# SOUTHERN CO (SO) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from SOUTHERN CO's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/92122/000009212222000003/so-20211231.htm Accession: 0000092122-22-000003 Filing date: 2022-02-17 Report date: 2021-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/SO/ All MD&A years: /company/SO/mda/ Next year: /company/SO/mda/fy2022/ (FY 2022) COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Southern Company and Subsidiary Companies 2021 Annual Report OVERVIEW Business Activities Southern Company is a holding company that owns all of the common stock of three traditional electric operating companies, 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 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 three reportable segments – gas distribution operations, gas pipeline investments, 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. Prior to the sale of Sequent on July 1, 2021, Southern Company Gas' reportable segments also included wholesale gas services. See Notes 7, 15, and 16 to the financial statements for additional information. Southern Company's other business activities include providing distributed energy and resilience solutions and deploying microgrids for commercial, industrial, governmental, and utility customers, as well as investments in telecommunications 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. See FUTURE EARNINGS POTENTIAL herein for a discussion of the many factors that could impact the Registrants' future results of operations, financial condition, and liquidity. Recent Developments Southern Company On October 29, 2021, Southern Company completed the sale of assets subject to a domestic leveraged lease to the lessee for $45 million. No gain or loss was recognized on the sale. On December 13, 2021, Southern Company completed the termination of its leasehold interest in assets associated with its two international leveraged lease projects and received cash proceeds of approximately $673 million after the accelerated exercise of the lessee's purchase options. The pre-tax gain associated with the transaction was approximately $93 million ($99 million gain after tax). See Note 15 to the financial statements under "Southern Company" for additional information. Alabama Power On September 23, 2021, Alabama Power entered into an agreement to acquire all of the equity interests in Calhoun Power Company, LLC, which owns and operates a 743-MW winter peak, simple-cycle, combustion turbine generation facility in Calhoun County, Alabama (Calhoun Generating Station). The completion of the acquisition is subject to the satisfaction and waiver of certain conditions, including, among other customary conditions, approval by the Alabama PSC and the FERC. On October 28, 2021, Alabama Power filed a petition for a CCN with the Alabama PSC to procure additional generating capacity through this acquisition. The ultimate outcome of this matter cannot be determined at this time. II-3     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report During 2021, Alabama Power continued construction of Plant Barry Unit 8. At December 31, 2021, associated project expenditures included in CWIP totaled approximately $304 million. For the year ended December 31, 2021, Alabama Power's weighted common equity return exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $181 million. In accordance with an Alabama PSC order issued on February 1, 2022, Alabama Power will apply $126 million to reduce the Rate ECR under recovered balance and the remaining $55 million will be refunded to customers through bill credits in July 2022. See Note 2 to the financial statements under "Alabama Power" for additional information. Georgia Power Plant Vogtle Units 3 and 4 Construction and Start-Up Status Construction continues on Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each), in which Georgia Power holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast to complete Plant Vogtle Units 3 and 4, including contingency, through the end of the first quarter 2023 and the fourth quarter 2023, respectively, is $10.4 billion. Georgia Power estimates the productivity impacts of the COVID-19 pandemic have consumed approximately three to four months of schedule margin previously embedded in the site work plan for Unit 3 and Unit 4. The continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4. During 2021, Southern Nuclear performed additional construction remediation work necessary to ensure quality and design standards are met and support system turnovers necessary for Unit 3 hot functional testing, which was completed in July 2021, and fuel load. As a result of Unit 3 challenges including, but not limited to, construction productivity, construction remediation work, the pace of system turnovers, spent fuel pool repairs, and the timeframe and duration for hot functional and other testing, at the end of each of the second and third quarters 2021, Southern Nuclear further extended certain milestone dates, including fuel load for Unit 3, from those established in January 2021. Through the fourth quarter 2021, the project continued to face these and other challenges related to the completion of documentation, including inspection records, necessary to submit the remaining ITAACs and begin fuel load. As a result, at the end of the fourth quarter 2021, Southern Nuclear further extended certain milestone dates, including fuel load for Unit 3, from those established at the end of the third quarter 2021. The site work plan currently targets fuel load for Unit 3 in the second quarter 2022 and an in-service date during the third quarter 2022 and primarily depends on significant improvements in overall construction productivity and production levels, the volume of construction remediation work, the pace of system and area turnovers, and the progression of startup and other testing. As the site work plan includes minimal margin to these milestone dates, an in-service date during the fourth quarter 2022 or the first quarter 2023 for Unit 3 is projected, although any further delays could result in a later in-service date. As the result of productivity challenges and temporarily diverting some Unit 4 craft and support resources to Unit 3 construction efforts, at the end of each of the second and third quarters 2021, Southern Nuclear also further extended milestone dates for Unit 4 from those established in January 2021. The temporary diversion of Unit 4 resources to support Unit 3 has continued into the first quarter 2022; therefore, at the end of the fourth quarter 2021, Southern Nuclear further extended