared to the prior year and an increase in medical and retirement benefit expenses and expenses passed through directly to customers primarily related to bad debt and pipeline compliance and maintenance activities.
Taxes Other Than Income Taxes
|
| | |
| First Quarter 2020 vs. First Quarter 2019 |
| (change in millions) | | (% change) |
| $(10) | | (12.2) |
In the flowback of excess deferredfirst quarter 2020, taxes other than income taxes were $72 million compared to $82 million for the corresponding period in 20192019. This decrease primarily reflects a decrease in revenue tax expenses as a result of lower natural gas revenues at Atlanta Gas Light as previously authorized by the Georgia PSC. See Note (G)Nicor Gas. These revenue tax expenses are passed through directly to the Condensedcustomers and have no impact on net income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 pipeline investments, wholesale gas services, and gas marketing services allows it to focus on a direct measure of performance before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.
Adjusted operating margin should not be considered an alternative to, or a more meaningful indicator of, Southern Company Gas' operating performance than operating income as determined in accordance with GAAP. In addition, Southern Company Gas' adjusted operating margin may not be comparable to similarly titled measures of other companies.
Detailed variance explanations of Southern Company Gas' financial performance are provided herein.
Reconciliations of operating income to adjusted operating margin are as follows:
| | | | First Quarter 2019 | | First Quarter 2018 | First Quarter 2020 | First Quarter 2019 |
| | (in millions) | (in millions) |
| Operating Income | $ | 353 |
| | $ | 388 |
| $ | 360 |
| $ | 353 |
|
Other operating expenses(a) | 435 |
| | 524 |
| 450 |
| 435 |
|
Revenue taxes(b) | (54 | ) | | (50 | ) | (45 | ) | (54 | ) |
| Adjusted Operating Margin | $ | 734 |
| | $ | 862 |
| $ | 765 |
| $ | 734 |
|
| |
| (a) | Includes other operations and maintenance, expenses, depreciation and amortization, and taxes other than income taxes, and goodwill impairment.taxes. |
| |
| (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
(Continued)
Segment Information
Adjusted operating margin, operating expenses, and net income for each segment are provided in the table below. See Note (M)(L) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
| | | | First Quarter 2019 |
| First Quarter 2018 | First Quarter 2020 | | First Quarter 2019 |
| Adjusted Operating Margin(a) | | Operating Expenses(a) | | Net Income (Loss) | | Adjusted Operating Margin(a) | | Operating Expenses(a)(b) | | Net Income (Loss)(b) | Adjusted Operating Margin(*) | | Operating Expenses(*) | | Net Income (Loss) | | Adjusted Operating Margin(*) | | Operating Expenses(*) | | Net Income (Loss) |
| | (in millions) | | (in millions) | (in millions) | | (in millions) |
| Gas distribution operations | $ | 524 |
|
| $ | 314 |
|
| $ | 133 |
|
| $ | 557 |
|
| $ | 323 |
|
| $ | 149 |
| $ | 595 |
| | $ | 340 |
| | $ | 164 |
| | $ | 524 |
| | $ | 314 |
| | $ | 133 |
|
| Gas pipeline investments | 8 |
|
| 3 |
|
| 32 |
|
| 8 |
|
| 3 |
|
| 27 |
| 8 |
| | 3 |
| | 30 |
| | 8 |
| | 3 |
| | 32 |
|
| Wholesale gas services | 84 |
|
| 19 |
|
| 47 |
|
| 163 |
|
| 22 |
|
| 104 |
| 50 |
| | 17 |
| | 23 |
| | 84 |
| | 19 |
| | 47 |
|
| Gas marketing services | 115 |
|
| 31 |
|
| 61 |
|
| 128 |
|
| 95 |
|
| 13 |
| 107 |
| | 30 |
| | 57 |
| | 115 |
| | 31 |
| | 61 |
|
| All other | 6 |
|
| 17 |
|
| (3 | ) |
| 9 |
|
| 34 |
|
| (14 | ) | 6 |
| | 16 |
| | 1 |
| | 6 |
| | 17 |
| | (3 | ) |
| Intercompany eliminations | (3 | ) |
| (3 | ) |
| — |
|
| (3 | ) |
| (3 | ) |
| — |
| (1 | ) | | (1 | ) | | — |
| | (3 | ) | | (3 | ) | | — |
|
| Consolidated | $ | 734 |
| | $ | 381 |
| | $ | 270 |
| | $ | 862 |
| | $ | 474 |
| | $ | 279 |
| $ | 765 |
| | $ | 405 |
| | $ | 275 |
| | $ | 734 |
| | $ | 381 |
| | $ | 270 |
|
| |
(a)(*) | Adjusted operating margin and operating expenses are adjusted for Nicor Gas' 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 the impacts of the Southern Company Gas Dispositions. See Note 15 to the financial statements in Item 8 of the 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 expense, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments.
With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various 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 2019 vs. First Quarter 2018
In the first quarter 2019,2020, net income decreased $16increased $31 million, or 10.7%23.3%, compared to the corresponding period in 2018. This decrease primarily relates to a $332019. The $71 million decreaseincrease in adjusted operating margin and a $7 million decrease in other income (expense), net, partially offset by a decrease of $16 million in income 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 frombase rate increases for Nicor Gas and Atlanta Gas Light and continued investments recovered through infrastructure replacement programs, and base rate increases, the effectpartially offset by warmer weather, net of revenues deferredweather normalization mechanisms. The $26 million increase 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 compensationmedical and retirement benefit costs,expenses, higher expenses passed through directly to customers, increased expenses for storage facilities,primarily related to bad debt and pipeline compliance and maintenance activities, and additional depreciation primarily due to additional assets placed in service. The decrease$6 million increase in other income (expense), net is due to a contractor litigation settlement in the first quarter 2018. Excluding $6 million of interest expense attributable to the utilities 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 non-service cost-related retirement benefits income. The $20 million increase in income tax expense is primarily due to higher pre-tax earnings and a decrease in the flowback of excess deferred income taxes at Atlanta Gas Light. See Note 2 to the financial statements in 2019, partially offset by higher pre-tax earnings.Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information.
Gas Pipeline Investments
Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG, PennEast Pipeline, Dalton Pipeline, and Atlantic Coast Pipeline PennEast Pipeline, (until its sale on March 24, 2020). See Notes (E)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
and a 50% joint ownership interest in the Dalton Pipeline. See Note (E)(K) to the Condensed Financial Statements under "Southern Company Gas" 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 2019,2020, there were no material changes in 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.2019.
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 2019,2020, net income decreased $57$24 million, or 54.8%51.1%, compared to the corresponding period in 2018.2019. This decrease primarily relates to a $79$34 million decrease in adjusted operating margin, partially offset by a decrease of $19 million in income tax expense and a $3$2 million decrease in operating expenses. expenses and a $7 million decrease in income tax expense.
Details of the decreasechanges in adjusted operating margin are provided in the table below. The decrease in operating expenses primarily reflectsreflect 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
expenses.
| | | | First Quarter 2019 | First Quarter 2018 | First Quarter 2020 | First Quarter 2019 |
| | (in millions) | (in millions) |
| Commercial activity recognized | $ | 38 |
| $ | 172 |
| $ | (20 | ) | $ | 38 |
|
| Gain on storage derivatives | 3 |
| 2 |
| |
| Gain (loss) on transportation and forward commodity derivatives | 29 |
| (16 | ) | |
| Gain (loss) on storage derivatives | | (6 | ) | 3 |
|
| Gain on transportation and forward commodity derivatives | | 77 |
| 29 |
|
| LOCOM adjustments, net of current period recoveries | (2 | ) | (3 | ) | (1 | ) | (2 | ) |
| Purchase accounting adjustments to fair value inventory and contracts | 16 |
| 8 |
| — |
| 16 |
|
| Adjusted operating margin | $ | 84 |
| $ | 163 |
| $ | 50 |
| $ | 84 |
|
Change in Commercial Activity
The commercial activity at wholesale gas services includes recognition of storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. The 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 20192020 compared to the corresponding period in 20182019 was primarily due to significant natural gas price volatility that resulted from prolonged coldwarmer-than-normal weather during the first quarter 2018 coupled with low natural gas supply.conditions.
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 20192020 resulted in storage derivative gains.losses. Transportation and forward commodity derivative gains in 20192020 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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, 2019.2020. A portion of wholesale gas services' storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.
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 | ) |
|
| | | | | | | | | | |
| | 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) |
| 2020 | 13 |
| | $ | 2 |
| | $ | (12 | ) |
| 2021 and thereafter | 16 |
| | 12 |
| | (65 | ) |
| Total at March 31, 2020 | 29 |
| | $ | 14 |
| | $ | (77 | ) |
| |
| (a) | At March 31, 2019,2020, the WACOG of wholesale gas services' expected natural gas withdrawals from storage was $2.24$1.80 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(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 provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts.
On June 4, 2018, Southern Company Gas completed the sale of Pivotal Home Solutions to American Water Enterprises LLC. See Note 15 to the financial statements in Item 8 of the Form 10-K under "Southern Company Gas" for additional information.
First Quarter 2019 vs. First Quarter 2018
In the first quarter 2019,2020, net income increased $48decreased $4 million compared to the corresponding period in 2018.2019. This increasedecrease primarily relates to a $64 million decrease in operating expenses, partially offset by a $13an $8 million decrease in adjusted operating margin, partially offset by a $1 million decrease in operating expenses and a $3 million increasedecrease in income tax expense.
Excluding a $25 million The decrease attributable to the 2018 disposition of Pivotal Home Solutions,in adjusted operating margin increased $12 million, whichis primarily reflects favorable margins and recoverydue to lower recoveries of prior period hedge losses. Excludinglosses, fewer customers as a $61 million decrease attributable toresult of the 2018 disposition of Pivotal Home Solutions that includes the related goodwill impairment charge, operating expenseOhio auction process, and warmer weather, partially offset by decreased $3 million.gas costs and increased customer count in Georgia.
All Other
All other includes natural gas storage businesses, fuels operations through the sale of Southern Company Gas' storage and fuels operations and itsinterest in Pivotal LNG on March 24, 2020, the investment in Triton through its sale on May 29, 2019, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense) associated with affiliate financing arrangements. See Note (K) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information on the sale of its interest in Pivotal LNG.
First Quarter 2019 vs. First Quarter 2018
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In the first quarter 2019,2020, there were no material changes in net loss decreased $11 millionincome compared to the corresponding period in 2018. This decrease primarily reflects an $17 million decrease in operating expenses, partially offset by a $3 million decrease in adjusted operating margin. The decrease in operating expenses primarily reflects a one-time adjustment in
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.2019.
Segment Reconciliations
Reconciliations of operating income to adjusted operating margin for the first quarter 20192020 and 20182019 are reflected in the following tables. See Note (M)(L) to the Condensed Financial Statements herein for additional information.
| |
| First Quarter 2019 | First Quarter 2020 |
| Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | 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) | $ | 210 |
| $ | 5 |
| $ | 65 |
| $ | 84 |
| $ | (11 | ) | $ | — |
| $ | 353 |
| $ | 255 |
| $ | 5 |
| $ | 33 |
| $ | 77 |
| $ | (10 | ) | $ | — |
| $ | 360 |
|
Other operating expenses(a) | 368 |
| 3 |
| 19 |
| 31 |
| 17 |
| (3 | ) | 435 |
| 385 |
| 3 |
| 17 |
| 30 |
| 16 |
| (1 | ) | 450 |
|
Revenue tax expense(b) | (54 | ) | — |
| — |
| — |
| — |
| — |
| (54 | ) | (45 | ) | — |
| — |
| — |
| — |
| — |
| (45 | ) |
| Adjusted Operating Margin | $ | 524 |
| $ | 8 |
| $ | 84 |
| $ | 115 |
| $ | 6 |
| $ | (3 | ) | $ | 734 |
| $ | 595 |
| $ | 8 |
| $ | 50 |
| $ | 107 |
| $ | 6 |
| $ | (1 | ) | $ | 765 |
|
| | | | First Quarter 2018 | First Quarter 2019 |
| | Gas Distribution Operations | Gas Pipeline Investments | Wholesale Gas Services | Gas Marketing Services | 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) | $ | 234 |
| $ | 5 |
| $ | 141 |
| $ | 33 |
| $ | (25 | ) | $ | — |
| $ | 388 |
| $ | 210 |
| $ | 5 |
| $ | 65 |
| $ | 84 |
| $ | (11 | ) | $ | — |
| $ | 353 |
|
Other operating expenses(a) | 373 |
| 3 |
| 22 |
| 95 |
| 34 |
| (3 | ) | 524 |
| 368 |
| 3 |
| 19 |
| 31 |
| 17 |
| (3 | ) | 435 |
|
Revenue tax expense(b) | (50 | ) | — |
| — |
| — |
| — |
| — |
| (50 | ) | (54 | ) | — |
| — |
| — |
| — |
| — |
| (54 | ) |
| Adjusted Operating Margin | $ | 557 |
| $ | 8 |
| $ | 163 |
| $ | 128 |
| $ | 9 |
| $ | (3 | ) | $ | 862 |
| $ | 524 |
| $ | 8 |
| $ | 84 |
| $ | 115 |
| $ | 6 |
| $ | (3 | ) | $ | 734 |
|
| |
| (a) | Includes other operations and maintenance, expenses, depreciation and amortization, and taxes other than income taxes, and goodwill impairment.taxes. |
| |
| (b) | Nicor Gas' revenue tax expenses, which are passed through directly to customers. |
FUTURE EARNINGS POTENTIAL
TheEach Registrant's results of operations discussed above are not necessarily indicative of Southern Company Gas'its future earnings potential. The Southern Company GasRecent disposition activities described under "Acquisitions and Dispositions are expected" herein, in Note (K) to materially decreasethe Condensed Financial Statements herein, and in Note 15 to the financial statements in Item 8 of the Form 10-K will impact future earnings and cash flows to Southern Company Gas. Infor the first quarter 2018,net income attributable to these dispositions, excluding the related goodwill impairment, was $34 million.applicable Registrants. The level of Southern Company Gas'the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein.
For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and the trend of reduced electricity usage per customer, especially in residential and commercial markets. Other major factors include Plant Vogtle Units 3 and 4 construction and rate recovery related thereto for Georgia Power and the ability to prevail against legal challenges associated with the Kemper County energy facility for Mississippi Power.
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 commerce transactions, and, for Georgia Power, more multi-family home construction, all of which could contribute to a net reduction in customer usage.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Global and U.S. economic conditions have been significantly affected by a series of demand and supply shocks. Most prominently, the COVID-19 pandemic has negatively impacted global supply chains and global demand for goods and services and public policy responses of social distancing and closing non-essential businesses have further restricted economic activity. In addition, a large supply shock of excess oil production due to actions by members of the Organization of the Petroleum Exporting Countries has significantly reduced oil prices, creating further volatility in financial markets. The combination of these economic shocks has driven the global and U.S. economies into a significant downturn. The drivers, speed, and depth of this economic contraction are unprecedented and have reduced energy demand primarily in the commercial and industrial classes. As a partial offset to these reductions, social distancing and shelter-in-place policies are increasing demand from residential customers in the short term. While these impacts on demand are expected to continue throughout, and for a period of time following, the pandemic, the ultimate extent of the negative impact on revenues depends on the depth and duration of the economic contraction in the Southern Company system's service territory and cannot be determined at this time.
The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs, as well as regulatory matters, creditworthiness of customers, total electric generating capacity available in Southern Power's market areas, and Southern Power's ability to successfully remarket capacity as current contracts expire. In addition, renewable portfolio standards, transmission constraints, cost of generation from units within the Southern Company power pool, and operational limitations could influence Southern Power's future earnings.
