(EDGAR Online via COMTEX) -- Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Combined Management's Discussion and Analysis of Financial Condition and Results of Operations Overview II- 3 Results of Operations II- 7 Southern Company II- 7 Alabama Power II- 17 Georgia Power II- 21 Mississippi Power II- 25 Southern Power II- 29 Southern Company Gas II- 32 Future Earnings Potential II- 40 Accounting Policies II- 48 Financial Condition and Liquidity II- 56
This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in Item 7 of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 19, 2020. The following Management's Discussion and Analysis of Financial Condition and Results of Operations is a combined presentation; however, information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY -
"Market Price Risk" in Item 7 herein and Note 1 to the financial statements
under "Financial Instruments" in Item 8 herein. Also see Notes 13 and 14 to the
financial statements in Item 8 herein.
II-2
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS
Southern Company and Subsidiary Companies 2020 Annual Report
OVERVIEW
Business Activities
Southern Company is a holding company that owns all of the common stock of three
traditional electric operating companies, as well as Southern Power and Southern
Company Gas, and owns other direct and indirect subsidiaries. The primary
businesses of the Southern Company system are electricity sales by the
traditional electric operating companies and Southern Power and the distribution
of natural gas by Southern Company Gas. Southern Company's reportable segments
are the sale of electricity by the traditional electric operating companies, the
sale of electricity in the competitive wholesale market by Southern Power, and
the sale of natural gas and other complementary products and services by
Southern Company Gas. See Note 16 to the financial statements for additional
information.
The traditional electric operating companies - Alabama Power, Georgia Power,
and Mississippi Power - are vertically integrated utilities providing electric
service to retail customers in three Southeastern states in addition to
wholesale customers in the Southeast.
Southern Power develops, constructs, acquires, owns, and manages power
generation assets, including renewable energy and battery energy storage
projects, and sells electricity at market-based rates in the wholesale market.
Southern Power continually seeks opportunities to execute its strategy to create
value through various transactions including acquisitions, dispositions, and
sales of partnership interests, development and construction of new generating
facilities, and entry into PPAs primarily with investor-owned utilities, IPPs,
municipalities, electric cooperatives, and other load-serving entities, as well
as commercial and industrial customers. In general, Southern Power commits to
the construction or acquisition of new generating capacity only after entering
into or assuming long-term PPAs for the new facilities.
Southern Company Gas is an energy services holding company whose primary
business is the distribution of natural gas. Southern Company Gas owns natural
gas distribution utilities in four states - Illinois, Georgia, Virginia, and
Tennessee - and is also involved in several other complementary businesses.
Southern Company Gas manages its business through four reportable segments - gas
distribution operations, gas pipeline investments, wholesale gas services, which
includes Sequent, a natural gas asset optimization company, and gas marketing
services, which includes SouthStar, a Marketer and provider of energy-related
products and services to natural gas markets - and one non-reportable segment,
all other. See Notes 7 and 16 to the financial statements for additional
information.
Many factors affect the opportunities, challenges, and risks of the Southern
Company system's electric service and natural gas businesses. These factors
include the ability to maintain constructive regulatory environments, to
maintain and grow sales and customers, and to effectively manage and secure
timely recovery of prudently-incurred costs. These costs include those related
to projected long-term demand growth; stringent environmental standards,
including CCR rules; safety; system reliability and resilience; fuel; natural
gas; restoration following major storms; and capital expenditures, including
constructing new electric generating plants and expanding and improving the
electric transmission and electric and natural gas distribution systems.
The traditional electric operating companies and the natural gas distribution
utilities have various regulatory mechanisms that address cost recovery.
Effectively operating pursuant to these regulatory mechanisms and appropriately
balancing required costs and capital expenditures with customer prices will
continue to challenge the Southern Company system for the foreseeable future.
See Note 2 to the financial statements for additional information.
Southern Power's future earnings will depend upon the parameters of the
wholesale market and the efficient operation of its wholesale generating assets,
as well as Southern Power's ability to execute its growth strategy and to
develop and construct generating facilities. In addition, Southern Power's
future earnings will depend upon the availability of federal and state ITCs and
PTCs on its renewable energy projects, which could be impacted by future tax
legislation. See FUTURE EARNINGS POTENTIAL - "Income Tax Matters" herein and
Notes 10 and 15 to the financial statements for additional information.
Southern Company's other business activities include providing energy solutions
to electric utilities and their customers in the areas of distributed
generation, energy storage and renewables, and energy efficiency. Other business
activities also include investments in telecommunications, leveraged lease
projects, and gas storage facilities. Management continues to evaluate the
contribution of each of these activities to total shareholder return and may
pursue acquisitions, dispositions, and other strategic ventures or investments
accordingly.