milestone dates for Unit 4 from those established at the end of the third quarter 2021. The site work plan targets an in-service date during the first quarter 2023 for Unit 4 and primarily depends on overall construction productivity and production levels significantly improving as well as appropriate levels of craft laborers, particularly electricians and pipefitters, being added and maintained. As the site work plan includes minimal margin to the milestone dates, an in-service date during the third or fourth quarter 2023 for Unit 4 is projected, although any further delays could result in a later in-service date. The latest schedule extension triggers the requirement that the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction by March 8, 2022. Georgia Power has voted to continue construction. In addition, if the holders of at least 90% of the ownership interests of Plant Vogtle Units 3 and 4 do not vote to continue construction, the DOE may require Georgia Power to prepay all outstanding borrowings under the FFB Credit Facilities over a period of five years. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" for additional information. During 2021, established construction contingency and additional costs totaling $1.3 billion were assigned to the base capital cost forecast for costs primarily associated with schedule extensions, construction productivity, the pace of system turnovers, and support resources for Units 3 and 4. Georgia Power also increased its total capital cost forecast as of December 31, 2021 by $99 million to replenish construction contingency. II-4     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded pre-tax charges to income in the first quarter 2021, the second quarter 2021, the third quarter 2021, and the fourth quarter 2021 of $48 million ($36 million after tax), $460 million ($343 million after tax), $264 million ($197 million after tax), and $480 million ($358 million after tax), respectively, for the increases in the total project capital cost forecast. Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery during the prudence review following the Unit 4 fuel load pursuant to the twenty-fourth VCM stipulation described in Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Regulatory Matters." In addition, Georgia Power recorded a pre-tax charge to income in the fourth quarter 2021 of approximately $440 million ($328 million after tax), and may be required to record additional pre-tax charges to income of up to $460 million, associated with the cost-sharing and tender provisions of the joint ownership agreements based on the current project capital cost forecast. The incremental costs associated with these provisions will not be recovered from retail customers. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Joint Owner Contracts" for additional information. The ultimate impact of the COVID-19 pandemic and other factors on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Plant Vogtle Unit 3 and Common Facilities Rate Proceeding On November 2, 2021, the Georgia PSC approved Georgia Power's application to adjust retail base rates to include a portion of costs related to its investment in Plant Vogtle Unit 3 and the common facilities shared between Plant Vogtle Units 3 and 4 (Common Facilities), as well as the related costs of operation, as modified pursuant to a stipulated agreement between Georgia Power and the staff of the Georgia PSC. The related increase in annual retail base rates of approximately $302 million includes recovery of all projected operations and maintenance expenses for Unit 3 and the Common Facilities and other related costs of operation, partially offset by the related production tax credits, and will become effective the month after Unit 3 is placed in service. This increase is partially offset by a decrease in the NCCR tariff of approximately $78 million that became effective January 1, 2022. See Note 2 to the financial statements under "Georgia Power – Plant Vogtle Unit 3 and Common Facilities Rate Proceeding" for additional information. Rate Plans On November 18, 2021, in accordance with the terms of the 2019 ARP, the Georgia PSC approved tariff adjustments effective January 1, 2022 resulting in a net increase in annual retail base rates of $157 million. Georgia Power is required to file its next general base rate case by July 1, 2022. See Note 2 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" for additional information. Integrated Resource Plan On January 31, 2022, Georgia Power filed its triennial IRP (2022 IRP), including a request to decertify and retire Plant Wansley Units 1 and 2 (926 MWs based on 53.5% ownership) by August 31, 2022; Plant Bowen Units 1 and 2 (1,400 MWs) by December 31, 2027; and Plant Scherer Unit 3 (614 MWs based on 75% ownership) and Plant Gaston Units 1 through 4 (500 MWs based on 50% ownership through SEGCO) by December 31, 2028. In the 2022 IRP, Georgia Power requested approval to reclassify the remaining net book value of Plant Wansley Units 1 and 2 (approximately $611 million at December 31, 2021), Plant Bowen Units 1 and 2 (approximately $937 million at December 31, 2021), and Plant Scherer Unit 3 (approximately $612 million at December 31, 2021) and any remaining unusable materials and supplies inventories upon each unit's respective retirement dates to a regulatory asset, with recovery periods to be determined in future base rate cases. The 2022 IRP also included a request for approval of the capital, operations and maintenance, and CCR ARO costs associated with ash pond and landfill closures and post-closure care. The recovery of these costs is expected to be determined in future base rate cases. A decision from the Georgia PSC on the 2022 IRP is expected in July 2022. The ultimate outcome of these matters cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plan" for additional information. II-5     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Mississippi Power During the first half of 2021, the Mississippi PSC approved the following non-fuel rate changes related to Mississippi Power's annual rate filings for 2021: •an increase in revenues related to the ad valorem tax adjustment factor of approximately $28 million annually, which became effective with the first billing cycle of May 2021, •an increase in revenues related to PEP of approximately $16 million annually, which became effective with the first billing cycle of April 2021 in accordance with the PEP rate schedule, and •a decrease in revenues related to the ECO Plan of approximately $9 million annually, which became effective with the first billing cycle of July 