The level of future earnings for Southern Company Gas' primary business of distributing natural gas distribution and its complementary businesses in the gas pipeline investments, wholesale gas services, and gas marketing services sectors.sectors depends on numerous factors. These factors include Southern Company Gas'the natural gas distribution utilities' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, itsand Southern Company Gas' 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 The volatility of natural gas prices has a significantan impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of itsSouthern Company Gas' gas marketing services and wholesale gas services segmentsbusinesses 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 further 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"Construction Programs" herein for additional information on permitting challenges experienced by the Atlantic CoastPennEast 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,In addition, if the COVID-19 pandemic results in a continued economic conditions continue to improve, including the new housing market, thedownturn for a sustained period, demand for natural gas may increase, which may causedecrease, resulting in further downward pressure on natural gas prices to rise and drive higherlower volatility in the natural gas markets on a longer-term basis.
Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings.
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 strategy,strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, Southern Power and Southern Company Gas regularly considersconsider and evaluatesevaluate joint development arrangements as well as acquisitions and dispositions of businesses and assets.assets as part of their business strategies.
DueFor additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL in Item 7 of the Form 10-K and RISK FACTORS in Item 1A herein.
Acquisitions and Dispositions
See Note 15 to the seasonal naturefinancial statements in Item 8 of the natural gas businessForm 10-K and Note (K) to the Condensed Financial Statements herein for additional information.
Alabama Power
On April 22, 2020, the FERC approved the Autauga Combined Cycle Acquisition. The Autauga Combined Cycle Acquisition remains subject to approval by the Alabama PSC. See "Regulatory Matters – Alabama Power" herein for additional information. The ultimate outcome of this matter cannot be determined at this time.
Southern Power
On January 17, 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to a subsidiary of Xcel for a purchase price of approximately $663 million, including final working capital adjustments. The sale resulted in a gain of approximately $39 million ($23 million after tax). Pre-tax income for Plant Mankato was immaterial for the three months ended March 31, 2020 and 2019.
In March 2020, Southern Power entered into an agreement to acquire a controlling membership interest in an approximately 300-MW wind facility located in South Dakota. The acquisition is subject to FERC approval and certain other factorscustomary conditions to closing, including but not limited to, weather, regulation, competition, customer demand, and general economic conditions, the first quarter 2019 results are not necessarily indicativecommercial operation of the resultsfacility, which is expected to occur in the fourth quarter 2020. The facility's output is contracted under two long-term PPAs. The ultimate outcome of this matter cannot be expecteddetermined at this time.
Southern Power continues to evaluate and refine the deployment of the remaining wind turbine equipment purchased in 2016 and 2017 to development and construction projects. During the three months ended March 31, 2020, certain wind turbine equipment was sold, resulting in an immaterial gain.
Southern Company Gas
On March 24, 2020, Southern Company Gas completed the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline to Dominion Modular LNG Holdings, Inc. and Dominion Atlantic Coast Pipeline, LLC, respectively, with aggregate proceeds of $178 million, including estimated working capital adjustments. The preliminary loss associated with the transactions was immaterial. Southern Company Gas may also receive two future payments of $5 million each, contingent upon certain milestones related to Pivotal LNG being met by Dominion Modular LNG Holdings, Inc. See Note (K) to the Condensed Financial Statements under "Southern Company Gas" herein for any other period.additional information.
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, 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 natural gas. See Note (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 under "Environmental Remediation" in Item 8 of the Form 10-K, as well as Note (C) to the Condensed Financial Statements under "Environmental Remediation" herein, for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Regulatory Matters
See Note 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information regarding Southern Company Gas' regulatory matters.
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
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Atlanta Gas Light
Atlanta 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, 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
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. Infrastructure expenditures incurred under these programs in the first three months of 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 8, 2019, Virginia Natural Gas filed an application with the Virginia Commission to amend and extend its SAVE 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.
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 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" in Item 8 of the Form 10-K for additional information.
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 – "FERC Matters" of Southern Company Gas in Item 7 of the Form 10-K and Notes 7 and 9 to the financial statements under "Southern Company Gas – Equity Method Investments" and "Guarantees," respectively, in Item 8 of the Form 10-K for additional information regarding Southern Company 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 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 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, 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 Gas' 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
Southern Company Gas 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 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 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 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, 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. At March 31, 2019, the amount of subsidiary retained earnings restricted to dividend totaled $875 million. This restriction did not impact Southern Company Gas' ability to meet its cash obligations.
Net cash provided from operating activities totaled $683 million for the first three months of 2019, a decrease of $295 million from the corresponding period in 2018. The decrease was primarily due to the impacts of the Southern Company Gas Dispositions and the timing of vendor payments. Net cash used for investing activities totaled $290 million for the first three months of 2019 primarily due to gross property additions related to utility capital expenditures and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method pipeline investments. Net cash used for financing activities totaled $402 million for the first three months of 2019 primarily due to 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 for the first three months of 2019 include a decrease of $363 million in natural gas for sale, net of temporary LIFO liquidation, due to the use of stored natural gas and a $289 million decrease in notes payable primarily related to net repayments of commercial paper borrowings. Other significant balance sheet changes include decreases of $272 million and $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 $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. Approximately $350 million will be required through March 31, 2020 to fund 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 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for informationadditional information.
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.
Petition for Certificate of Convenience and Necessity
During March 2020, a hearing was held before the Alabama PSC regarding Alabama Power's petition for a certificate of convenience and necessity (CCN) to procure additional factors that may impact infrastructure investment expenditures.capacity, including the Autauga Combined Cycle Acquisition. On April 22, 2020, the FERC approved the Autauga Combined Cycle Acquisition. The Autauga Combined Cycle Acquisition, as well as procurement of the other resources identified in Alabama Power's CCN petition, remain subject to approval by the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of Capitalthe Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through an alternate rate plan, which includes traditional base tariffs, Demand-Side Management tariffs, the Environmental Compliance Cost Recovery tariff, and Municipal Franchise Fee tariffs. In addition, financing costs on certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff.
Southern Company GasDeferral of Incremental COVID-19 Costs
On April 7, 2020, in response to the COVID-19 pandemic, the Georgia PSC approved an order directing Georgia Power to continue its previous, voluntary suspension of customer disconnections and to defer the resulting incremental bad debt and other incremental costs as a regulatory asset. Georgia Power and the staff of the Georgia PSC will work collaboratively to establish a methodology for identifying these incremental costs. The period over which such costs will be recovered is expected to be determined in Georgia Power's next base rate case. At March 31, 2020, the incremental costs deferred were immaterial. The ultimate outcome of this matter cannot be determined at this time.
Integrated Resource Plan
On March 5, 2020, the Sierra Club filed a petition for judicial review in the Superior Court of Fulton County to appeal the Georgia PSC's decision in the 2019 ARP allowing Georgia Power to recover compliance costs for CCR AROs. The ultimate outcome of this matter cannot be determined at this time.
Fuel Cost Recovery
On March 9, 2020, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by 16% effective June 1, 2020, which is expected to reduce annual billings by approximately $329 million. Georgia Power expects the Georgia PSC to make a final decision on this matter on May 28, 2020. The ultimate outcome of this matter cannot be determined at this time.
Mississippi Power
Mississippi Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's rates are a combination of base rates and several separate cost recovery
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased power, ad valorem taxes, property damage, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are expected to be recovered through Mississippi Power's base rates.
2019 Base Rate Case
On March 17, 2020, the Mississippi PSC approved the Mississippi Power Rate Case Settlement Agreement between Mississippi Power and the Mississippi Public Utilities Staff related to Mississippi Power's base rate case filed in November 2019.
Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020, based on a test year period of January 1, 2020 through December 31, 2020, a 53% average equity ratio, an allowed maximum actual equity ratio of 55% by the end of 2020, and a 7.57% return on investment.
Additionally, the approved Mississippi Power Rate Case Settlement Agreement: (i) established common amortization periods of four years for regulatory assets and three years for regulatory liabilities included in the approved revenue requirement, including those related to unprotected deferred income taxes; (ii) established new depreciation rates reflecting an annual increase in depreciation of approximately $10 million; and (iii) excluded certain compensation costs totaling approximately $3.9 million. It also eliminated separate rates for costs associated with Plant Ratcliffe and energy efficiency initiatives and includes such costs in the PEP, ECO Plan, and ad valorem tax adjustment factor, as applicable. In accordance with the previous order of the Mississippi PSC suspending the operation of PEP and the ECO Plan for 2018 through 2020, Mississippi Power plans to obtainresume PEP proceedings and ECO Plan filings for 2021.
Performance Evaluation Plan
Under the fundsMississippi Power Rate Case Settlement Agreement, Mississippi Power is required to meet its future capital needsfile with the Mississippi PSC PEP compliance rate clauses to incorporate Mississippi Power's and the Mississippi Public Utilities Staff's recommended revisions to PEP by May 18, 2020. These revisions include, but are not limited to, changing the filing date for the annual PEP rate filing from sources similarNovember of the immediately preceding year to those usedMarch of the current year, utilizing a historic test year adjusted for "known and measurable" changes, using discounted cash flow and regression formulas to determine base return on equity, and moving all embedded ad valorem property taxes currently collected in PEP to the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. 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 generallyad valorem tax adjustment clause. These revisions are subject to the approval of the Illinois Commission. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "SourcesMississippi PSC. The ultimate outcome of Capital"this matter cannot be determined at this time.
Deferral of Southern Company GasIncremental COVID-19 Costs
On April 14, 2020, in Item 7order to mitigate the economic impact of the Form 10-K for additional information.
Southern Company Gas' current liabilities exceeded current assets by $495 million primarilyCOVID-19 pandemic on customers, the Mississippi PSC approved an order directing Mississippi Power to continue its previous, voluntary suspension of customer disconnections and to defer as a resultregulatory asset all necessary and reasonable incremental costs or expenses to plan, prepare, stage, or react to protect and keep safe its employees and customers, and to reliably operate its utility system during the COVID-19 pandemic. The period over which such costs will be recovered is expected to be determined in Mississippi Power's next PEP filing. At March 31, 2020, the incremental costs deferred were immaterial. The ultimate outcome of $361this matter cannot be determined at this time.
Municipal and Rural Associations Tariff
On April 27, 2020, Mississippi Power filed a request with the FERC for an increase in wholesale base revenues under the MRA tariff as agreed upon in a settlement agreement reached with its wholesale customers. The MRA settlement agreement provides that base rates will increase $2 million annually, effective May 1, 2020. Mississippi Power expects the FERC to rule on the request in notes payable and $354 million in securities due within one year. Southern Company Gas' currentthe second quarter 2020. The ultimate outcome of this 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
(Continued)
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.
At March 31, 2019, Southern Company Gas had $57 million
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, energy efficiency plans, and cash equivalents. Committedbad debt.
The natural gas distribution utilities have various regulatory mechanisms to recover bad debt expense, which will mitigate potential increases in bad debt expense as a result of the COVID-19 pandemic. Nicor Gas fully recovers its bad debt expenses, both the gas and non-gas portions, through its purchased gas adjustment mechanism and separate bad debt rider. Virginia Natural Gas and Chattanooga Gas recover the gas portion of bad debt expense through their purchased gas adjustment mechanisms and the non-gas portion of bad debt expense through their base rates in accordance with established benchmarks. Atlanta Gas Light does not have material bad debt expense because its receivables are from Marketers, rather than end-use customers. Its tariff allows it to obtain credit arrangementssecurity support from the Marketers in an amount equal to at least two times their estimated highest bill.
Rate Proceedings
On February 3, 2020, Virginia Natural Gas filed a notice of intent with banks at March 31, 2019 werethe Virginia Commission as follows:
|
| | | | | | | |
| Company | Expires 2022 | | Unused |
| | (in millions) |
Southern Company Gas Capital(a) | $ | 1,400 |
| | $ | 1,395 |
|
| Nicor Gas | 500 |
| | 500 |
|
Total(b) | $ | 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 8required prior to the consolidatedfiling of a base rate case. Virginia Natural Gas planned to file its rate case in April 2020 but, as a result of the COVID-19 pandemic, now expects to file in June 2020. The ultimate outcome of this matter cannot be determined at this time.
Construction Programs
Overview
The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations.
For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4. See "Nuclear Construction" herein for additional information. Also see Note 2 to the financial statements under "Bank Credit Arrangements""Alabama Power" in Item 8 of the Form 10-K for information regarding Alabama Power's construction of Plant Barry Unit 8.
While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. See "Southern Power" herein, "Acquisitions and Dispositions – Southern Power" herein, and Note (F)(K) to the Condensed Financial Statements under "Bank Credit ArrangementsSouthern Power" herein, for additional information.
The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas (Facility) contains a covenant that limits the debt levels 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. At March 31, 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. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings werewell 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 |
| Commercial paper: | (in millions) | | | | (in millions) | | | | (in millions) |
| Southern Company Gas Capital | $ | 326 |
| | 2.8 | % | | $ | 364 |
| | 2.9 | % | | $ | 472 |
|
| Nicor Gas | 35 |
| | 2.6 | % | | 106 |
| | 2.9 | % | | 247 |
|
| Total | $ | 361 |
| | 2.8 | % | | $ | 470 |
| | 2.9 | % | | |
| |
(*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 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.
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, 2019 was approximately $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.
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 Southern Company Gas, may be negatively impacted. Southern Company Gas and 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, Southern Company Gas', Southern Company Gas Capital's, and Nicor Gas' credit ratings could be negatively affected. The Georgia PSC's MayNote 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 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Southern Company Gas" herein for information on additional 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, 2019, the non-principal components totaled $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.