II-3
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
COVID-19
During March 2020, COVID-19 was declared a pandemic by the World Health
Organization and the Centers for Disease Control and Prevention and has spread
globally, including throughout the United States. The Southern Company system
provides an essential service to its customers; therefore, it is critical that
Southern Company system employees are able to continue to perform their
essential duties safely and effectively. The Southern Company system has
implemented applicable business continuity plans, including teleworking,
canceling non-essential business travel, increasing cleaning frequency at
business locations, implementing applicable safety and health guidelines issued
by federal and state officials, and establishing protocols for required work on
customer premises. To date, these procedures have been effective in maintaining
the Southern Company system's critical operations. As a result of the COVID-19
pandemic, there have been economic disruptions in the Registrants' operating
territories. The traditional electric operating companies and the natural gas
distribution utilities temporarily suspended disconnections for non-payment by
customers and waived late fees for certain periods. See Note 2 to the financial
statements for information regarding deferral of certain incremental
COVID-19-related costs, including bad debt, to a regulatory asset by certain of
the traditional electric operating companies and the natural gas distribution
utilities. In addition, the COVID-19 pandemic has impacted productivity and the
pace of activity completion at Plant Vogtle Units 3 and 4, as discussed further
herein. Additional information regarding the COVID-19 pandemic and its past and
potential future impacts on the Registrants is provided throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
Item 1A herein.
Alabama Power
On August 14, 2020, the Alabama PSC issued an order granting Alabama Power a CCN
to procure additional capacity, and, on August 31, 2020, Alabama Power completed
its acquisition of the Central Alabama Generating Station.
In October 2020, Alabama Power reduced its over-collected fuel balance by
$94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing
Alabama Power to reduce its over-collected fuel balance by $100 million and
return that amount to customers in the form of bill credits, with any
undistributed amount remaining in the regulatory liability for the benefit of
customers.
For the year ended December 31, 2020, Alabama Power's weighted common equity
return exceeded 6.15%, resulting in Alabama Power establishing a current
regulatory liability of $50 million for Rate RSE refunds, which will be refunded
to customers through bill credits in April 2021.
During 2020, Alabama Power recorded $51 million and $67 million against the NDR
for damages incurred to its transmission and distribution facilities from
Hurricane Sally and Hurricane Zeta, respectively. Alabama Power made an
additional accrual of $100 million to the NDR in December 2020.
Effective for the billing month of January 2021, Alabama Power's Rate RSE
increased 4.09%, or approximately $228 million annually, and Alabama Power's
Rate ECR decreased 1.84%, or approximately $103 million annually, as approved by
the Alabama PSC.
See Notes 2 and 15 to the financial statements under "Alabama Power" for
additional information.
Georgia Power
Rate Plans
On December 15, 2020, in accordance with the terms of the 2019 ARP, the Georgia
PSC approved tariff adjustments effective January 1, 2021 as follows: (i)
increased traditional base tariffs by approximately $120 million; (ii) increased
the Environmental Compliance Cost Recovery (ECCR) tariff by approximately $2
million; (iii) decreased Demand-Side Management tariffs by approximately $15
million; and (iv) increased Municipal Franchise Fee tariffs by approximately $4
million, for a total net increase in annual base revenues of approximately $111
million. Georgia Power expects to submit a compliance filing in the third
quarter 2021 to request tariff adjustments approved pursuant to the 2019 ARP
effective January 1, 2022. The amounts requested in the 2019 ARP were as
follows: (i) increase traditional base tariffs by approximately $192 million;
(ii) increase the ECCR tariff by approximately $184 million; (iii) increase
Demand-Side Management tariffs by approximately $1 million; and (iv) increase
Municipal Franchise Fee tariffs by approximately $9 million, for a total
increase in annual base revenues of approximately $386 million. The ultimate
outcome of this matter cannot be determined at this time. See Note 2 to the
financial statements under "Georgia Power - Rate Plans - 2019 ARP" for
additional information.
II-4
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2020 Annual Report site restoration activities. These activities are expected to be completed by 2026. See Note 3 to the financial statements under "Other Matters - Mississippi Power - Kemper County Energy Facility" for additional information. On February 12, 2021, Mississippi Power submitted its 2021 ECO Plan filing to the Mississippi PSC, which requested an annual decrease in revenues of approximately $9 million, as well as its ad valorem tax adjustment filing for 2021, which requested an annual increase in revenues of approximately $28 million. Mississippi Power plans to submit its 2021 PEP filing in March 2021.
Table of Contents Index to Financial Statements
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2020 2019
(in millions)
Electricity business $ 3,115 $ 3,268
. . .
Feb 18, 2021
COMTEX_381290816/2041/2021-02-18T06:08:12
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