2021. On September 9, 2021, the Mississippi PSC issued an order confirming the conclusion of its review of Mississippi Power's 2021 IRP with no deficiencies identified. The 2021 IRP included a schedule to retire Plant Watson Unit 4 (268 MWs) and Mississippi Power's 40% ownership interest in Plant Greene County Units 1 and 2 (103 MWs each) in December 2023, 2025, and 2026, respectively, consistent with each unit's remaining useful life in the most recent approved depreciation studies. In addition, the schedule reflects the early retirement of Mississippi Power's 50% undivided ownership interest in Plant Daniel Units 1 and 2 (502 MWs) by the end of 2027. In accordance with an accounting order issued by the Mississippi PSC on October 14, 2021, Mississippi Power reclassified $49 million of retail costs associated with Hurricanes Zeta and Ida to a regulatory asset to be recovered through PEP over a period to be determined in Mississippi Power's 2022 PEP proceeding. In addition, on December 7, 2021, the Mississippi PSC approved Mississippi Power's annual SRR filing, which requested an increase in retail revenues of approximately $9 million annually effective with the first billing cycle of March 2022 to restore the property damage reserve. On January 18, 2022, the Mississippi PSC approved Mississippi Power's retail fuel cost recovery filing, which requested an increase in revenues of approximately $43 million annually effective with the first billing cycle of February 2022. See Note 2 to the financial statements under "Mississippi Power" for additional information. Southern Power During 2021, Southern Power completed construction of and placed in service the 118-MW Glass Sands wind facility, 73 MWs of the 88-MW Garland battery energy storage facility, and 32 MWs of the 72-MW Tranquillity battery energy storage facility. Southern Power continues construction of the remainder of the Garland and Tranquillity battery energy storage facilities. On March 26, 2021, Southern Power purchased a controlling membership interest in the 300-MW Deuel Harvest wind facility located in Deuel County, South Dakota from Invenergy Renewables LLC. Southern Power calculates an investment coverage ratio for its generating assets, including those owned with various partners, based on the ratio of investment under contract to total investment using the respective facilities' net book value (or expected in-service value for facilities under construction) as the investment amount. With the inclusion of investments associated with the facilities currently under construction, as well as other capacity and energy contracts, Southern Power's average investment coverage ratio at December 31, 2021 was 95% through 2026 and 92% through 2031, with an average remaining contract duration of approximately 13 years. See Note 15 to the financial statements under "Southern Power" for additional information. Southern Company Gas On April 28, 2021, Atlanta Gas Light filed its first Integrated Capacity and Delivery Plan (i-CDP) with the Georgia PSC, which includes a series of ongoing and proposed pipeline safety, reliability, and growth programs for the next 10 years, as well as the required capital investments and related costs to implement the programs. On November 18, 2021, the Georgia PSC approved an October 14, 2021 joint stipulation agreement between Atlanta Gas Light and the staff of the Georgia PSC, under which, for the years 2022 through 2024, Atlanta Gas Light will incrementally reduce its combined GRAM and System Reinforcement Rider request by 10% through Atlanta Gas Light's GRAM mechanism, or $5 million for 2022. The stipulation agreement also provides for $1.7 billion of total capital investment for the years 2022 through 2024. Also on November 18, 2021, the Georgia PSC approved Atlanta Gas Light's amended annual GRAM filing, which resulted in an annual rate increase of $43 million effective January 1, 2022. II-6     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report On September 14, 2021, the Virginia Commission approved a stipulation agreement related to Virginia Natural Gas' June 2020 general rate case filing, which allows for a $43 million increase in annual base rate revenues, including $14 million related to the recovery of investments under the SAVE program, based on a ROE of 9.5% and an equity ratio of 51.9%. Interim rate adjustments became effective as of November 1, 2020, subject to refund, based on Virginia Natural Gas' original request for an increase of approximately $50 million. Refunds to customers related to the difference between the approved rates and the interim rates were completed during the fourth quarter 2021. On November 18, 2021, the Illinois Commission approved a $240 million annual base rate increase for Nicor Gas effective November 24, 2021. The base rate increase included $94 million related to the recovery of program costs under the Investing in Illinois program and was based on a ROE of 9.75% and an equity ratio of 54.5%. See Note 2 to the financial statements under "Southern Company Gas" for additional information. On July 1, 2021, Southern Company Gas affiliates completed the sale of Sequent to Williams Field Services Group for a total cash purchase price of $159 million, including final working capital adjustments. The pre-tax gain associated with the transaction was approximately $121 million ($92 million after tax). As a result of the sale, changes in state apportionment rates resulted in $85 million of additional tax expense. See Note 15 to the financial statements under "Southern Company Gas" for additional information. During the second and third quarters of 2021, Southern Company Gas recorded pre-tax impairment charges totaling $84 million ($67 million after tax) related to its equity method investment in the PennEast Pipeline project. On September 27, 2021, PennEast Pipeline announced that further development of the project is no longer supported, and, as a result, all further development of the project has ceased. See Note 7 to the financial statements under "Southern Company Gas" for additional information. Key Performance Indicators In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.7 million electric and gas utility customers collectively, the traditional electric operating companies and Southern Company Gas continue to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, and execution of major construction projects. In addition, Southern Company and the Subsidiary Registrants focus on earnings per share (EPS) and net income, respectively, as a key performance indicator. See RESULTS OF OPERATIONS herein for information on the