Southern Company Gas did not issue or redeem any securities during the three months ended March 31, 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 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 (I) and (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:
|
| | | | | | |
| | First Quarter 2019 | First Quarter 2018 |
| | (in millions) |
| Contracts outstanding at beginning of period, assets (liabilities), net | $ | (167 | ) | $ | (106 | ) |
| Contracts realized or otherwise settled | (5 | ) | 49 |
|
Current period changes(a) | 44 |
| (13 | ) |
| Contracts outstanding at the end of period, assets (liabilities), net | $ | (128 | ) | $ | (70 | ) |
| Netting of cash collateral | 190 |
| 223 |
|
Cash collateral and net fair value of contracts outstanding at end of period(b) | $ | 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, respectively. |
The maturities of Southern Company Gas' energy-related derivative contracts at March 31, 2019 were as follows:
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurements |
| | | | March 31, 2019 |
| | Total
Fair Value | | Maturity |
| | | Year 1 | | Years 2 & 3 | | Years 4 and thereafter |
| | (in millions) |
Level 1(a) | $ | (144 | ) | | $ | (36 | ) | | $ | (76 | ) | | $ | (32 | ) |
Level 2(b) | 35 |
| | 26 |
| | 10 |
| | (1 | ) |
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 $190 million as well as premium and associated intrinsic value associated with weather derivatives of $11 million at March 31, 2019. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
(UNAUDITED)
INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS
|
| | |
Note | | Page Number |
A | | |
B | | |
C | | |
D | | |
E | | |
F | | |
G | | |
H | | |
I | | |
J | | |
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, 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, K, L, M |
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
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, 2018 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, 2019 and 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
In 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize on 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 the accounting for existing leveraged leases. The registrants adopted the new standard effective January 1, 2019. See Note (L) for additional information and related disclosures.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Goodwill and Other Intangible Assets
Goodwill at March 31, 2019 and December 31, 2018 was as follows: |
| | | | | | |
| | 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, 2019 | | At December 31, 2018 |
| | Gross Carrying Amount | Accumulated Amortization | Other Intangible Assets, Net | | Gross Carrying Amount | Accumulated Amortization | Other
Intangible Assets, Net |
| | (in millions) | | (in millions) |
| Southern Company | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| Customer relationships | $ | 211 |
| $ | (100 | ) | $ | 111 |
| | $ | 223 |
| $ | (94 | ) | $ | 129 |
|
| Trade names | 70 |
| (22 | ) | 48 |
| | 70 |
| (21 | ) | 49 |
|
| Storage and transportation contracts | 64 |
| (56 | ) | 8 |
| | 64 |
| (54 | ) | 10 |
|
| PPA fair value adjustments | 405 |
| (67 | ) | 338 |
| | 405 |
| (61 | ) | 344 |
|
| Other | 11 |
| (6 | ) | 5 |
| | 11 |
| (5 | ) | 6 |
|
| Total other intangible assets subject to amortization | $ | 761 |
| $ | (251 | ) | $ | 510 |
|
| $ | 773 |
| $ | (235 | ) | $ | 538 |
|
| Other intangible assets not subject to amortization: | | | | | | | |
| Federal Communications Commission licenses | 75 |
| — |
| 75 |
| | 75 |
| — |
| 75 |
|
| Total other intangible assets | $ | 836 |
| $ | (251 | ) | $ | 585 |
| | $ | 848 |
| $ | (235 | ) | $ | 613 |
|
| | | | | | | | |
| Southern Power | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| PPA fair value adjustments | $ | 405 |
| $ | (67 | ) | $ | 338 |
| | $ | 405 |
| $ | (61 | ) | $ | 344 |
|
| | | | | | | | |
| Southern Company Gas | | | | | | | |
| Other intangible assets subject to amortization: | | | | | | | |
| Gas marketing services | | | | | | | |
| Customer relationships | $ | 156 |
| $ | (89 | ) | $ | 67 |
| | $ | 156 |
| $ | (84 | ) | $ | 72 |
|
| Trade names | 26 |
| (8 | ) | 18 |
| | 26 |
| (7 | ) | 19 |
|
| Wholesale gas services | | | | | | | |
| Storage and transportation contracts | 64 |
| (56 | ) | 8 |
| | 64 |
| (54 | ) | 10 |
|
| Total other intangible assets subject to amortization | $ | 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 |
| | March 31, 2019 |
| | (in millions) |
| Southern Company | $ | 17 |
|
Southern Power(a) | $ | 6 |
|
| Southern Company Gas | |
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
At December 31, 2018, Georgia Power had restricted cash related to 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, 2019 and December 31, 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, 2019 and/or December 31, 2018:
|
| | | | | | | |
| | Southern Company | | Southern Company Gas |
| | (in millions) |
| At March 31, 2019 | | | |
| Cash and cash equivalents | $ | 1,361 |
| | $ | 57 |
|
| Restricted cash: | | | |
| Other accounts and notes receivable | 4 |
| | 4 |
|
| Total cash, cash equivalents, and restricted cash | $ | 1,364 |
| (*) | $ | 61 |
|
| |
(*) | Total does not add due to rounding. |
|
| | | | | | | | | |
| | Southern Company | Georgia Power | Southern Company Gas |
| | (in millions) |
| At December 31, 2018 | | | |
| Cash and cash equivalents | $ | 1,396 |
| $ | 4 |
| $ | 64 |
|
| Cash and cash equivalents held for sale | 9 |
| — |
| — |
|
| Restricted cash: | | | |
| Restricted cash | — |
| 108 |
| — |
|
| Other accounts and notes receivable | 114 |
| — |
| 6 |
|
| Total cash, cash equivalents, and restricted cash | $ | 1,519 |
| $ | 112 |
| $ | 70 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Natural Gas for Sale
Southern Company Gas, with the exception of Nicor Gas, carries 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. Nicor Gas' inventory decrement at March 31, 2019 is expected to be restored prior to year end.
(B) REGULATORY MATTERS
See Note 2 to the financial statementsPower" in Item 8 of the Form 10-K, for additional information about costs relating to regulatory matters.Southern Power's acquisitions that involve construction of renewable energy facilities.
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 decisionSouthern Company Gas is engaged in various infrastructure improvement programs designed 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 depreciateupdate or expand 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 millionnatural gas distribution systems of the remaining net investment costs of the unitsnatural gas distribution utilities 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
improve reliability and meet
NOTES TO THE CONDENSEDMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS:CONDITION
AND RESULTS OF OPERATIONS (Continued)
(UNAUDITED)
retirement costs will be reclassified tooperational flexibility and growth. The natural gas distribution utilities recover their investment and a regulatory asset and recovered in accordancereturn associated with accounting guidance provided by the Alabama PSC.these infrastructure programs through their regulated rates. See Note 2 to the financial statements under "Alabama Power – Environmental Accounting Order" and Note 6 in Item 8 of the Form 10-K"Southern Company Gas" herein for additional information.information regarding infrastructure improvement programs at the natural gas distribution utilities and the PennEast pipeline construction project.
Georgia PowerSee FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding the Registrants' capital requirements for their 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 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 required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for information on the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
NOTES TO THE CONDENSEDMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS:CONDITION
AND RESULTS OF OPERATIONS (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 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:
| | | | (in billions) | (in billions) |
Base project capital cost forecast(a)(b) | $ | 8.0 |
| $ | 8.2 |
|
| Construction contingency estimate | 0.4 |
| 0.2 |
|
Total project capital cost forecast(a)(b) | 8.4 |
| 8.4 |
|
Net investment as of March 31, 2019(b) | (4.9 | ) | |
Net investment as of March 31, 2020(b) | | (6.2 | ) |
Remaining estimate to complete(a) | $ | 3.5 |
| $ | 2.2 |
|
| |
| (a) | Excludes financing costs expected to be capitalized through AFUDC of approximately $325 million.$270 million, of which $36 million had been accrued through March 31, 2020. |
| |
| (b) | Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds.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$2.3 billion had been incurred through March 31, 2019.2020.
As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of commodity installation, system turnovers, and workforce statistics.
During the first quarter 2020, approximately $66 million of the $366 million construction contingency estimate established in the second quarter 2018 was allocated to the base capital cost forecast for cost risks including, among other things, construction productivity, field support, subcontracts, and procurement, as well as the impacts of the April 2020 reduction in workforce described below.
Through March 31, 2020, a total of approximately $206 million of the $366 million construction contingency estimate established in the second quarter 2018 has been allocated to the base capital cost forecast for cost risks including, among other factors, construction productivity, including the April 2020 reduction in workforce described below; craft labor incentives; adding resources for supervision, field support, project management, initial test program, start-up, and operations and engineering support; subcontracts; and procurement. As and when construction contingency is spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.
In April 2019, Southern Nuclear completedestablished aggressive target values for monthly construction production and system turnover activities as part of a strategy to maintain and, where possible, build margin to the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. Through early 2020, the project faced challenges with the April 2019 aggressive strategy targets including, but not limited to, electrical and pipefitting labor productivity and closure rates for work packages, which resulted in a backlog of activities and completion percentages below the April 2019 aggressive strategy targets.
In February 2020, Southern Nuclear updated its 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 confirmedforecast, which did not change the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4. Theconfirmed the expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. This update included initiatives to improve productivity while refining and extending system turnover plans and certain near-term milestone dates. Other milestone dates did not change. Achievement of the aggressive site work plan relies on meeting increased monthly production and activity target values during 2020. Through March 2020, Unit 3 mechanical, electrical, and subcontract activities started to build a backlog; however, overall production was generally consistent with the updated aggressive site work plan.
In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site, including worker distancing measures, isolating individuals who have tested positive for COVID-19, are showing symptoms consistent with COVID-19, are being tested for
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
COVID-19, or have been in close contact with such persons, requiring self-quarantine, and adopting additional precautionary measures. Multiple members of the workforce have tested positive for COVID-19. The COVID-19 pandemic has impacted productivity levels and pace of activity completion.
On April 15, 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 as previously approvedexpected to total approximately 20% of the existing workforce. This reduction in workforce was a mitigation action intended to address the impact of the COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and construction site, including ongoing challenges with labor productivity that have been exacerbated by the impact of the COVID-19 pandemic. It is expected to provide operational efficiencies by increasing productivity of the remaining workforce and reducing workforce fatigue and absenteeism. It is also expected to allow for increased social distancing by the workforce and facilitate compliance with the latest recommendations from the Centers for Disease Control and Prevention.
To meet the 2020 targets in the aggressive site work plan for both Unit 3 and Unit 4, construction productivity, including subcontractors, must improve and be sustained above historical average levels. In addition, appropriate levels of craft laborers, particularly electrical and pipefitter craft labor, must be maintained. The workforce levels resulting from the April 2020 reduction are expected to last at least through the summer as Georgia PSC, remain unchanged.Power continues to monitor the impacts of the COVID-19 pandemic on the construction site. Georgia Power's proportionate share of the estimated incremental cost of this mitigation action, which is currently estimated to total approximately $20 million and is included in the first quarter 2020 contingency allocation, assumes absenteeism rates normalize and the intended productivity efficiencies are realized in the coming months. Based on these assumptions, while this mitigation action has extended and may further extend certain milestone dates in the updated aggressive site work plan, Georgia Power does not expect it to affect either the total project capital cost forecast or the ability to achieve the regulatory-approved in-service dates of November 2021 and November 2022 for Plant Vogtle Units 3 and 4, respectively. Southern Nuclear and Georgia Power continue to believe that pursuit of an aggressive site work plan is an appropriate strategy to achieve completion of the units by their regulatory-approved in-service dates.
As construction, including subcontract work, continues and testing and system turnover activities increase, challenges with management of contractors subcontractors, and vendors; subcontractor performance; supervision of craft labor and related craft labor productivity, particularly in the installation of electrical and mechanical commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, and/or installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only recentlywithin the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; regional transmission upgrades; or other issues could arise and change the projected schedule and estimated cost. Monthly
In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction, production targets established as parttesting, supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate impact of a strategy to maintainthe COVID-19 pandemic on the construction schedule 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 improvebudget for Plant Vogtle Units 3 and additional craft laborers must4 cannot be retained and deployed.determined at this time.
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 resolutionsubmittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, may arise, which may result in additional license amendments or require other resolution. As part of the aggressive site work plan, in January 2020, Southern Nuclear notified the NRC of its intent to load fuel in 2020. On April 20, 2020, Nuclear Watch South filed a request for hearing and contention with the NRC that challenges the closure of certain ITAAC. If any license
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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$10 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.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
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 thean increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report in 2018, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.
Amendments to the Vogtle Joint Ownership Agreements
In connection with the vote to continue construction, Georgia Power entered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and MEAG'sMEAG Power's wholly-owned subsidiaries MEAG Power SPVJ, LLC (MEAG SPVJ), MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) a term sheet (MEAG Term Sheet) with MEAG Power and MEAG SPVJ to provide up to $300 million of funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. OnIn January 14, 2019, Georgia Power, MEAG Power, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. OnIn February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG'sMEAG Power's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet.Sheet (Global Amendments).
As previously disclosed, pursuant to the Global Amendments: (i) each Vogtle Owner must pay its proportionate share of qualifying construction costs for Plant Vogtle Units 3 and 4 based on its ownership percentage up to the estimated cost at completion (EAC) for Plant Vogtle Units 3 and 4 which formed the basis of Georgia Power's forecast of $8.4 billion in the nineteenth VCM plus $800 million; (ii) Georgia Power will be responsible for 55.7% of actual qualifying construction costs between $800 million and $1.6 billion over the EAC in the nineteenth VCM (resulting in $80 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 44.3% of such costs pro rata in accordance with their respective ownership interests; and (iii) Georgia Power will be responsible for 65.7% of qualifying construction costs between $1.6 billion and $2.1 billion over the EAC in the nineteenth VCM (resulting in a further $100 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 34.3% of such costs pro rata in accordance with their
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
respective ownership interests. If the EAC is revised and exceeds the EAC in the nineteenth VCM by more than $2.1 billion, each of the other Vogtle Owners will have a one-time option at the time the project budget forecast is so revised to tender a portion of its ownership interest to Georgia Power in exchange for Georgia Power's agreement to pay 100% of such Vogtle Owner's remaining share of total construction costs in excess of the EAC in the nineteenth VCM plus $2.1 billion.
In addition, pursuant to the Global Amendments, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain adverse events occur, including, among other events: (i) the bankruptcy of Toshiba; (ii) the termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement, the Bechtel Agreement, or the agency agreement with Southern Nuclear; (iii) Georgia Power's public announcement of its intention not to submit for rate recovery any portion of its investment in Plant Vogtle Units 3 and 4 or the Georgia PSC determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates, excluding any additional amounts paid by Georgia Power on behalf of the other Vogtle Owners pursuant to the Global Amendments described above and the first 6% of costs during any six-month VCM reporting period that are disallowed by the Georgia PSC for recovery, or for which Georgia Power elects not to seek cost recovery, through retail rates; and (iv) an incremental extension of one year or more over the most recently approved schedule.
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, 2019,2020, Georgia Power had recovered approximately $1.9$2.3 billion of financing costs. Financing costs related to capital costs above $4.418 billion willare being recognized through AFUDC and are expected to be recovered through AFUDC;retail rates over the life of Plant Vogtle Units 3 and 4; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. In December 2018,2019, the Georgia PSC approved Georgia Power's request to increasedecrease the NCCR tariff by $88$62 million annually, effective January 1, 2019.2020.
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
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
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)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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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$75 million in 20182019 and are estimated to have negative earnings impacts of approximately $75$145 million, $255 million, and $200 million in 20192020, 2021, and an aggregate of approximately $635 million from 2020 to 2022.
2022, respectively. In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.
In 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. OnIn January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. In October 2019, the Georgia Court of Appeals issued an opinion affirming the Fulton County Superior Court's ruling that the Georgia PSC's January 11, 2018 order was not a final, appealable decision. In addition, the Georgia Court of Appeals remanded the case to the Fulton County Superior Court to clarify its ruling as to whether the petitioners showed that review of the Georgia PSC's final order would not provide them an adequate remedy. On April 21, 2020, the Fulton County Superior Court entered an appealable order granting Georgia Power's motion to dismiss the two appeals. Georgia Power believes the appeal haspetitions have no merit; however, an adverse outcome in the appeallitigation 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 theThe Georgia PSC which requested approval of $578 million of construction capital costs incurred from January 1, 2018has approved 21 VCM reports covering the periods 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 approvedincluding total construction capital costs incurred through June 30, 2018that date of $5.4$6.7 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds)customer refunds). In addition, the staff ofOn February 19, 2020, Georgia Power filed its twenty-second VCM report with the Georgia PSC requested, and Georgia Power agreed, to reportcovering the results of the cost and schedule validation process to the Georgia PSC (which is expected to occur by Mayperiod from July 1, 2019) and to file its twentieth VCM report concurrently with the twenty-first VCM report by August 31, 2019.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The ultimate outcome of these matters cannot be determined at this time.
DOE Financing
At March2019 through December 31, 2019, Georgia Power had borrowed $3.46 billion related to Plant Vogtle Units 3 and 4requesting approval of $674 million of construction capital 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. incurred during that period.
See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings"RISK FACTORS in Item 8 of1A herein and in the Form 10-K for a discussion of certain risks associated with the licensing, construction, and Note (F) under "DOE Loan Guarantee Borrowings" for additional information,operation of nuclear generating units, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
The ultimate outcome of these matters cannot be determined at this time.
MississippiSouthern 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 statementsMANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Construction Programs – Southern Power" in Item 87 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
During the first quarter 2019, Mississippithree months ended March 31, 2020, Southern Power recorded pre-tax chargescontinued construction of the Reading and Skookumchuck wind facilities. Total aggregate construction costs, excluding acquisition costs, are expected to income of $2be between $490 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$535 million for the remaindertwo facilities under construction. At March 31, 2020, total costs of 2019construction incurred for these projects were $447 million and $2 million to $6 million annuallyare included 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.CWIP. The ultimate outcome of these matters cannot be
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
determined at this time; however, they could have a material impact on Mississippi Power's and Southern Company's financial statements.time.
|
| | | | | | |
| Project Facility | Resource | Approximate Nameplate Capacity (MW) | Location | Actual/Expected COD | PPA Counterparties | PPA Contract Period |
| Projects Under Construction as of March 31, 2020 | | |
Reading(a) | Wind | 200 | Osage and Lyon Counties, KS | May 2020 | Royal Caribbean Cruises LTD | 12 years |
Skookumchuck(b) | Wind | 136 | Lewis and Thurston Counties, WA | Second half of 2020 | Puget Sound Energy | 20 years |
| |
| (a) | In 2018, Southern Power purchased 100% of the membership interests of the Reading facility pursuant to a joint development arrangement. 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. |
| |
| (b) | In October 2019, Southern Power purchased 100% of the membership interests of the Skookumchuck facility pursuant to a joint development arrangement. In December 2019, Southern Power entered into a tax equity agreement as the Class B member with funding of the tax equity amounts expected to occur upon commercial operation. Shortly after commercial operation, Southern Power may sell a noncontrolling interest in these Class B membership interests to another partner. The ultimate outcome of this matter cannot be determined at this time. |
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 increaseSee MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Construction Programs – Southern Company Gas" 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 impactsItem 7 of the Tax Reform Legislation.Form 10-K for additional information.
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%Infrastructure Replacement Programs 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.Capital Projects
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. Infrastructure expenditures incurred under these programs in the first three months of 2020 were as follows:
|
| | | | |
| Utility | Program | Year-to-Date 2020 |
| | | (in millions) |
| Nicor Gas | Investing in Illinois | $ | 45 |
|
| Virginia Natural Gas | Steps to Advance Virginia's Energy (SAVE) | 12 |
|
| Total | | $ | 57 |
|
See Note 2 to the financial statements under "Southern Company Gas– Infrastructure Replacement Programs and Capital Projects" in Item 8 of the Form 10-K for additional information.
Pipeline Construction Projects
On AprilMarch 24, 2020, Southern Company Gas completed the sale of its interest in Atlantic Coast Pipeline. See Note (K) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
On February 20, 2020, the FERC approved a two-year extension for PennEast Pipeline to complete the project by January 19, 2022. Expected project costs related to the PennEast Pipeline for Southern Company Gas total approximately $300 million, excluding financing costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The ultimate outcome of the PennEast construction project cannot be determined at this time; however, any work delays, whether caused by judicial or regulatory action, abnormal weather, or other conditions, may result in additional cost or schedule modifications or, ultimately, in project cancellation, any of which could result in impairment of Southern Company Gas' investment and could have a significant impact on Southern Company's financial statements and a material impact on Southern Company Gas' financial statements.
See Notes 3 and 7 to the financial statements in Item 8 2019, Virginia Naturalof the Form 10-K and Note (E) to the Condensed Financial Statements herein under "Southern Company Gas filed an application with" for additional information.
Southern Power's Power Sales Agreements
See BUSINESS – "The Southern Company System – Southern Power" in Item 1 of the Virginia Commission to amendForm 10-K 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 investmentMANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Southern Power's Power Sales Agreements" in Item 7 of the Form 10-K for additional information regarding Southern Power's PPAs. Generally, under the currently-approved plan. Virginia Naturalsolar and wind generation PPAs, the purchasing party retains the right to keep or resell the renewable energy credits.
During the first quarter 2020, Southern Power received $15 million from Pacific Gas seeks to amend its currently-approved plan by increasing the authorized investment& Electric Company (PG&E) 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,accordance with a total potential net varianceNovember 2019 bankruptcy court order granting payment of upcertain transmission interconnections. PG&E continues to $10 million allowed forperform under the program. The Virginia Commissionterms of four solar PPAs where it is expectedthe energy off-taker. PG&E's plan of reorganization is now subject to rulea vote by interested parties, with a plan confirmation hearing scheduled to begin on the request in the third quarter 2019.May 27, 2020. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
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.
FERCTax Matters
See Note 2 to the financial statements under "FERC Matters MANAGEMENT'S DISCUSSION AND ANALYSIS – Open Access Transmission Tariff" FUTURE EARNINGS POTENTIAL – "Income Tax Matters" in Item 87 of the Form 10-K for additional information.
On March 25, 2019,18, 2020 and March 27, 2020, President Trump signed the Alabama Municipal Electric Authority and Cooperative Energy and SCSFamilies First Coronavirus Response Act and the traditional electric operating companies filed a formal settlement agreement with the FERC agreeingCoronavirus Aid, Relief, and Economic Security Act, respectively, into law. Both acts include provisions intended to a rate reduction based on a 10.6% ROE, with a retroactive effective date of May 10, 2018,provide stability and a five-year moratorium on these parties seeking changessupport for individuals and businesses in response to the OATT formula rate. The ultimate outcome of this matter cannot be determined at this time;COVID-19 pandemic. Southern Company management is continuing to evaluate these provisions, including those related to payroll tax deferrals and employee retention credits; however, if approved by the FERC as filed, the OATT settlement wouldthey are not expected to have a material impact on the Registrants' financial statementsstatements.
On March 20, 2020 and April 9, 2020, the Treasury Department and the Internal Revenue Service issued Notices 2020-18 and 2020-23, respectively, providing relief to taxpayers by postponing to July 15, 2020 a variety of anytax form filings and payment obligations that were due before July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will also be suspended and will not begin to accrue until July 16, 2020. Southern Company is continuing to evaluate these provisions, as well as each respective state's adoption, which are expected to have a modestly positive impact on the Registrants' liquidity. However, Southern Power's expected utilization of tax credits in the traditional electric operating companies or Southern Company.
(C) CONTINGENCIES
See Note 3 to the financial statements in Item 8first half of the Form 10-K for information relating to various lawsuits and other contingencies.2020 will now be delayed until July 15, 2020.
General Litigation Matters
Each registrant is subject to certain claimsThe Registrants are involved in various other matters being litigated 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 laws and regulations governing air, water, land, and protection of 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.
regulatory matters that could affect future earnings. The ultimate outcome of such pending or potential litigation or regulatory matters against each registrantRegistrant and any subsidiaries cannot be predicteddetermined at this time; however, for current proceedings not specifically reported herein or in Notes (B) and (C) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on such registrant'sRegistrant's financial statements. See Notes (B) and (C) to the Condensed Financial Statements for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
The Registrants believe the pending legal challenges discussed below have no merit; however, the ultimate outcome of these matters cannot be determined at this time.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Southern Company
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 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 dismisseddismissing certain claims against certain officers of Southern Company and Mississippi Power and dismisseddismissing 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 defendants' motion for reconsideration and also denied a motion to certify the issue for interlocutory appeal.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
the class certification order with the U.S. Court of Appeals for the Eleventh Circuit. In December 2019, the U.S. District Court for the Northern District of Georgia entered an order staying all deadlines in the case pending mediation. The stay automatically expired on March 31, 2020; however, in light of the COVID-19 pandemic, the U.S. District Court for the Northern District of Georgia vacated all existing discovery deadlines until at least June 15, 2020.
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 August 2019, the court granted a motion filed by the plaintiff in July 2019 to substitute a new named plaintiff, Martin J. Kobuck, in place of Helen E. Piper Survivor's Trust.
Southern Company believes these legal challenges have no merit; however, an adverse outcome in any
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Georgia Power
In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of amounts for municipal franchise fees (which fees are paid to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state 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. Georgia Power filed a petition for writ of certiorari with the Georgia Supreme Court, which was granted in 2017. In June 2018, the Georgia Supreme Court affirmed 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, onin 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 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. In October 2019, the Georgia PSC issued an order that found and concluded that Georgia Power andhas appropriately implemented the plaintiffs also have filed notices of appeal withmunicipal franchise fee schedule. On March 11, 2020, the Georgia Court of Appeals regardingvacated the Superior Court of Fulton County's February 2019 order. Georgia Power believesorder granting conditional class certification. The Court of Appeals remanded the plaintiffs' claims have no merit.case to the Superior Court of Fulton County for the entry of a detailed order addressing each class certification factor. The amount of any possible losses cannot be calculated at this time because, among other factors, it is unknown whether conditionala class certification will be upheld andcertified, the ultimate composition of any class, and whether any losses would be subject to recovery from any municipalities. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Mississippi Power
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. A portion of the claim for damages was on behalf of Martin Transport, Inc. (Martin Transport), an affiliate of Martin. In May 2019, the first quarterarbitration panel denied Mississippi Power's and Southern Company's motions to dismiss. In September 2019, Martin Transport filed a separate complaint against Mississippi Power in the Circuit Court of Kemper County, Mississippi alleging claims of fraud, negligent misrepresentation, promissory estoppel, and Southern Company filed motions to dismiss.equitable estoppel, each arising out of the same alleged facts and circumstances that underlie Martin's arbitration demand. Martin Transport seeks compensatory damages of $5 million and punitive damages of $50 million. In November 2019, Martin Transport's claim was combined with the Martin arbitration case and the separate court case was dismissed. In December 2019, Southern Company and Mississippi Power believe this legal challenge has no merit; however, aneach filed motions for summary judgment on all claims. On February 17, 2020, the arbitration panel granted Southern Company's motion and dismissed Southern Company from the arbitration. On March 12, 2020, the arbitration panel denied Mississippi Power's motions for summary judgment. 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. The ultimate outcome of this matter cannot be determined at this time.statements.
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 by up to $23.5 million in the refund process by applying an incorrect interest rate. The plaintiffs seek to recover, on behalf of themselves and their putative class, actual damages, punitive damages, pre-judgment interest, post-judgment interest, attorney's fees, and costs. In response to Mississippi Power and the Mississippi PSC each filing a motion to dismiss, the plaintiffs filed an amended complaint onin March 14, 2019. The
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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. On March 27, 2020, the Mississippi PSC's motion to dismiss was granted. Also on March 27, 2020, the plaintiffs filed a motion seeking to name the new members of the Mississippi PSC, the Mississippi Development Authority, and Southern Company as additional defendants and add a cause of action against all defendants under a cause of action based on a dormant commerce clause theory under the U.S. Constitution. On April 9, 2020 and April 10, 2020, Mississippi Power believes this legal challenge has no merit; however, anand the Mississippi PSC, respectively, filed responses opposing the motion for leave to file a second amended complaint. Mississippi Power's motion to dismiss the first amended complaint filed in 2019 remains pending before the court. An adverse outcome in this proceeding could have a material impact on Mississippi Power's resultsfinancial statements.
See Note 2 to the financial statements under "Mississippi Power – Kemper County Energy Facility" in Item 8 of operations,the Form 10-K for additional information.
Other Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" in Item 7 of the Form 10-K for additional information.
Mississippi Power
Kemper County Energy Facility
See Note 2 to the financial condition,statements under "Mississippi Power – Kemper County Energy Facility" in Item 8 of the Form 10-K for additional information.
As the mining permit holder, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation and liquidity.Mississippi Power has a contractual obligation to fund all reclamation activities related to the lignite mine and equipment and mineral reserves located around the Kemper County energy facility site. As a result of the abandonment of the Kemper IGCC, final mine reclamation began in 2018 and 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.
Dismantlement of the abandoned gasifier-related assets and site restoration activities are expected to be completed in 2024. The additional pre-tax period costs associated with dismantlement and site restoration activities, including related costs for compliance and safety, ARO accretion, and property taxes, are estimated to total $17 million for the remainder of 2020, $15 million to $17 million annually in 2021 through 2023, and $5 million in 2024. In addition, closure costs for the mine and gasifier-related assets, currently estimated at up to $10 million pre-tax (excluding dismantlement costs, net of salvage), may be incurred during the remainder of 2020.
In 2018, Mississippi Power filed with the DOE its request for property closeout certification under the contract related to the $387 million of grants received for the Kemper County energy facility. Mississippi Power expects to close out the DOE contract in 2020. In connection with the DOE closeout discussions, in April 2019, the Civil Division of the Department of Justice informed Southern Company and Mississippi Power of an investigation related to the Kemper County energy facility. The ultimate outcome of this matter cannot be determined at this time.
Southern Power
Southern Power indirectly owns a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas. Prior to the facility being placed in service in 2016, certain solar panels were damaged during installation by the construction contractor, McCarthy Building Companies, Inc. (McCarthy), and certain solar panels were damaged by a hail event that also occurred during construction. In connection therewith, Southern Power withheld payment of approximately $26 million to the construction contractor, which placed a lien on the Roserock facility for the same amount. In 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas against XL Insurance America, Inc. and North American Elite Insurance Company seeking recovery from an insurance policy for damages resulting from the hail event and McCarthy's installation practices. In June 2018, the court granted Roserock's motion for partial summary judgment, finding that the insurers were in breach of contract and in violation of the Texas Insurance Code for failing to pay any monies owed for the hail claim. Separate lawsuits were filed between Roserock and McCarthy, as well as other parties, and that litigation was consolidated in the U.S. District Court for the Western District of Texas. On 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 2019). Roserock will pay $26 million to McCarthy that was withheld and included in the original construction costs and will receive funds that will cover all related legal costs and the replacement costs of certain solar panels. In addition, during the first quarter 2019, Roserock received a partial payment of approximately $5 million in insurance proceeds toward the hail event. Any additional funds received in excess of the initial replacement costs are expected to be recognized as a gain when received by Roserock in the second quarter 2019, but are not expected totime; however, it could have a material impact on Southern Company's and Mississippi Power's net income.financial statements.
Plant Daniel
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
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 and Georgia have each 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 $18 million and $23 million as of March 31, 2019 and December 31, 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.
Southern Company Gas' environmental remediation liability was $289 million and $294 million as of March 31, 2019 and December 31, 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, or Southern Company Gas.
Other Matters
Mississippi Power
In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committedagreed 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,April 24, 2020, Mississippi Power and Gulf Power provided noticeamended the terms of the agreement to extend the deadline from May 1, 2020 to August 1, 2020 for Mississippi Power thatto notify Gulf Power will retire its share of which generating unit it has selected for 100% ownership. The impacts of operating the generating capacity of Plant Danielunits on January 15, 2024.an individual basis continue to be evaluated by Mississippi Power has the option to purchase Gulf Power'sand any transfer of 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 remainswould be subject to completion
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
approval by the FERC and the Mississippi PSC, andPSC. The ultimate outcome of this matter cannot be determined at this time. See Note (K) under "Southern Company" for information regarding the sale of Gulf Power.
(D) REVENUE FROM CONTRACTS WITH CUSTOMERSACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
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 1 to theRegistrants prepare their financial statements under "Recently Adopted Accounting Standards – Revenue" in Item 8 ofaccordance with GAAP. Significant accounting policies are described in the Form 10-K for additional information on the adoption of ASC 606 for revenue from contracts with customers and Note 1 to the financial statements under "Revenues" and "Other Taxes" in Item 8 of the Form 10-K for additional information on the revenue policies of the registrants. 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" in Item 8 of the Form 10-K for alternative revenue programs at the natural gas distribution utilities, and Note 2notes to the financial statements in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on the Registrants' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" in Item 7 of the Form 10-K for cost recovery mechanisms.a complete discussion of the Registrants' critical accounting policies and estimates.