Registrants' financial performance. See RESULTS OF OPERATIONS – "Southern Company Gas – Operating Metrics" for additional information on Southern Company Gas' operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold. The financial success of the traditional electric operating companies and Southern Company Gas is directly tied to customer satisfaction. Key elements of ensuring customer satisfaction include outstanding service, high reliability, and competitive prices. The traditional electric operating companies use customer satisfaction surveys to evaluate their results and generally target the top quartile of these surveys in measuring performance. Reliability indicators are also used to evaluate results. See Note 2 to the financial statements under "Alabama Power – Rate RSE" and "Mississippi Power – Performance Evaluation Plan" for additional information on Alabama Power's Rate RSE and Mississippi Power's PEP rate plan, respectively, both of which contain mechanisms that directly tie customer service indicators to the allowed equity return. Southern Power continues to focus on several key performance indicators, including, but not limited to, the equivalent forced outage rate and contract availability to evaluate operating results and help ensure its ability to meet its contractual commitments to customers. II-7     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report RESULTS OF OPERATIONS Southern Company Consolidated net income attributable to Southern Company was $2.4 billion in 2021, a decrease of $726 million, or 23.3%, from 2020. The decrease was primarily due to a $1.0 billion increase in after-tax charges related to the construction of Plant Vogtle Units 3 and 4 and higher non-fuel operations and maintenance costs, partially offset by an increase in natural gas revenues associated with colder weather in the first quarter 2021 as compared to the corresponding period in 2020 and infrastructure replacement programs and base rate changes, higher retail electric revenues primarily associated with rates and pricing and sales growth, a decrease in impairment charges and a gain on termination related to leveraged leases at Southern Holdings, and higher wholesale electric capacity revenues. See Notes 2, 9, and 15 to the financial statements under "Georgia Power – Nuclear Construction," "Southern Company Leveraged Lease," and "Southern Company," respectively, for additional information. Basic EPS was $2.26 in 2021 and $2.95 in 2020. Diluted EPS, which factors in additional shares related to stock-based compensation, was $2.24 in 2021 and $2.93 in 2020. EPS for 2021 and 2020 was negatively impacted by $0.01 and $0.03 per share, respectively, as a result of increases in the average shares outstanding. See Note 8 to the financial statements under "Outstanding Classes of Capital Stock – Southern Company" for additional information. Dividends paid per share of common stock were $2.62 in 2021 and $2.54 in 2020. In January 2022, Southern Company declared a quarterly dividend of 66 cents per share. For 2021, the dividend payout ratio was 116% compared to 86% for 2020. Discussion of Southern Company's results of operations is divided into three parts – the Southern Company system's primary business of electricity sales, its gas business, and its other business activities. [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Electricity business","$","2,247","","","$","3,115"],["Gas business","539","","","590"],["Other business activities","(393)","","","(586)"],["Net Income","$","2,393","","","$","3,119"]] [[/GREPCENT_TABLE]] II-8     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Electricity Business Southern Company's electric utilities generate and sell electricity to retail and wholesale customers. A condensed statement of income for the electricity business follows: [[GREPCENT_TABLE]] [["","2021","","Increase (Decrease) from 2020"],["","(in millions)"],["Electric operating revenues","$","18,300","","","$","1,803"],["Fuel","4,010","","","1,043"],["Purchased power","978","","","179"],["Cost of other sales","109","","","15"],["Other operations and maintenance","4,809","","","559"],["Depreciation and amortization","2,953","","","12"],["Taxes other than income taxes","1,062","","","38"],["Estimated loss on Plant Vogtle Units 3 and 4","1,692","","","1,367"],["Impairment charges","2","","","2"],["Gain on dispositions, net","(59)","","","(17)"],["Total electric operating expenses","15,556","","","3,198"],["Operating income","2,744","","","(1,395)"],["Allowance for equity funds used during construction","179","","","41"],["Interest expense, net of amounts capitalized","968","","","(8)"],["Other income (expense), net","427","","","112"],["Income taxes","219","","","(298)"],["Net income","2,163","","","(936)"],["Less:"],["Dividends on preferred stock of subsidiaries","15","","","\u2014"],["Net loss attributable to noncontrolling interests","(99)","","","(68)"],["Net Income Attributable to Southern Company","$","2,247","","","$","(868)"]] [[/GREPCENT_TABLE]] Electric Operating Revenues Electric operating revenues for 2021 were $18.3 billion, reflecting a $1.8 billion, or 10.9%, increase from 2020. Details of electric operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Retail electric \u2014 prior year","$","13,643"],["Estimated change resulting from \u2014"],["Rates and pricing","209"],["Sales growth","208"],["Weather","(74)"],["Fuel and other cost recovery","866"],["Retail electric \u2014 current year","$","14,852","","","$","13,643"],["Wholesale electric revenues","2,455","","","1,945"],["Other electric revenues","718","","","672"],["Other revenues","275","","","237"],["Electric operating revenues","$","18,300","","","$","16,497"]] [[/GREPCENT_TABLE]] II-9     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Retail electric revenues increased $1.2 billion, or 8.9%, in 2021 as compared to 2020. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2021 was primarily due to an increase effective January 1, 2021 in Alabama Power's Rate RSE, net of a related customer refund, and increases at Georgia Power resulting from higher contributions by commercial and industrial customers with variable demand-driven pricing, fixed residential customer bill programs, the effects of higher KWH sales on ECCR tariff revenues, and base tariff increases in accordance with the 2019 ARP, partially offset by a decrease in Georgia Power's NCCR tariff, both effective January 1, 2021. Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of PPA costs, and do not affect net income. The traditional electric operating companies each have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPA capacity costs. See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" for additional information. Also see "Energy Sales" herein for a discussion of changes in the volume of energy sold, including changes related to sales growth (decline) and weather. Wholesale electric revenues consist of revenues from PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Energy sales from solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or through a fixed price related to the energy. As a result, the ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Wholesale electric revenues at Mississippi Power include FERC-regulated MRA 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. Wholesale electric revenues from power sales were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Capacity and other","$","550","","","$","476"],["Energy","1,905","","","1,469"],["Total","$","2,455","","","$","1,945"]] [[/GREPCENT_TABLE]] In 2021, wholesale electric revenues increased $510 million, or 26.2%, as compared to 2020 due to increases of $436 million in energy revenues and $74 million in capacity revenues. Energy revenues increased $292 million at Southern Power primarily from a $247 million net increase in the price of energy and a $45 million increase in the volume of KWHs sold. Energy revenues increased $144 million at the traditional electric operating companies primarily due to higher energy prices. The increase in capacity revenues primarily resulted from a power sales agreement at Alabama Power that began in September 2020 and a net increase in natural gas PPAs at Southern Power. Other Electric Revenues Other electric revenues increased $46 million, or 6.8%, in 2021 as compared to 2020. The increase was primarily due to increases of $28 million in transmission revenues primarily related to new PPAs at Southern Power and increased open access transmission tariff sales at Alabama Power, $27 million in customer fees largely resulting from the COVID-19 pandemic-related temporary suspensions of disconnections and late fees in 2020 for the traditional electric operating companies, $11 million from outdoor lighting sales at Georgia Power, and $10 million in cogeneration steam revenue associated with higher natural gas prices at Alabama Power, partially offset by a $26 million decrease in pole attachment revenues at Georgia Power. II-10     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2021 and the percent change from 2020 were as follows: [[GREPCENT_TABLE]] [["","2021"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","47.4","","","(0.2)","%","","0.5","%"],["Commercial","46.7","","","2.7","","","3.2"],["Industrial","48.7","","","3.7","","","3.7"],["Other","0.6","","","(5.1)","","","(5.1)"],["Total retail","143.4","","","2.0","","","2.4","%"],["Wholesale","50.0","","","9.5"],["Total energy sales","193.4","","","3.8","%"]] [[/GREPCENT_TABLE]] (*)Weather-adjusted KWH sales are estimated using statistical models of the historical relationship between temperatures and energy sales, and then removing the estimated effect of deviations from normal temperature conditions. Normal temperature conditions are defined as those experienced in the applicable service territory over a specified historical period. This metric is useful because it allows trends in historical operations to be evaluated apart from the influence of weather conditions. Management also considers this metric in developing long-term capital and financial plans. Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Weather-adjusted retail energy sales increased 3.4 billion KWHs in 2021 as compared to 2020. Weather-adjusted residential usage increased primarily due to customer growth, largely offset by decreased customer usage resulting from shelter-in-place orders in effect during 2020. Weather-adjusted commercial and industrial usage increased primarily due to the negative impacts of the COVID-19 pandemic on energy sales being more severe in 2020. See "Electric Operating Revenues" above for a discussion of significant changes in wholesale revenues related to changes in price and KWH sales. Other Revenues Other revenues increased $38 million, or 16.0%, in 2021 as compared to 2020. The increase was primarily due to increases in unregulated sales of products and services of $29 million at Alabama Power and $9 million at Georgia Power. Fuel and Purchased Power Expenses The mix of fuel sources for the generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, the electric utilities purchase a portion of their electricity needs from the wholesale market. II-11     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Details of the Southern Company system's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["Total generation (in billions of KWHs)(a)","179","","","174"],["Total purchased power (in billions of KWHs)","18","","","18"],["Sources of generation (percent) \u2014"],["Gas","48","","","52"],["Coal","22","","","18"],["Nuclear","18","","","18"],["Hydro","4","","","4"],["Wind, Solar, and Other","8","","","8"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Gas(a)","3.07","","","2.03"],["Coal","2.85","","","2.91"],["Nuclear","0.75","","","0.78"],["Average cost of fuel, generated (in cents per net KWH)(a)","2.55","","","1.96"],["Average cost of purchased power (in cents per net KWH)(b)","5.85","","","4.65"]] [[/GREPCENT_TABLE]] (a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel as its fuel is provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" for additional information. (b)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. In 2021, total fuel and purchased power expenses were $5.0 billion, an increase of $1.2 billion, or 32.4%, as compared to 2020. The increase was primarily the result of a $1.1 billion increase in the average cost of fuel generated and purchased and a $170 million increase in the volume of KWHs generated and purchased. Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See Note 2 to the financial statements for additional information. Fuel expenses incurred under Southern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact net income. Fuel In 2021, fuel expense was $4.0 billion, an increase of $1.0 billion, or 35.2%, as compared to 2020. The increase was primarily due to a 51.2% increase in the average cost of natural gas per KWH generated, a 25.7% increase in the volume of KWHs generated by coal, and a 12.2% decrease in the volume of KWHs generated by hydro, partially offset by a 4.9% decrease in the volume of KWHs generated by natural gas. Purchased Power In 2021, purchased power expense was $978 million, an increase of $179 million, or 22.4%, as compared to 2020. The increase was primarily due to a 25.8% increase in the average cost per KWH purchased primarily due to higher natural gas 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 cost of the Southern Company system's generation, and the availability of the Southern Company system's generation. Cost of Other Sales Cost of other sales increased $15 million, or 16.0%, in 2021 as compared to 2020 primarily due to an increase in unregulated power delivery construction and maintenance projects at Georgia Power. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $559 million, or 13.2%, in 2021 as compared to 2020. A portion of the increase in 2021 compared to 2020 reflects cost containment activities implemented to help offset the effects of the recessionary economy resulting from the beginning of the COVID-19 pandemic. The increase was primarily associated with increases of $174 million in transmission and distribution expenses, including $37 million of reliability NDR credits applied in 2020 at Alabama II-12     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Power, $133 million in scheduled generation outage and maintenance expenses, and $63 million in compensation and benefit expenses, as well as a $40 million loss on sales-type leases associated with PPAs at Southern Power's Garland and Tranquillity battery energy storage facilities. Also contributing to the increase was a $19 million increase in compliance and environmental expenses at the traditional electric operating companies and an $18 million decrease in nuclear property insurance refunds at Alabama Power and Georgia Power. See Notes 2 and 9 to the financial statements under "Alabama Power – Rate NDR" and "Lessor," respectively, for additional information. Depreciation and Amortization Depreciation and amortization increased $12 million, or 0.4%, in 2021 as compared to 2020. The increase was due to an increase of $111 million in depreciation associated with additional plant in service, partially offset by a net decrease of $90 million in amortization of regulatory assets primarily associated with CCR AROs under the terms of Georgia Power's 2019 ARP. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information. Taxes Other Than Income Taxes Taxes other than income taxes increased $38 million, or 3.7%, in 2021 as compared to 2020. The increase primarily reflects a $25 million increase in municipal franchise fees at Georgia Power and a $21 million increase in property taxes primarily resulting from higher assessed values, partially offset by a $14 million decrease in utility license taxes at Alabama Power. Estimated Loss on Plant Vogtle Units 3 and 4 Estimated probable loss on Plant Vogtle Units 3 and 4 increased $1.4 billion in 2021 as compared to 2020. The losses in each year were recorded to reflect Georgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Gain on Dispositions, Net Gain on dispositions, net increased $17 million, or 40.5%, in 2021 as compared to 2020. The increase primarily reflects $41 million in gains at Southern Power primarily due to contributions of wind turbine equipment to various equity method investments in the first quarter 2021 and $14 million in gains at Alabama Power primarily from property sales, partially offset by a $39 million gain at Southern Power related to the sale of Plant Mankato in the first quarter 2020. See Notes 7 and 15 to the financial statements under "Southern Power" for additional information. Allowance for Equity Funds Used During Construction Allowance for equity funds used during construction increased $41 million, or 29.7%, in 2021 as compared to 2020. The increase was primarily associated with Georgia Power's construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Regulatory Matters" for additional information. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized decreased $8 million, or 0.8%, in 2021 as compared to 2020 primarily due to a decrease of approximately $30 million due to lower interest rates at the traditional electric operating companies and an $11 million net increase in capitalized interest, partially offset by an increase of approximately $33 million due to an increase in average outstanding long-term borrowings. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net increased $112 million, or 35.6%, in 2021 as compared to 2020 primarily related to a $135 million increase in non-service cost-related retirement benefits income, partially offset by a $12 million gain recorded by Southern Power in the third quarter 2020 associated with the Roserock solar facility litigation and an $8 million decrease in interest income. See Note 11 to the financial statements for additional information. Income Taxes Income taxes decreased $298 million, or 57.6%, in 2021 as compared to 2020. The decrease was primarily due to lower pre-tax earnings primarily resulting from higher charges in 2021 associated with the construction of Plant Vogtle Units 3 and 4 at Georgia Power and changes in state apportionment methodology resulting from tax legislation enacted by the State of Alabama in February 2021 at Southern Power, partially offset by an increase in a valuation allowance on certain state tax credit carryforwards II-13     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report at Georgia Power. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" and Note 10 to the financial statements for additional information. Net Loss Attributable to Noncontrolling Interests Substantially all noncontrolling interests relate to renewable projects at Southern Power. Net loss attributable to noncontrolling interests increased $68 million in 2021 as compared to 2020. The increased loss was primarily due to loss allocations to Southern Power's partners in the Garland and Tranquillity battery energy storage facilities, including $26 million allocated from the loss on sales-type leases. In addition, the increased loss was due to higher HLBV loss allocations to Southern Power's wind tax equity partners, including new partnerships entered into during 2020 and 2021, and lower income allocations to Southern Power's solar equity partners, totaling $29 million. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power," respectively, for additional information. Gas Business Southern Company Gas distributes natural gas through utilities in four states and is involved in several other complementary businesses including gas pipeline investments, wholesale gas services (until the sale of Sequent on July 1, 2021), and gas marketing services. A condensed statement of income for the gas business follows: [[GREPCENT_TABLE]] [["","2021","","Increase (Decrease) from 2020"],["","(in millions)"],["Operating revenues","$","4,380","","","$","946"],["Cost of natural gas","1,619","","","647"],["Other operations and maintenance","1,072","","","106"],["Depreciation and amortization","536","","","36"],["Taxes other than income taxes","225","","","19"],["Gain on dispositions, net","(127)","","","(105)"],["Total operating expenses","3,325","","","703"],["Operating income","1,055","","","243"],["Earnings from equity method investments","50","","","(91)"],["Interest expense, net of amounts capitalized","238","","","7"],["Other income (expense), net","(53)","","","(94)"],["Income taxes","275","","","102"],["Net income","$","539","","","$","(51)"]] [[/GREPCENT_TABLE]] Seasonality of Results During the period from November through March when natural gas usage and operating revenues are generally higher (Heating Season), more customers are connected to Southern Company Gas' distribution systems and natural gas usage is higher in periods of colder weather. Prior to the sale of Sequent, wholesale gas services' operating revenues were occasionally impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively equally over any given year. Thus, operating results can vary significantly from quarter to quarter as a result of seasonality. For 2021, the percentage of operating revenues and net income generated during the Heating Season (January through March and November through December) were 70% and 102%, respectively. For 2020, the percentage of operating revenues and net income generated during the Heating Season were 68% and 86%, respectively. II-14     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Operating Revenues Operating revenues in 2021 were $4.4 billion, reflecting a $946 million, or 27.5%, increase compared to 2020. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021"],["","(in millions)"],["Operating revenues \u2013 prior year","$","3,434"],["Estimated change resulting from \u2013"],["Infrastructure replacement programs and base rate changes","146"],["Gas costs and other cost recovery","675"],["Wholesale gas services","114"],["Other","11"],["Operating revenues \u2013 current year","$","4,380"]] [[/GREPCENT_TABLE]] Revenues at the natural gas distribution utilities increased in 2021 compared to 2020 due to rate increases and continued investment in infrastructure replacement. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Revenues associated with gas costs and other cost recovery increased in 2021 compared to 2020 primarily due to higher natural gas cost recovery as a result of higher volumes of natural gas sold and an increase in natural gas prices. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. See "Cost of Natural Gas" herein for additional information. Revenues from wholesale gas services increased in 2021 primarily due to higher volumes of natural gas sold and higher commercial activities as a result of Winter Storm Uri, partially offset by derivative losses, all prior to the sale of Sequent. See Note 15 to the financial statements under "Southern Company Gas" for additional information. Southern Company Gas hedged its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. The remaining impacts of weather on earnings were immaterial. Cost of Natural Gas Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities charge their utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The natural gas distribution utilities defer or accrue the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. Cost of natural gas at the natural gas distribution utilities represented 86.3% of the total cost of natural gas for 2021. Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives. Cost of natural gas was $1.6 billion, an increase of $647 million, or 66.6%, in 2021 compared to 2020, which reflects higher gas cost recovery in 2021 as a result of higher volumes sold and a 91.2% increase in natural gas prices compared to 2020. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $106 million, or 11.0%, in 2021 compared to 2020. The increase was primarily due to increases of $60 million in compensation expenses, $30 million of which was at Sequent, $10 million in facility costs, and $10 million in bad debt expense, which is passed through directly to customers and has no impact on net income. II-15     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Depreciation and Amortization Depreciation and amortization increased $36 million, or 7.2%, in 2021 compared to 2020. The increase was primarily due to continued infrastructure investments at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information. Taxes Other Than Income Taxes Taxes other than income taxes increased $19 million, or 9.2%, in 2021 compared to 2020. The increase was primarily due to a $15 million increase in revenue tax expenses as a result of higher natural gas revenues at Nicor Gas, which are passed through directly to customers and have no impact on net income. Gain on Dispositions, Net Gain on dispositions, net increased $105 million in 2021 compared to 2020. In 2021, Southern Company Gas recorded a $121 million gain on the sale of Sequent, as well as an additional $5 million gain from the sale of Pivotal LNG. In 2020, Southern Company Gas recorded a $22 million gain on the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information. Earnings from Equity Method Investments Earnings from equity method investments decreased $91 million, or 64.5%, in 2021 compared to 2020. The decrease was primarily due to impairment charges in 2021 totaling $84 million related to the PennEast Pipeline project. See Note 7 to the financial statements under "Southern Company Gas" for additional information. Other Income (Expense), Net Other income (expense), net decreased $94 million in 2021 compared to 2020. The decrease was largely due to $101 million in charitable contributions by Sequent prior to its sale. Income Taxes Income taxes increased $102 million, or 59.0%, in 2021 compared to 2020. The increase was primarily due to $114 million in additional tax expense resulting from the sale of Sequent, including changes in state tax apportionment rates, and higher pre-tax earnings at the natural gas distribution utilities, partially offset by $18 million of tax benefit resulting from the PennEast Pipeline project impairment charges in the second and third quarters of 2021. See Notes 7 and 15 to the financial statements under "Southern Company Gas" and Note 10 to the financial statements for additional information. Other Business Activities Southern Company's