Recently Issued Accounting Standards
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The following tables disaggregate revenue sourcesthe Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the three months ended March 31, 2019 and 2018:
|
| | | | | | |
| | For the Three Months Ended March 31, 2019 | For the Three Months Ended March 31, 2018 |
| | (in millions) |
| Southern Company | | |
| Operating revenues | | |
Retail electric revenues(a) | | |
| Residential | $ | 1,288 |
| $ | 1,539 |
|
| Commercial | 1,093 |
| 1,243 |
|
| Industrial | 677 |
| 756 |
|
| Other | 26 |
| 30 |
|
| Natural gas distribution revenues | 1,163 |
| 1,224 |
|
Alternative revenue programs(b) | (2 | ) | (24 | ) |
| Total retail electric and gas distribution revenues | $ | 4,245 |
| $ | 4,768 |
|
Wholesale energy revenues(c)(d) | 367 |
| 472 |
|
Wholesale capacity revenues(d) | 132 |
| 151 |
|
Other natural gas revenues(e)(f) | 313 |
| 407 |
|
Other revenues(g) | 355 |
| 574 |
|
| Total operating revenues | $ | 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.
|
| |
(b) | 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 physical energy sales in the wholesale electricity market. |
| |
(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, for 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 (M) under "Southern Company Gas" for additional informationdiscontinuation of LIBOR, which is currently expected to occur 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, including $31 million and $33 million in 2019 and 2018, respectively, accounted for as leases. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | |
| | Alabama Power | Georgia Power | Mississippi Power |
| | (in millions) |
| For the Three Months Ended March 31, 2019 | | | |
| Operating revenues | | | |
Retail revenues(a)(b) | | | |
| Residential | $ | 540 |
| $ | 688 |
| $ | 60 |
|
| Commercial | 354 |
| 674 |
| 65 |
|
| Industrial | 313 |
| 289 |
| 74 |
|
| Other | 6 |
| 17 |
| 4 |
|
| Total retail electric revenues | $ | 1,213 |
| $ | 1,668 |
| $ | 203 |
|
Wholesale energy revenues(c) | 94 |
| 18 |
| 78 |
|
| Wholesale capacity revenues | 27 |
| 14 |
| 1 |
|
Other revenues(b)(d) | 74 |
| 133 |
| 5 |
|
| Total operating revenues | $ | 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, 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, 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. |
| |
(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, and Mississippi Power include $3 million, $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 wholesale electricity market. |
| |
(d) | Other revenues at Alabama Power and Georgia Power include $28 million and $31 million, respectively, for the three months ended March 31, 2019 and $25 million and $26 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, 2019 | For the Three
Months Ended March 31, 2018 |
| | (in millions) |
| Southern Power | | |
PPA capacity revenues(a) | $ | 127 |
| $ | 138 |
|
PPA energy revenues(a) | 227 |
| 254 |
|
Non-PPA revenues(b) | 85 |
| 115 |
|
| Other revenues | 4 |
| 2 |
|
| Total operating revenues | $ | 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. |
| |
(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. |
|
| | | | | | |
| | For the Three Months Ended March 31, 2019 | For the Three
Months Ended March 31, 2018 |
| | (in millions) |
| Southern Company Gas | | |
| Operating revenues | | |
| Natural gas distribution revenues | | |
| Residential | $ | 601 |
| $ | 660 |
|
| Commercial | 170 |
| 192 |
|
| Transportation | 256 |
| 277 |
|
| Industrial | 17 |
| 17 |
|
| Other | 119 |
| 78 |
|
Alternative revenue programs(a) | (2 | ) | (24 | ) |
| Total natural gas distribution revenues | $ | 1,161 |
| $ | 1,200 |
|
Gas pipeline investments(b) | 8 |
| 8 |
|
Wholesale gas services(c) | 66 |
| 146 |
|
Gas marketing services(d) | 229 |
| 271 |
|
| Other revenues | 10 |
| 14 |
|
| Total operating revenues | $ | 1,474 |
| $ | 1,639 |
|
| |
(a) | Alternative revenue program revenues are presented net of any previously recognized program amounts billed to customers during the same accounting period. |
| |
(b) | Revenues from gas pipeline investments include $8 million for the three months ended March 31, 2019 accounted for as 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 accounted for as derivatives. See Note (M) under "Southern Company Gas" for additional information on the components of wholesale gas services operating 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 |
| | March 31, 2019 | December 31, 2018 | | March 31, 2019 | December 31, 2018 | | March 31, 2019 | December 31, 2018 |
| | (in millions) |
Southern Company(*) | $ | 2,522 |
| $ | 2,630 |
| | $ | 84 |
| $ | 102 |
| | $ | 62 |
| $ | 32 |
|
| Alabama Power | 514 |
| 520 |
| | 1 |
| — |
| | 10 |
| 12 |
|
| Georgia Power | 668 |
| 721 |
| | 41 |
| 58 |
| | 25 |
| 7 |
|
| Mississippi Power | 85 |
| 100 |
| | — |
| — |
| | — |
| — |
|
| Southern Power | 99 |
| 118 |
| | — |
| — |
| | 4 |
| 11 |
|
| Southern Company Gas | 948 |
| 952 |
| | — |
| — |
| | 1 |
| 2 |
|
| |
(*) | Includes amounts related to held for sale investments. |
As2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The new guidance provides the following optional expedients: (i) simplifies accounting analyses under current GAAP for contract modifications; (ii) simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue; and (iii) allows a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform. An entity may elect to apply the amendments prospectively from March 31, 2019 and12, 2020 through December 31, 2018, Georgia Power had contract assets primarily related2022 by accounting topic.
The Registrants currently reference LIBOR for certain debt and hedging arrangements. Contract language has been, or is expected to unregulated servicebe, incorporated into each of these agreements where payment is contingent on project completion and fixed retail customer bill programs whereto address the payment is contingent upon Georgia Power's continued performancetransition to an alternative rate for agreements that will be in place at the transition date. While existing effective hedging relationships are expected to continue, the Registrants are continuing to evaluate the provisions of ASU 2020–04 and the customer's continued participationimpacts of transitioning to an alternative rate. The ultimate outcome of the transition cannot be determined at this time, but is not expected to have a material impact on the Registrants' financial statements. See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein and Note (J) to the Condensed Financial Statements under "Interest Rate Derivatives" herein for additional information.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" in Item 7 of the program over the one-year contract term. Alabama Power had contract liabilitiesForm 10-K for outstanding performance obligations primarily related to extended service agreements. Contract liabilities for Georgia Power and Southern Power relate to cash collections recognized in advanceadditional information. The financial condition of revenue for certain unregulated service agreements 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 liabilitieseach Registrant remained stable at March 31, 2019 and December 31, 2018, respectively, remaining for outstanding performance obligations.
The following table reflects revenue from contracts with customers recognized2020. Throughout the recent volatility in the three-month period ended March 31, 2019 included infinancial markets, the contract liabilityRegistrants have maintained adequate access to capital without drawing on any committed bank credit arrangements existing 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 immaterialare used to support commercial paper programs and, for Alabama Power, Georgia Power, and Southern Company Gas.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Remaining Performance Obligations
The traditional electric operating companies and Southern Power have long-term contracts with customers in which revenues are recognized when the performance obligations are satisfied during the contract term. These contracts primarily relate to PPAs whereby the traditional electric operating companies, variable rate revenue bonds. There were periods during this volatility in the credit markets where access across the Southern Company system to commercial paper began to be constrained. As a precautionary measure, in March 2020, Southern Company, Georgia Power, Mississippi Power, and Southern Power provide electricityCompany Gas increased their outstanding short-term debt while also increasing cash and generation capacity to a customer. The revenue recognized forcash equivalents by taking actions such as entering into new bank term loans, entering into and funding new committed and uncommitted credit facilities, funding existing uncommitted credit facilities, and issuing commercial paper with longer-date maturities when available. No material changes occurred in the delivery of electricity is variable; however, certain PPAs include a fixed payment for fixed generation capacity over the termterms of the contract.applicable Registrants' bank credit arrangements or their interest expense on
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
short-term debt as a result of these actions. In addition, Southern Company's unregulated distributed generation business also has partially satisfied performance obligations relatedCompany Gas received proceeds from the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline. Alabama Power's existing cash and cash equivalents and Southern Power's proceeds from the sale of Plant Mankato in January 2020 provided each respective company with adequate liquidity support during this period of volatility. Subsequent to certain fixed price contracts.March 31, 2020, Southern Company issued $1.0 billion aggregate principal amount of senior notes, as discussed under "Financing Activities" herein.
The Registrants with revenues from contracts with customers relatedhave experienced no material counterparty credit losses as a result of the volatility in the financial markets. The Registrants intend to these performance obligations remainingcontinue to monitor their access to short-term and long-term capital markets as well as their bank credit arrangements to meet future capital and liquidity needs. The impact on future financing costs as a result of continued financial market volatility cannot be determined at this time. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein and Note (K) to the Condensed Financial Statements herein for additional information.
The Registrants' investments in the qualified pension plan and Alabama Power's and Georgia Power's investments in their nuclear decommissioning trust funds decreased in value at March 31, 2019 expect2020 as compared to December 31, 2019. While no material changes in related funding requirements are currently expected, the revenues toultimate outcome cannot be recognized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 2019 (remaining) | 2020 | 2021 | 2022 | 2023 | Thereafter |
| | (in millions) |
Southern Company(*) | $ | 451 |
| $ | 349 |
| $ | 315 |
| $ | 310 |
| $ | 301 |
| $ | 2,219 |
|
| Alabama Power | 16 |
| 22 |
| 27 |
| 23 |
| 22 |
| 140 |
|
| Georgia Power | 30 |
| 38 |
| 40 |
| 30 |
| 31 |
| 82 |
|
| Mississippi Power | 2 |
| 3 |
| 1 |
| — |
| — |
| — |
|
| Southern Power | 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
determined at this time. See Note 7Notes 6 and 11 to the financial statements in Item 8 of the Form 10-K for additional information on Southern Power's VIEs.information.
Southern Power has certain wholly-owned subsidiaries that are determined to be VIEs. Southern Power is consideredAt the primary beneficiary of these VIEs because it controls the most significant activitiesend of the VIEs, including operatingfirst quarter 2020, the market price of Southern Company's common stock was $54.14 per share (based on the closing price as reported on the NYSE) and maintaining the respective assets,book value was $26.26 per share, representing a market-to-book ratio of 206%, compared to $63.70, $26.11, and has244%, respectively, at the obligationend of 2019. Southern Company's common stock dividend for the first quarter 2020 was $0.62 per share compared 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$0.60 per share in the VIEsfirst quarter 2019.
Analysis of Cash Flows
Net cash flows provided from (used for) operating, investing, and financing activities for the three months ended March 31, 2020 and 2019 are subjectpresented in the following table:
|
| | | | | | | | | | | | | | | | | | |
Net cash provided from (used for): | Southern Company | Alabama Power | Georgia
Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Three Months Ended March 31, 2020 | | | | | | |
| Operating activities | $ | 894 |
| $ | 155 |
| $ | 213 |
| $ | (17 | ) | $ | 83 |
| $ | 643 |
|
| Investing activities | (889 | ) | (424 | ) | (795 | ) | (71 | ) | 600 |
| (193 | ) |
| Financing activities | 185 |
| 273 |
| 742 |
| (98 | ) | (632 | ) | (185 | ) |
| | | | | | | |
| Three Months Ended March 31, 2019 | | | | | | |
| Operating activities | $ | 744 |
| 146 |
| $ | 212 |
| $ | (23 | ) | $ | 110 |
| $ | 683 |
|
| Investing activities | 2,454 |
| (511 | ) | (980 | ) | (63 | ) | (79 | ) | (290 | ) |
| Financing activities | (3,353 | ) | 811 |
| 665 |
| 5 |
| (79 | ) | (402 | ) |
Fluctuations in cash flows from financing activities vary from year to limited partner consentyear based on capital needs and the liabilities are non-recourse to the general creditmaturity or redemption 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.securities.
Southern Company Gas
Net cash provided from operating activities increased $0.2 billion for the three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to the timing of vendor payments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The net cash used for investing activities for the three months ended March 31, 2020 was primarily due to the Subsidiary Registrants' construction programs, partially offset by proceeds from the sale transactions described in Note (K) to the Condensed Financial Statements herein.
The net cash provided from financing activities for the three months ended March 31, 2020 was primarily due to net issuances of long-term debt, partially offset by common stock dividend payments and net repayments of short-term bank debt and commercial paper.
Alabama Power
Net cash provided from operating activities increased $9 million for the three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to increased fuel cost recovery, partially offset by the timing of fossil fuel stock purchases.
The net cash used for investing activities for the three months ended March 31, 2020 was primarily due to gross property additions.
The net cash provided from financing activities for the three months ended March 31, 2020 was primarily due to capital contributions from Southern Company, partially offset by a common stock dividend payment and the repurchase of pollution control bonds.
Georgia Power
Net cash provided from operating activities increased $1 million for the three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to the timing of vendor payments and increased fuel cost recovery, partially offset by customer bill credits issued in February 2020 related to Tax Reform. See Note 72 to the financial statements under "Georgia Power – Rate Plans – Tax Reform Settlement Agreement" in Item 8 of the Form 10-K for additional information.
The net cash used for investing activities for the three months ended March 31, 2020 was primarily due to gross property additions, including approximately $380 million related to the construction of Plant Vogtle Units 3 and 4. See FUTURE EARNINGS POTENTIAL – "Construction Programs – Nuclear Construction" herein for additional information on construction of Plant Vogtle Units 3 and 4.
The net cash provided from financing activities for the three months ended March 31, 2020 was primarily due to issuances of senior notes, capital contributions from Southern Company, and an increase in short-term borrowings, partially offset by the redemption and maturity of senior notes and payment of common stock dividends.
Mississippi Power
Net cash used for operating activities decreased$6 million for the three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to the timing of vendor payments.
The net cash used for investing activities for the three months ended March 31, 2020 was primarily due to gross property additions.
The net cash used for financing activities for the three months ended March 31, 2020 was primarily due to the redemption of senior notes and a return of capital to Southern Company, partially offset by the issuance of long-term debt, short-term borrowings, and capital contributions from Southern Company.
Southern Power
Net cash provided from operating activities decreased $27 million for the three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to the decrease in capacity revenues resulting from the sale of Plant Nacogdoches in the second quarter 2019 and the sale of Plant Mankato in the first quarter 2020. See Note 15 to the financial statements in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein under "Southern Power" for additional information on Southern Company Gas' equity method investments.information.
Equity Method Investments
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The carrying amounts of Southern Company Gas' equity method investments as of March 31, 2019 and December 31, 2018 and related incomenet cash provided 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 SNGinvesting activities for the three months ended March 31, 2019 and 2018 is as follows:2020 was primarily due to proceeds from the disposition of Plant Mankato.
|
| | | | | | |
| 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 supportThe net cash used for financing activities for the three months ended March 31, 2020 was primarily due to the registrants'repayment of commercial paper borrowings and a $100 million short-term floating rate bank loan.
Southern Company Gas
Net cash provided from operating activities decreased $40 million for the traditional electric operating companies' revenue bonds. three months ended March 31, 2020 as compared to the corresponding period in 2019 primarily due to the timing of collection of customer receivables and a decrease in the use of stored natural gas, partially offset by the timing of vendor payments.
The amountnet cash used for investing activities for the three months ended March 31, 2020 was primarily due to utility capital expenditures and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments, partially offset by proceeds from the sale of variableinterests in Pivotal LNG and Atlantic Coast Pipeline. See Note (K) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.
The net cash used for financing activities for the three months ended March 31, 2020 was primarily due to the payment of common stock dividends and repayment of commercial paper borrowings, partially offset by the issuance of a short-term floating rate revenue bondsbank loan and borrowings pursuant to a short-term uncommitted bank credit arrangement.
Significant Balance Sheet Changes
Southern Company
Significant balance sheet changes for the three months ended March 31, 2020 included:
an increase of $1.3 billion in long-term debt (including amounts due within one year) related to new issuances;
an increase of $0.9 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs;
a decrease of $0.8 billion in assets held for sale related to the completion of Southern Power's sale of Plant Mankato and Southern Company Gas' sale of its interests in Pivotal LNG and Atlantic Coast Pipeline;
decreases of $0.5 billion in both accounts payable and accrued compensation related to the timing of payments; and
an increase of $0.5 billion in accumulated deferred income taxes related to the expected utilization of tax credits in 2020.
See "Financing Activities" herein and Note (K) to the Condensed Financial Statements herein for additional information.
Alabama Power
Significant balance sheet changes for the three months ended March 31, 2020 included:
an increase of $654 million in common stockholder's equity primarily due to capital contributions from Southern Company;
| |
| • | a decrease of $243 million in accounts payable, other related to the timing of vendor payments; |
| |
| • | an increase of $205 million in regulatory assets associated with AROs and a decrease of $168 million in nuclear decommissioning trusts, at fair value, primarily due to unrealized losses on nuclear decommissioning trust fund investments resulting from a decline in market prices; and |
an increase of $138 million in total property, plant, and equipment primarily related to Alabama Power's construction program.
See Note (I) to the Condensed Financial Statement herein for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Georgia Power
Significant balance sheet changes for the three months ended March 31, 2020 included:
an increase of $668 million in total property, plant, and equipment to comply with environmental standards and the construction of generation, transmission, and distribution facilities;
an increase of $555 million in long-term debt (including securities due within one year) primarily due to a net increase in outstanding senior notes; and
an increase of $447 million in common stockholder's equity primarily due to capital contributions from Southern Company.
See "Financing Activities – Georgia Power" herein for additional information.
Mississippi Power
Significant balance sheet changes for the three months ended March 31, 2020 included:
a decrease of $186 million in cash and cash equivalents and a decrease of $176 million in long-term debt (including amounts due within one year) primarily related to the redemption of senior notes and
a decrease of $54 million in accrued taxes primarily due to the payment of ad valorem taxes.
See "Financing Activities" herein for additional information.
Southern Power
Significant balance sheet changes for the three months ended March 31, 2020 included:
a decrease of $618 million in assets held for sale (of which $17 million related to current assets) due to completion of the traditional electric operating companies outstanding requiring liquidity support assale of Plant Mankato;
a decrease of $549 million in notes payable due to lower commercial paper borrowings and repayment of a $100 million short-term floating rate bank loan; and
an increase of $416 million in prepaid income taxes and a decrease of $422 million in accumulated deferred income tax assets primarily related to the expected utilization of tax credits in 2020.
See "Financing Activities" herein and Note (K) to the Condensed Financial Statements herein for additional information.
Southern Company Gas
Significant balance sheet changes for the three months ended March 31, 2019 was approximately $1.4 billion (comprised2020 included:
an increase of approximately $854$265 million at Alabama Power, $550in cash and cash equivalents primarily related to proceeds from the sale of interests in Pivotal LNG and Atlantic Coast Pipeline and short-term borrowings;
a decrease of $246 million at Georgiain natural gas for sale due to the use of stored natural gas;
an increase of $178 million in total property, plant, and equipment primarily due to utility capital expenditures and infrastructure investments recovered through replacement programs;
a decrease of $171 million in assets held for sale due to the completed sale of interests in Pivotal LNG and Atlantic Coast Pipeline; and
decreases of $137 million and $144 million in energy marketing receivables and payables, respectively, due to lower natural gas prices and volumes of natural gas sold.
See Note (K) 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" in Item 7 of the Form 10-K for a description of the
NOTES TO THE CONDENSEDMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS:CONDITION
AND RESULTS OF OPERATIONS (Continued)
(UNAUDITED)
Power,Registrants' capital requirements and $40 million at Mississippi Power). In addition, atcontractual obligations. The following table provides the applicable Registrants' maturities and announced redemptions of long-term debt through March 31, 2019, the traditional electric operating companies had approximately $432 million (comprised2021:
|
| | | | | | | | | | | | | | | | | | |
| At March 31, 2020: | Southern Company | Alabama Power | Georgia
Power | Mississippi Power | Southern Power | Southern Company Gas |
| | (in millions) |
| Securities due within one year | $ | 1,809 |
| $ | 296 |
| $ | 74 |
| $ | 7 |
| $ | 824 |
| $ | — |
|
See "Sources of approximately $87 million at Alabama PowerCapital" and $345 million at Georgia Power) of revenue bonds outstanding"Financing Activities" herein for additional information, including financing activities that were required to be remarketed within the next 12 months. Subsequentoccurred subsequent to March 31, 2019, Georgia Power purchased2020.
The construction programs are subject to periodic review and held approximately $115 millionrevision, and actual construction costs may vary from these estimates because of outstanding pollution control revenue bonds requirednumerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in electric generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; abnormal weather; delays in construction due to judicial or regulatory action; storm impacts; and the cost of capital. The continued COVID-19 pandemic could also impair the ability to develop, construct, and operate facilities, as discussed further in Item 1A herein. In addition, there can be remarketed.no assurance that costs related to capital expenditures will be fully recovered. Additionally, Southern Power's planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 815 to the financial statements under "Bank Credit Arrangements""Southern Power" in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Financing ActivitiesSouthern Power" herein for additional information.information regarding Southern Power's plant acquisitions and construction projects.
The construction program of Georgia Power also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K, Note (B) to the Condensed Financial Statements under "Georgia Power – Nuclear Construction" herein, and Item 1A herein for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. Southern Company does not expect to issue any equity in the capital markets through 2024.
The following table outlinesSubsidiary Registrants plan to obtain 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 |
|
| |
(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 expiringfunds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Georgia Power plans to utilize borrowings from the FFB (as discussed further 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) and Southern Power plans to utilize tax equity partnership contributions (as discussed further herein).
The traditional electric operating companies and the natural gas distribution utilities have begun to experience a reduction in operating cash flows as a result of the temporary suspension of disconnections for non-payment by customers resulting from the COVID-19 pandemic and the related overall economic contraction. While the reduction in operating cash flows is expected to continue throughout, and for a period of time following, the pandemic, the ultimate extent of the negative impact on the Registrants' liquidity depends on the duration of the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
COVID-19 pandemic and the timing of economic recovery and cannot be determined at this time. The Registrants intend to continue to monitor their access to short-term and long-term capital markets as well as their bank credit arrangements to meet future capital and liquidity needs.
The amount, type, and timing of any financings in 2020, as well as in subsequent years, will be contingent on investment opportunities and the Registrants' capital requirements and will depend upon prevailing market conditions, regulatory approvals (for the Subsidiary Registrants), and other factors. See "Capital Requirements and Contractual Obligations" herein for additional information. Also see "Overview" herein for information on recent volatility in the financial markets resulting from the COVID-19 pandemic.
Southern Power utilizes tax equity partnerships as one of its financing sources, where the tax partner takes significantly all of the federal tax benefits. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using HLBV methodology to allocate partnership gains and losses. During the first three months of 2020, Southern Power received tax equity funding totaling $16 million from existing partnerships. See Note 1 to the financial statements under "General" in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements under "Southern Power" herein for additional information.
By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At March 31, 2020, the amount of subsidiary retained earnings restricted to dividend totaled $1.0 billion. This restriction did not impact Southern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" in Item 7 of the Form 10-K for additional information.
The Registrants' current liabilities frequently exceed their current assets because of long-term debt maturities and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. See "Financing Activities" herein for information regarding Georgia Power's 2014 loan guarantee agreement.on financing activities that occurred subsequent to March 31, 2020. At March 31, 2020, the following Registrants' current liabilities exceeded their current assets, primarily as a result of securities due within one year and notes payable, as shown in the table below:
|
| | | | | | | | | | | | |
| At March 31, 2020 | Southern Company(*) | Georgia
Power | Mississippi Power | Southern Company Gas |
| | (in millions) |
| Current liabilities in excess of current assets | $ | 123 |
| $ | 546 |
| $ | 38 |
| $ | 84 |
|
| Securities due within one year | 1,809 |
| 74 |
| 7 |
| — |
|
| Notes payable | 1,710 |
| 451 |
| 40 |
| 611 |
|
| |
| (*) | Includes $600 million and $585 million of securities due within one year and notes payable, respectively, at the parent company. |
The Registrants believe the need for working capital can be adequately met by utilizing operating cash flows, as well as commercial paper, lines of credit, and short-term bank notes, as market conditions permit. In addition, under certain circumstances, the Subsidiary Registrants may utilize equity contributions and/or loans from Southern Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Bank Credit Arrangements
At March 31, 2020, the Registrants' unused committed credit arrangements with banks were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2020 | Southern Company parent | Alabama Power | Georgia
Power | Mississippi Power | Southern Power(a) | Southern Company Gas(b) | SEGCO | Southern Company |
| | (in millions) |
| Unused committed credit | $ | 1,999 |
| $ | 1,328 |
| $ | 1,733 |
| $ | 210 |
| $ | 591 |
| $ | 1,745 |
| $ | 30 |
| $ | 7,636 |
|
| |
| (a) | At March 31, 2020, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $85 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangement or to the letter of credit facilities. |
| |
| (b) | Includes $1.245 billion and $500 million at Southern Company Gas Capital and Nicor Gas, respectively. |
Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to the loan guarantee program established under Title XVIIrevenue bonds of the Energy Policy Acttraditional electric operating companies and the commercial paper programs of 2005 (Title XVII Loan Guarantee Program),the Registrants, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at March 31, 2020 was approximately $1.4 billion (comprised of approximately $854 million at Alabama Power, $550 million at 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$40 million at an interest rate of 3.213% through the final maturity date of February 20, 2044. AtMississippi Power). Subsequent to March 31, 2019,2020, Mississippi Power purchased and held or redeemed all $40 million of its variable rate revenue bonds. In addition, at March 31, 2020, Georgia Power had a totalapproximately $188 million of $3.46 billionfixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months.
See Note 8 to the financial statements under "Bank Credit Arrangements" in Item 8 of borrowings outstandingthe Form 10-K and Note (F) to the Condensed Financial Statements under the FFB"Bank Credit Facilities.
Arrangements" herein for additional information.
NOTES TO THE CONDENSEDMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS:CONDITION
AND RESULTS OF OPERATIONS (Continued)
(UNAUDITED)
AllShort-term Borrowings
The Registrants, Nicor Gas, and SEGCO make short-term borrowings underprimarily through commercial paper programs that have the FFB Credit Facilitiesliquidity support of the committed bank credit arrangements described above. Southern Power's subsidiaries 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 FFBnot issuers or obligors under its guarantee. Georgia Power's reimbursement obligations to the DOEcommercial paper program. Commercial paper and short-term bank term loans are full recourse and secured by a first priority lien on (i) Georgia Power's 45.7% undivided ownership interestincluded in Plant Vogtle Units 3 and 4 (primarily the units under construction, the related real property, and any nuclear fuel loadednotes payable 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 requirementsbalance sheets. Details 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,Registrants' short-term borrowings were 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.
follows:
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | |
| | Short-term Debt at March 31, 2020 | | Short-term Debt During the Period(*) |
| | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | (in millions) | | | | (in millions) | | | | (in millions) |
| Southern Company | $ | 1,710 |
| | 2.0 | % | | $ | 1,527 |
| | 1.9 | % | | $ | 2,113 |
|
| Alabama Power | — |
| | — |
| | 22 |
| | 1.5 |
| | 155 |
|
| Georgia Power | 451 |
| | 2.3 |
| | 266 |
| | 2.1 |
| | 451 |
|
| Mississippi Power | 40 |
| | 2.2 |
| | 4 |
| | 2.2 |
| | 40 |
|
| Southern Power | — |
| | — |
| | 146 |
| | 2.3 |
| | 550 |
|
| Southern Company Gas: | | | | | | | | | |
| Southern Company Gas Capital | $ | 532 |
| | 1.7 | % | | $ | 468 |
| | 1.9 | % | | $ | 641 |
|
| Nicor Gas | 79 |
| | 1.5 |
| | 141 |
| | 1.6 |
| | 278 |
|
| Southern Company Gas Total | $ | 611 |
| | 1.7 | % | | $ | 609 |
| | 1.8 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2020. |
Financing Activities
The following table outlines the Registrants' long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2019:2020:
| | | | | | | | | | | | | | Senior Notes | | Revenue Bonds | | Other Long-Term Debt |
| 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) | Issuances | | Maturities, Redemptions, and Repurchases | | Issuances/ Reofferings | | Maturities, Redemptions, and Repurchases | | Issuances | | Redemptions and Maturities(*) |
| | (in millions) | (in millions) |
Southern Company(b) | $ | 2,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Southern Company parent | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | — |
|
| Alabama Power | 200 |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | 87 |
| | — |
| | — |
|
| Georgia Power | — |
| | 343 |
| | 108 |
| | 835 |
| | 2 |
| 1,500 |
| | 950 |
| | 53 |
| | 148 |
| | — |
| | 18 |
|
| Mississippi Power | — |
| | 43 |
| | — |
| | — |
| | — |
| — |
| | 275 |
| | — |
| | — |
| | 100 |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 19 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Southern Company Consolidated | $ | 2,300 |
| | $ | 386 |
| | $ | 108 |
| | $ | 835 |
| | $ | 21 |
| |
| Southern Company | | $ | 1,500 |
| | $ | 1,225 |
| | $ | 53 |
| | $ | 235 |
| | $ | 1,100 |
| | $ | 21 |
|
| |
(a)(*) | Includes reductions in finance lease obligations resulting from cash payments under finance leases. |
| |
(b) | Represents the Southern Company parent entity.leases and, for Georgia Power, principal amortization payments for FFB borrowings. |
Except as otherwise described herein, Southern Company and its subsidiariesthe Registrants used the proceeds of debt issuances for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including working capital. The subsidiariesSubsidiary Registrants also used the proceeds for their construction programs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, the Registrants plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Southern Company
During the first three months of 2020, Southern Company issued approximately 2.7 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $52 million.
In January 2019,2020, Southern Company repaid aissued $1.0 billion aggregate principal amount of Series 2020A 4.95% Junior Subordinated Notes due January 30, 2080.
In March 2020, Southern Company borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement, bearing interest at a rate agreed upon by Southern Company and the bank from time to time and payable on demand, following specified notice by the bank.
Also in March 2020, Southern Company entered into a $75 million short-term floating rate bank loan bearing interest based on one-month LIBOR.
Subsequent to March 31, 2020, Southern Company issued $1.0 billion aggregate principal amount of Series 2020A 3.70% Senior Notes due April 30, 2030, repaid $50 million of the $250 million borrowed in March 2020 pursuant to a 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),called 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$600 million aggregate principal amount of its Series 2015A 2.750% Senior Notes due June 15, 2020.
Alabama Power
In March 2020, Alabama Power purchased and held approximately $87 million aggregate principal amount of The Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Plant Barry Project), Series 2007-A, which may be reoffered to the public at a later date.
Georgia Power
In January 2020, Georgia Power issued $700 million aggregate principal amount of Series 2020A 2.10% Senior Notes due July 30, 2023, $500 million aggregate principal amount of Series 2020B 3.70% Senior Notes due January 30, 2050, and an additional $300 million aggregate principal amount of Series 2019B 2.65% Senior Notes due September 15, 2029.
In February 2020, Georgia Power redeemed all $500 million aggregate principal amount of its Series 2017C 2.00% Senior Notes due September 8, 2020.
Also in February 2020, Georgia Power purchased and held approximately $28 million, $49 million, and $18 million aggregate principal amounts of Development Authority of BurkeMonroe 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 VogtleScherer Project), Second Series 2008.
Subsequent to March 31, 2019, Georgia Power purchased2006, First Series 2012, and held the following pollution control revenue bonds,First Series 2013, respectively, which may be reoffered to the public at a later date:date.
$55Also in February 2020, Georgia Power made principal amortization payments of $16 million aggregateunder the FFB Credit Facilities. At March 31, 2020, the outstanding 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 tobalance under 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.FFB Credit Facilities was $3.8 billion. 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"Long-Term Debt – 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"DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information.
In March 2020, Georgia Power repaid at maturity $450 million aggregate principal amount of its Series 2017A 2.00% Senior Notes. (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 fundedAlso in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No mandatory contributionsMarch 2020, Georgia Power purchased and subsequently reoffered to the qualified pension plan are anticipated for the year ending December 31, 2019. The Southernpublic approximately $53 million of pollution control revenue bonds.
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 statementsAlso 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, 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 |
|
| |
(a) | Energy-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, and2020, Georgia Power continueextended one of its $125 million short-term term floating rate bank loans to elect the optiona long-term term loan, which matures in June 2021, and borrowed $200 million pursuant to fair value investment securities held in the nuclear decommissioning trust funds. The fair value of the funds, including reinvesteda $250 million short-term uncommitted bank credit arrangement, which bears 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, 2018at a rate agreed upon 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.the bank
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
| | | | | | |
| | 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 withinand is payable on demand, following specified notice by 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 inputsbank. Subsequent 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,2020, Georgia Power Mississippi Power, Southern Power, and Southern Company Gas.
Commodity Contracts with Level 3 Valuation Inputs
As of March 31, 2019,borrowed 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 partremaining $50 million pursuant 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.this bank credit arrangement.
(J) DERIVATIVESMississippi Power
In February 2020, Mississippi Power entered into $60 million and $15 million floating rate bank term loans, which mature in December 2021 and January 2022, respectively, each bearing interest based on one-month LIBOR.
In March 2020, Mississippi Power entered into a $125 million revolving credit arrangement that matures in March 2023 and borrowed $40 million (short term) and $25 million (long term) pursuant to the arrangement, each of which bears interest based on one-month LIBOR.
In March 2020, Mississippi Power repaid at maturity the remaining $275 million aggregate principal amount of its Series 2018A Floating Rate Senior Notes.
Subsequent to March 31, 2020, Mississippi Power purchased and held approximately $11 million, $14 million, and $9 million aggregate principal amount of Mississippi Business Finance Corporation Solid Waste Disposal Facilities Revenue Bonds, Series 1995 (Mississippi Power Company Project), Solid Waste Disposal Facilities Revenue Refunding Bonds, Series 1998 (Mississippi Power Company Project), and Revenue Bonds, Series 1999 (Mississippi Power Company Project), respectively, which may be reoffered to the public at a later date.
Also subsequent to March 31, 2020, Mississippi Power redeemed approximately $7 million aggregate principal amount of The Industrial Development Board of the City of Eutaw, Alabama Pollution Control Revenue Refunding Bonds, Series 1992 (Mississippi Power Greene County Plant Project) due December 1, 2020.
Southern Power
In February 2020, Southern Power repaid its $100 million short-term floating rate bank loan entered into in December 2019.
Southern Company the traditional electric operating companies,Gas
In March 2020, Southern Power,Company Gas Capital, as borrower, and Southern Company Gas, are exposed to market risks, including commodity price risk,as guarantor, entered into a $150 million short-term floating rate bank loan bearing 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 policiesbased on one-month LIBOR.
Also 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 (I) for additional fair value information. In the statements of cash flows, any cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. Any cash impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with classification of the hedged interest or principal, respectively. See Note 1 to the financial statements under "Financial Instruments" in Item 8 of the Form 10-K for additional information.
Energy-Related Derivatives
The traditional electric operating companies, Southern Power, andMarch 2020, Southern Company Gas enter into energy-related derivativesCapital borrowed approximately $95 million pursuant 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 ofa short-term uncommitted bank credit arrangement, guaranteed by Southern Company Gas, manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which are expected to continue to mitigate price volatility. The traditional electric operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in energy-related commodity prices because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional electric operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity.bearing interest at a rate agreed upon by Southern Company Gas retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.
Southern Company Gas also enters into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in operating revenues.
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 designated as regulatory hedges relate primarily to the traditional electric operating companies'Capital and the natural gas distribution utilities' fuel-hedging programs, where gainsbank from time to time and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense aspayable on demand, following specified notice by the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.
bank.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.Credit Rating Risk
At March 31, 2019,2020, the net volume of energy-related derivative contracts for natural gas positions, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:
|
| | | | | |
| | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date |
| | (in millions) | | | | |
Southern Company(*) | 538 | | 2022 | | 2029 |
| Alabama Power | 72 | | 2022 | | — |
| Georgia Power | 153 | | 2022 | | — |
| Mississippi Power | 61 | | 2022 | | — |
| Southern Power | 9 | | 2020 | | — |
Southern Company Gas(*) | 243 | | 2021 | | 2029 |
| |
(*) | 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 3.8 billion mmBtu and short natural gas positions of 3.6 billion mmBtu as of March 31, 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 40 million mmBtu for Southern Company, which includes 6 million mmBtu for Alabama Power, 12 million mmBtu for Georgia Power, 5 million mmBtu for Mississippi Power, and 13 million mmBtu for Southern Power.
For cash flow hedges of energy-related derivatives, the estimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending March 31, 2020 are immaterial for all registrants.
Interest Rate Derivatives
Southern Company and certain subsidiaries may enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow
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.
At March 31, 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, 2019 |
| | (in millions) | | | | | | (in millions) |
| Fair Value Hedges of Existing Debt | | | | | | |
Southern Company(*) | $ | 300 |
| | 2.75% | 3-month LIBOR+0.92% | June 2020 | | $ | (3 | ) |
Southern Company(*) | 1,500 |
| | 2.35% | 1-month LIBOR+0.87% | July 2021 | | (30 | ) |
| Georgia Power | 200 |
| | 4.25% | 3-month LIBOR+2.46% | December 2019 | | (2 | ) |
| Southern Company Consolidated | $ | 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, 2020 are $(19) million for Southern Company and immaterial for all other registrants. Deferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2046 for the Southern Company parent entity, 2035 for Alabama Power, 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 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, 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, 2019 |
| | (in millions) | | (in millions) | | | (in millions) |
| Cash Flow Hedges of Existing Debt | | | | | |
| Southern Power | $ | 677 |
| 2.95% | € | 600 |
| 1.00% | June 2022 | $ | 2 |
|
| Southern Power | 564 |
| 3.78% | 500 |
| 1.85% | June 2026 | 11 |
|
| Total | $ | 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 expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending March 31, 2020 are $(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, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | 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 | $ | 12 |
| $ | 10 |
| $ | 8 |
| $ | 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 11 |
| 21 |
| 9 |
| 26 |
|
| Assets held for sale, current/Liabilities held for sale, current | — |
| — |
| — |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 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 | $ | 1 |
| $ | 3 |
| $ | 3 |
| $ | 7 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 1 |
| 1 |
| 2 |
|
| Interest rate derivatives: | | | | |
| Other current assets/Other current liabilities | — |
| 20 |
| — |
| 19 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 15 |
| — |
| 30 |
|
| Foreign currency derivatives: | | | | |
| Other current assets/Other current liabilities | — |
| 24 |
| — |
| 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 38 |
| — |
| 75 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 39 |
| $ | 63 |
| $ | 79 |
| $ | 81 |
|
| Derivatives not designated as hedging instruments | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 259 |
| $ | 291 |
| $ | 561 |
| $ | 575 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 171 |
| 269 |
| 180 |
| 325 |
|
| Total derivatives not designated as hedging instruments | $ | 430 |
| $ | 560 |
| $ | 741 |
| $ | 900 |
|
| Gross amounts recognized | $ | 492 |
| $ | 654 |
| $ | 837 |
| $ | 1,036 |
|
Gross amounts offset(a) | $ | (333 | ) | $ | (523 | ) | $ | (524 | ) | $ | (801 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 159 |
| $ | 131 |
| $ | 313 |
| $ | 235 |
|
| | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | |
| | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | 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 | $ | 3 |
| $ | 2 |
| $ | 3 |
| $ | 4 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 3 |
| 5 |
| 3 |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 6 |
| $ | 7 |
| $ | 6 |
| $ | 10 |
|
| Gross amounts recognized | $ | 6 |
| $ | 7 |
| $ | 6 |
| $ | 10 |
|
| Gross amounts offset | $ | (5 | ) | $ | (5 | ) | $ | (4 | ) | $ | (4 | ) |
| Net amounts recognized in the Balance Sheets | $ | 1 |
| $ | 2 |
| $ | 2 |
| $ | 6 |
|
| | | | | |
| Georgia Power | | | | |
| Derivatives designated as hedging instruments for regulatory purposes | | | | |
| Energy-related derivatives: | | | | |
| Other current assets/Other current liabilities | $ | 4 |
| $ | 5 |
| $ | 2 |
| $ | 8 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 5 |
| 11 |
| 4 |
| 13 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 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 | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | — |
| $ | 2 |
| $ | — |
| $ | 2 |
|
| Gross amounts recognized | $ | 9 |
| $ | 18 |
| $ | 6 |
| $ | 23 |
|
| Gross amounts offset | $ | (8 | ) | $ | (8 | ) | $ | (6 | ) | $ | (6 | ) |
| Net amounts recognized in the Balance Sheets | $ | 1 |
| $ | 10 |
| $ | — |
| $ | 17 |
|
| | | | | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | |
| | As of March 31, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | 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 | $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 3 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 1 |
| 4 |
| 2 |
| 6 |
|
| Total derivatives designated as hedging instruments for regulatory purposes | $ | 3 |
| $ | 6 |
| $ | 3 |
| $ | 9 |
|
| Gross amounts recognized | $ | 3 |
| $ | 6 |
| $ | 3 |
| $ | 9 |
|
| Gross amounts offset | $ | (3 | ) | $ | (3 | ) | $ | (2 | ) | $ | (2 | ) |
| Net amounts recognized in the Balance Sheets | $ | — |
| $ | 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 | $ | 1 |
| $ | 2 |
| $ | 3 |
| $ | 6 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | — |
| 1 |
| 1 |
| 2 |
|
| Foreign currency derivatives: | | | | |
| Other current assets/Other current liabilities | — |
| 24 |
| — |
| 23 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 38 |
| — |
| 75 |
| — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | $ | 39 |
| $ | 27 |
| $ | 79 |
| $ | 31 |
|
| Gross amounts recognized | $ | 39 |
| $ | 27 |
| $ | 79 |
| $ | 31 |
|
| Gross amounts offset | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) |
| Net amounts recognized in the Balance Sheets | $ | 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, 2019 | As of December 31, 2018 |
| Derivative Category and Balance Sheet Location | Assets | Liabilities | Assets | Liabilities |
| | (in millions) | (in millions) |
| Derivatives not designated as hedging instruments | | | | |
| Energy-related derivatives: | | | | |
| Assets from risk management activities/Liabilities from risk management activities-current | $ | 259 |
| $ | 291 |
| $ | 559 |
| $ | 574 |
|
| Other deferred charges and assets/Other deferred credits and liabilities | 171 |
| 269 |
| 180 |
| 325 |
|
| Total derivatives not designated as hedging instruments | $ | 430 |
| $ | 560 |
| $ | 739 |
| $ | 899 |
|
| Gross amounts of recognized | $ | 434 |
| $ | 562 |
| $ | 741 |
| $ | 909 |
|
Gross amounts offset(a) | $ | (316 | ) | $ | (506 | ) | $ | (508 | ) | $ | (785 | ) |
Net amounts recognized in the Balance Sheets(b) | $ | 118 |
| $ | 56 |
| $ | 233 |
| $ | 124 |
|
| |
(a) | Gross amounts offset include cash collateral held on deposit in broker margin accounts of $190 million and $277 million as of March 31, 2019 and December 31, 2018, respectively. |
| |
(b) | Net amounts of derivative instruments outstanding exclude premium and intrinsic value associated with weather derivatives of $11 million and $8 million as of March 31, 2019 and December 31, 2018, respectively. |
At March 31, 2019 and December 31, 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, 2019 |
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 | $ | (5 | ) | $ | (1 | ) | $ | (2 | ) | $ | (1 | ) | $ | (1 | ) |
| Other regulatory assets, deferred | (11 | ) | (2 | ) | (6 | ) | (3 | ) | — |
|
| Other regulatory liabilities, current | 7 |
| 1 |
| 1 |
| 1 |
| 4 |
|
| Total energy-related derivative gains (losses) | $ | (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 $2 million at March 31, 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)
For the three months ended March 31, 2019 and 2018, the pre-tax effects of cash flow hedge accounting on accumulated OCI were as follows:
|
| | | | | | |
| Gain (Loss) Recognized in OCI on Derivative | For the Three Months
Ended March 31, |
| 2019 | 2018 |
| | (in millions) |
| Southern Company | | |
| Energy-related derivatives | $ | — |
| $ | 12 |
|
| Interest rate derivatives | — |
| (2 | ) |
| Foreign currency derivatives | (39 | ) | 53 |
|
| Total | $ | (39 | ) | $ | 63 |
|
| Southern Power | | |
| Energy-related derivatives | $ | — |
| $ | 11 |
|
| Foreign currency derivatives | (39 | ) | 53 |
|
| Total | $ | (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. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
For the three months ended March 31, 2019 and 2018, 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.
As of March 31, 2019 and December 31, 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 |
| Balance Sheet Location of Hedged Items | As of March 31, 2019 | As of December 31, 2018 |
| As of March 31, 2019 | As of December 31, 2018 |
| (in millions) | | (in millions) |
| Southern Company | | | | | |
| Securities due within one year | $ | (499 | ) | $ | (498 | ) | | $ | 1 |
| $ | 2 |
|
| Long-term debt | (2,065 | ) | (2,052 | ) | | 28 |
| 41 |
|
| | | | | | |
| Georgia Power | | | | | |
| Securities due within one year | $ | (499 | ) | $ | (498 | ) | | $ | 1 |
| $ | 2 |
|
| Long-term debt | — |
| — |
| | — |
| — |
|
For the three months ended March 31, 2019 and 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) |
| | | Three Months Ended March 31, |
| Derivatives in Non-Designated Hedging Relationships | Statements of Income Location | 2019 | 2018 |
| | | (in millions) |
| Energy-related derivatives: | Natural gas revenues(*) | $ | 33 |
| $ | (15 | ) |
| | Cost of natural gas | 8 |
| 2 |
|
| Total derivatives in non-designated hedging relationships | $ | 41 |
| $ | (13 | ) |
| |
(*) | Excludes immaterial gains (losses) recorded in natural gas revenues associated with weather derivatives for the three months ended March 31, 2019 and 2018. |
For the three months ended March 31, 2019 and 2018, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were immaterial for the traditional electric operating companies and Southern Power.
Contingent Features
Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas doRegistrants 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 derivativescontracts that could require collateral, but not accelerated payment, in the event of variousa credit rating changeschange of certain Southern Company subsidiaries. At March 31, 2019, the registrants had no collateral posted with derivative counterpartiessubsidiaries to satisfy these arrangements.
For the registrants withBBB 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 derivativesmanagement, and, for Georgia Power, construction of new generation at March 31, 2019, the fair value of interest rate derivative liabilities with contingent featuresPlant Vogtle Units 3 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, 2019, the fair value of energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial for all
4.
NOTES TO THE CONDENSEDMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS:CONDITION
AND RESULTS OF OPERATIONS (Continued)
(UNAUDITED)
registrants. The maximum potential collateral requirements arisingunder these contracts at March 31, 2020 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Credit Ratings | Southern Company(*) | Alabama Power | Georgia Power | Mississippi Power | Southern Power(*) | Southern Company Gas |
| | (in millions) |
| At BBB and/or Baa2 | $ | 36 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 35 |
| $ | — |
|
| At BBB- and/or Baa3 | 491 |
| 2 |
| 86 |
| — |
| 404 |
| — |
|
| At BB+ and/or Ba1 or below | 2,118 |
| 323 |
| 1,022 |
| 269 |
| 1,255 |
| 13 |
|
| |
| (*) | Southern Power has PPAs that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPAs require credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade. Southern Power had $105 million of cash collateral posted related to PPA requirements at March 31, 2020. |
The potential collateral requirement amounts in the credit-risk-related contingent featuresprevious table for the traditional electric operating companies and Southern Power include certain agreements that could require collateral in the event that oneeither Alabama Power or more Southern Company power pool participantsGeorgia Power 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 forAdditionally, a credit rating downgrade could impact 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 valueability of the positions in these accountsRegistrants to access capital markets and would be likely to impact the associated margin requirements, Alabama Power and Southern Power may be required to post collateral. At March 31, 2019, cash collateral posted in these accounts was immaterial.cost at which they do so.
Market Price Risk
Other than the Southern Company Gas maintains accounts with brokers oritems discussed below, there were no material changes to the clearing housesRegistrants' disclosures about market price risk during the first quarter 2020. For an in-depth discussion of certain exchanges to facilitate financial derivative transactions. Based on the valueSouthern Company Gas' market price risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" in Item 7 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, 2019, cash collateral heldForm 10-K. Also see "Overview" herein for information on deposit in broker margin accounts was $190 million.
The registrants are exposed to losses related to financial instrumentsrecent volatility in the event of counterparties' nonperformance. The registrants only enter into agreementsfinancial markets resulting from the COVID-19 pandemic and material transactions with counterparties that have investment grade credit ratings by Moody'sNotes (I) and S&P or with counterparties who have posted collateral(J) to cover potential credit exposure. The registrants have also established risk management policies and controlsthe Condensed Financial Statements herein for information relating to determine and monitor the creditworthiness of counterparties in order to mitigate 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.derivative instruments.
Southern Company Gas also utilizes master netting agreements whenever possibleis exposed to mitigatemarket risks, including commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms, the natural gas distribution utilities that sell natural gas directly to end-use customers continue to have limited 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 nettingmarket volatility of natural gas prices. Certain of the positivenatural gas distribution utilities 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. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and negative exposures with that counterpartyweather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and a reasonable measureover-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 may not be designated, for hedge accounting treatment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
For the periods presented below, the changes in net fair value of Southern Company Gas' creditderivative contracts were as follows:
|
| | | | | | |
| | First Quarter 2020 | First Quarter 2019 |
| | (in millions) |
| Contracts outstanding at beginning of period, assets (liabilities), net | $ | 72 |
| $ | (167 | ) |
| Contracts realized or otherwise settled | (91 | ) | (5 | ) |
Current period changes(a) | 36 |
| 44 |
|
| Contracts outstanding at the end of period, assets (liabilities), net | $ | 17 |
| $ | (128 | ) |
| Netting of cash collateral | 128 |
| 190 |
|
Cash collateral and net fair value of contracts outstanding at end of period(b) | $ | 145 |
| $ | 62 |
|
| |
| (a) | Current period changes also include the fair value of new contracts entered into during the period, if any. |
| |
| (b) | Excludes premium and intrinsic value associated with weather derivatives of $16 million at March 31, 2020 and an immaterial amount at March 31, 2019. |
The maturities of Southern Company Gas' energy-related derivative contracts at March 31, 2020 were as follows:
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurements |
| | | | March 31, 2020 |
| | Total
Fair Value | | Maturity |
| | | Year 1 | | Years 2 & 3 | | Years 4 and thereafter |
| | (in millions) |
Level 1(a) | $ | (98 | ) | | $ | (63 | ) | | $ | (38 | ) | | $ | 3 |
|
Level 2(b) | 39 |
| | 25 |
| | 10 |
| | 4 |
|
Level 3(c) | 76 |
| | 12 |
| | 25 |
| | 39 |
|
Fair value of contracts outstanding at end of period(d) | $ | 17 |
| | $ | (26 | ) | | $ | (3 | ) | | $ | 46 |
|
| |
| (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 $128 million and $16 million of premium and intrinsic value associated with weather derivatives. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2020, 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, also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Master netting agreements enable Southern Company Gassee MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" 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" in Item 7 of the Form 10-K and Note 1 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.
The registrants do not anticipate a material adverse effect on their respective financial statements as a result of counterparty nonperformance.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(K) ACQUISITIONS AND DISPOSITIONS
See Note 15under "Financial Instruments" and Notes 13 and 14 to the financial statements in Item 8 of the Form 10-K, for additional information.as well as Notes (I) and (J) to the Condensed Financial Statements herein.
Southern Company
On January 1, 2019, Southern Company completed the sale 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 assetsItem 4. Controls 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, 2019. 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.
See "Assets Held for Sale" herein for additional information.
Southern Power
Construction Projects in Progress
During the three months ended March 31, 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 $575 million and $640 million for the Plant Mankato expansion and the Wildhorse Mountain and Reading facilities. At March 31, 2019, total costs of construction incurred for these projects were $347 million and are included in CWIP, 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 | Expected COD | PPA Contract Period |
Mankato expansion(a)
| Natural Gas | 385 | Mankato, MN | May 2019 | 20 years |
Wildhorse Mountain(b)
| Wind | 100 | Pushmataha County, OK | Fourth quarter 2019 | 20 years |
Reading(c)
| Wind | 200 | Osage and Lyon Counties, KS | Second quarter 2020 | 12 years |
Procedures. | |
| (a) | In November 2018, Southern Power entered into an agreement to sell allEvaluation of its equity interests in Plant Mankato, including this expansion currently under construction. This transaction is subject to FERCdisclosure controls 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.
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) | In May 2018, Southern Power purchased 100% of the Wildhorse Mountain facility. Southern Power may enter into a tax equity partnership,Changes 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.
|
| |
(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.
internal controls over financial reporting. |
Development Projects
Southern Power continues to evaluate and refine the deployment of the wind turbine equipment purchasedThere have been no changes in 2016 and 2017 to potential joint development and construction projects as well as the amount of MW capacity to be constructed. During the three months ended March 31, 2019, approximately $53 million of equipment was marketed for sale 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, andAlabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, balance sheets. See "Assets Held for 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,or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) 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 at15d-15(f) under the lowerSecurities Exchange Act 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 classification1934, 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 and Southern Power 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 the periods presented.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Gulf Power and 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 recognize leases with a term of greater than 12 months on the balance sheet as lease obligations, representing the discounted future fixed payments due, along with right-of-use (ROU) assets that will be amortized over the term of each lease.
The registrants elected the transition methodology provided by ASC 842, whereby the applicable requirements 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 registrants applied the use-of-hindsight practical expedient in determining lease terms as of the date of adoption and elected the practical expedient that allows existing land easements not previously accounted for as leases not to be reassessed.
Lessee
As lessee, the registrants lease certain electric generating units (including renewable energy facilities), real estate/land, communication towers, railcars, and other equipment and vehicles. The major categories of lease obligations are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 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 Southern Company Gas and various land leases primarily associated with renewable energy facilities at Southern Power. The commercial real estate leases have remaining terms of up to 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 many 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 the 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 Georgia PSC.
Short-term Leases
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the registrants generally recognize lease expense for these leases on a straight-line basis over the lease term.
Residual Value Guarantees
Residual value guarantees exist primarily in railcar leases at Alabama Power and Georgia Power and the amounts probable of being paid under those guarantees are included in the lease payments. All such amounts are immaterial as of March 31, 2019.
Lease and Nonlease Components
For all asset categories, with the exception of electric generating units, gas pipelines, and real estate leases, the registrants combine lease payments and any nonlease components, such as asset maintenance, for purposes of calculating the lease obligation and the right-of-use asset.
Balance sheet amounts recorded for operating and finance leases are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 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 |
| $ | — |
| $ | — |
| $ | — |
|
| |
(*) | Includes operating lease ROU assets, net and operating lease obligations classified as held for sale. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Lease costs for the three months ended March 31, 2019, which includes both amounts recognized as operations and maintenance expense and amounts capitalized as part of the cost of another asset, are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | 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)
|
| | | | | | | | | | | | |
| | 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 Company 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.
Lease income for the three months ended March 31, 2019 is as follows:
|
| | | | | | | | | | | | | | | |
| | 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 for2020 that have materially affected or are reasonably likely to materially affect Southern Power is included in wholesale revenues. Lease payments received under tolling arrangements and PPAs consist of either scheduled paymentsCompany's, Alabama Power's, Georgia Power's, Mississippi Power's, Southern Power's, 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.Company Gas' internal control over financial reporting.
(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 traditional electric operating companies – Alabama Power, Georgia Power, and Mississippi Power – are vertically integrated utilities providing electric service in three Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through its natural gas distribution utilities and is involved in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company's reportable business segments are the sale of electricity by the traditional electric operating companies, the sale of electricity in the competitive wholesale market by Southern Power, and the sale of natural gas and other complementary products and services by Southern Company Gas. Revenues from sales by Southern PowerIndex to the traditional electric operating companies were $87 million for the three months ended March 31, 2019 and $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 $17 million for the three months ended March 31, 2019 and $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, as well as investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.Financial data for business segments and products and services for the three months ended March 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Electric Utilities | | | | |
| | Traditional Electric Operating Companies | Southern Power | Eliminations | Total | Southern Company Gas | All Other | Eliminations | Consolidated |
| | (in millions) |
| 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: | | | | | | | |
| Operating revenues | $ | 3,979 |
| $ | 509 |
| $ | (106 | ) | $ | 4,382 |
| $ | 1,639 |
| $ | 401 |
| $ | (50 | ) | $ | 6,372 |
|
Segment net income (loss)(a)(b)(d) | 612 |
| 121 |
| — |
| 733 |
| 279 |
| (74 | ) | — |
| 938 |
|
| 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 plants under construction of $2 million ($1 million after tax) and $44 million ($33 million after tax) for the three months ended March 31, 2019 and 2018, respectively. See Note 2 to the financial statements in Item 8 of the Form 10-K and Note (B) under "Mississippi Power – Kemper County Energy 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 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. |
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 |
|
| |
(a) | Operating revenues for the three gas distribution operations dispositions were $167 million for the three months ended March 31, 2018. |
| |
(b) | Operating revenues for Pivotal Home Solutions were $32 million for the three months ended March 31, 2018. |
Southern Company Gas
Southern Company Gas manages its business through four reportable segments – gas distribution operations, gas pipeline investments, wholesale gas services, and gas marketing services. The non-reportable segments are combined and presented as all other.
Gas distribution operations is the largest component of Southern Company Gas' business and includes natural gas local distribution utilities that construct, manage, and maintain intrastate natural gas pipelines and gas distribution facilities in four states.
Gas pipeline investments consists of joint ventures in natural gas pipeline investments including a 50% interest in SNG, 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 the customers 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 marketing services provides natural gas marketing to end-use customers primarily in Georgia and 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, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) | Operating revenues for the three gas distribution operations dispositions were $167 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. |
| |
(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 |
| | (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 |
|
| |
(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 registrantsRegistrants 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. ThereRegistrants. Except as described below, there have been no material changes to these risk factors from those previously disclosed in the Form 10-K.
The Registrants are subject to risks related to the COVID-19 pandemic, including, but not limited to, disruption to the construction of Plant Vogtle Units 3 and 4 for Southern Company and Georgia Power.
COVID-19 has been declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention and has spread globally, including throughout the United States. In response, most jurisdictions, including in the United States, have instituted restrictions on travel, public gatherings, and non-essential business operations. These restrictions have significantly disrupted economic activity in the service territories of the traditional electric operating companies and the natural gas distribution utilities and have caused volatility in capital markets. In addition, the traditional electric operating companies and the natural gas distribution utilities have temporarily suspended disconnections for non-payment by customers and waived late fees. The effects of the continued COVID-19 pandemic and related responses could include extended disruptions to supply chains and capital markets, further reduced labor availability and productivity, and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts on the Registrants, including continued reduced demand for energy, particularly from commercial and industrial customers, reduced cash flows and liquidity, impairment of goodwill or long-lived assets, reductions in investments recorded at fair value, and further impairment of the ability of the Registrants to develop, construct, and operate facilities, including electric generation, transmission, and distribution assets, to perform necessary corporate and customer service functions, and to access funds from financial institutions and capital markets. In addition, the COVID-19 pandemic could cause delays or cancellations to regulatory proceedings, which could affect the Registrants' ability to timely complete acquisitions or other transactions. Further, the effects of the COVID-19 pandemic could further disrupt or delay construction, testing, supervisory, and support activities at Plant Vogtle Units 3 and 4. In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission at the construction site, including worker distancing measures, isolating individuals who have tested positive for COVID-19, are showing symptoms consistent with COVID-19, are being tested for COVID-19, or have been in close contact with such persons, requiring self-quarantine, and adopting additional precautionary measures. Multiple members of the workforce at the project site have tested positive for COVID-19. On April 15, 2020, Georgia Power announced a reduction in workforce at Plant Vogtle Units 3 and 4 expected to total approximately 20% of the existing workforce. This reduction in workforce was a mitigation action intended to address the impact of the COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and construction site, including ongoing challenges with labor productivity that have been exacerbated by the impact of the COVID-19 pandemic. The workforce levels resulting from this reduction are expected to last at least through the summer as Georgia Power continues to monitor the impacts of the COVID-19 pandemic on the construction site. Assuming absenteeism rates normalize and the intended productivity efficiencies are realized in the coming months, while this mitigation action has extended and may further extend certain milestone dates in the updated aggressive site work plan, Georgia Power does not expect it to affect either the total project capital cost forecast or the ability to achieve the regulatory-approved in-service dates of November 2021 and November 2022 for Plant Vogtle Units 3 and 4, respectively; however, the ultimate impact of the COVID-19 pandemic on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time.
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 |
| | | | | |
| | | Georgia PowerSouthern Company |
| | | | | |
| | | (c)1(a) | - | Amended and Restated Loan Guarantee Agreement,Twenty-First Supplemental Indenture to the Senior Note Indenture dated as of March 22, 2019, between Georgia Power andApril 3, 2020, providing for the DOE. (Designatedissuance of Southern Company's Series 2020A 3.70% Senior Notes due April 30, 2030. (Designated in Form 8-K dated March 22, 2019,April 1, 2020, File No. 1-6468,1-3526, as Exhibit 4.1.4.2) |
| | | | |
| | (c)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 | - | Form of Terms for 2018 Named Executive Officer2020 Equity Awards granted under the Southern Company 2011 Omnibus Incentive Compensation Plan. See Exhibit 10(a)3 herein. |
| | | | | |
| | (18) Letter re Change in Accounting Principles |
| | | | |
| | Southern Company |
| | | | |
| * | (a) | - | |
| | | | |
| | Alabama Power |
| | | | |
| | (b) | - | Preferability letter of Deloitte & Touche LLP. See Exhibit 18(a) herein. |
| | | | |
| | Georgia Power |
| | | | |
| | (c) | - | Preferability letter of Deloitte & Touche LLP. See Exhibit 18(a) herein. |
| | | | |
| | Mississippi Power |
| | | | |
| | (d) | - | Preferability letter of Deloitte & Touche LLP. See Exhibit 18(a) herein. |
| | | | |
| | Southern Power |
| | | | |
| | (e) | - | Preferability letter of Deloitte & Touche LLP. See Exhibit 18(a) herein. |
| | | | |
| | Southern Company Gas |
| | | | |
| | (f) | - | Preferability letter of Deloitte & Touche LLP. See Exhibit 18(a) herein. |
| | | |
| | | (24) Power of Attorney and Resolutions |
| | | | | |
| | | Southern Company |
| | | | | |
| | | (a) | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | | (b) | - | |
| | | | | |
|
| | | | |
| | | Georgia Power |
| | | | | |
| | | (c) | - | |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | | (d) | - | |
| | | | | |
| | | Southern Power |
| | | | | |
| | | (e) | - | |
| | | | | |
| | | Southern Company Gas |
| | | | | |
| | | (f)1 | - | |
| | | | |
| | (f)2 | - | |
| | | | | |
| | | (31) Section 302 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a)1 | - | |
| | | | | |
| | * | (a)2 | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b)1 | - | |
| | | | | |
| | * | (b)2 | - | |
| | | | | |
|
| | | | |
| | | Georgia Power |
| | | | | |
| | * | (c)1 | - | |
| | | | | |
| | * | (c)2 | - | |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | * | (d)1 | - | |
| | | | | |
| | * | (d)2 | - | |
| | | | | |
| | | Southern Power |
| | | | | |
| | * | (e)1 | - | |
| | | | | |
| | * | (e)2 | - | |
| | | | | |
|
| | | | |
| | | Southern Company Gas |
| | | | | |
| | * | (f)1 | - | |
| | | | | |
| | * | (f)2 | - | |
| | | | | |
| | | (32) Section 906 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a) | - | |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b) | - | |
| | | | | |
| | | Georgia Power |
| | | | | |
| | * | (c) | - | |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | * | (d) | - | |
| | | | | |
| | | Southern Power |
| | | | | |
| | * | (e) | - | |
| | | | | |
| | | Southern Company Gas |
| | | | | |
| | * | (f) | - | |
| | | | | |
|
| | | | |
| | | (101) Interactive Data Files |
| | | | | |
| | * | INS | - | XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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 |
| | | | |
| | (104) Cover Page Interactive Data File |
| * | | | Formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101. |
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 | | Andrew W. Evans |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: April 30, 201929, 2020
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: April 30, 201929, 2020
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 | | David P. Poroch |
| | | Executive Vice President, Chief Financial Officer, Treasurer, and Comptroller |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: April 30, 201929, 2020
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: April 30, 201929, 2020
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. GranthamElliott L. Spencer |
| | | Senior Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/ Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: April 30, 201929, 2020
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 | | Kimberly S. Greene |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Daniel 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: April 30, 201929, 2020