other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, which provides distributed energy and resilience solutions and deploys microgrids for commercial, industrial, governmental, and utility customers; Southern Holdings, which invests in various projects; and Southern Linc, which provides digital wireless communications for use by the Southern Company system and also markets these services to the public and provides fiber optics services within the Southeast. II-16     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report A condensed statement of operations for Southern Company's other business activities follows: [[GREPCENT_TABLE]] [["","2021","","Increase (Decrease) from 2020"],["","(in millions)"],["Operating revenues","$","433","","","$","(11)"],["Cost of other sales","249","","","15"],["Other operations and maintenance","207","","","11"],["Depreciation and amortization","75","","","(2)"],["Taxes other than income taxes","4","","","\u2014"],["Gain on dispositions, net","\u2014","","","1"],["Total operating expenses","535","","","25"],["Operating income (loss)","(102)","","","(36)"],["Earnings from equity method investments","26","","","14"],["Interest expense","631","","","17"],["Impairment of leveraged leases","7","","","(199)"],["Other income (expense), net","94","","","103"],["Income taxes (benefit)","(227)","","","70"],["Net loss","$","(393)","","","$","193"]] [[/GREPCENT_TABLE]] Operating Revenues Southern Company's operating revenues for these other business activities decreased $11 million, or 2.5%, in 2021 as compared to 2020 primarily due to a decrease at Southern Linc related to a contract for the design and construction of a fiber optic system completed in 2020. Cost of Other Sales Cost of other sales for these other business activities increased $15 million, or 6.4%, in 2021 as compared to 2020 primarily due to distributed infrastructure projects at PowerSecure. Other Operations and Maintenance Expenses Other operations and maintenance expenses for these other business activities increased $11 million, or 5.6%, in 2021 as compared to 2020. The increase was primarily due to a $16 million increase at the parent company primarily related to director compensation expenses and an $11 million increase at PowerSecure primarily associated with higher bad debt expense, partially offset by a $17 million decrease at Southern Linc primarily related to the design and construction of a fiber optic system completed in 2020. Earnings from Equity Method Investments Earnings from equity method investments for these other business activities increased $14 million in 2021 as compared to 2020 primarily due to an increase in investment income at Southern Holdings. Interest Expense Interest expense for these other business activities increased $17 million, or 2.8%, in 2021 as compared to 2020 primarily due to an increase of approximately $64 million related to higher average outstanding long-term borrowings, partially offset by decreases of approximately $34 million due to lower interest rates and $6 million due to a reduction in losses associated with the extinguishment of debt at the parent company. See Note 8 to the financial statements for additional information. Impairment of Leveraged Leases Impairment charges related to leveraged lease investments at Southern Holdings decreased $199 million, or 96.6%, in 2021 as compared to 2020. See Notes 9 and 15 to the financial statements under "Southern Company Leveraged Lease" and "Southern Company," respectively, for additional information. II-17     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Other Income (Expense), Net Other income (expense), net for these other business activities increased $103 million in 2021 as compared to 2020 primarily due to a $93 million pre-tax gain ($99 million gain after tax) recorded at Southern Holdings in 2021 related to the termination of leveraged leases and a $12 million decrease in charitable donations at the parent company. See Note 15 to the financial statements under "Southern Company" for additional information. Income Taxes (Benefit) The income tax benefit for these other business activities decreased $70 million, or 23.6%, in 2021 as compared to 2020 primarily due to the tax impacts related to the 2020 charges associated with leveraged lease investments and the 2021 leveraged lease dispositions at Southern Holdings, partially offset by lower pre-tax earnings at the parent company. See Notes 9, 10, and 15 to the financial statements under "Southern Company Leveraged Lease," "Effective Tax Rate," and "Southern Company," respectively, for additional information. Alabama Power Alabama Power's 2021 net income after dividends on preferred stock was $1.24 billion, representing an $88 million, or 7.7%, increase from 2020. The increase was primarily due to an increase in retail revenues associated with an adjustment effective in January 2021 to Rate RSE, net of a related customer refund, and higher customer usage. Also contributing to the increase were additional wholesale capacity revenues related to a power sales agreement that began in September 2020 and increased sales of unregulated products and services. These increases to income were partially offset by increases in operations and maintenance expenses and depreciation. See Note 2 to the financial statements under "Alabama Power – Rate RSE" for additional information. A condensed income statement for Alabama Power follows: [[GREPCENT_TABLE]] [["","2021","","Increase(Decrease)from 2020"],["","(in millions)"],["Operating revenues","$","6,413","","","$","583"],["Fuel","1,235","","","265"],["Purchased power","368","","","49"],["Other operations and maintenance","1,735","","","116"],["Depreciation and amortization","859","","","47"],["Taxes other than income taxes","410","","","(6)"],["Total operating expenses","4,607","","","471"],["Operating income","1,806","","","112"],["Allowance for equity funds used during construction","52","","","6"],["Interest expense, net of amounts capitalized","340","","","2"],["Other income (expense), net","107","","","7"],["Income taxes","372","","","35"],["Net income","1,253","","","88"],["Dividends on preferred stock","15","","","\u2014"],["Net income after dividends on preferred stock","$","1,238","","","$","88"]] [[/GREPCENT_TABLE]] II-18     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Operating Revenues Operating revenues for 2021 were $6.4 billion, reflecting a $583 million, or 10.0%, increase from 2020. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Retail \u2014 prior year","$","5,213"],["Estimated change resulting from \u2014"],["Rates and pricing","115"],["Sales growth","50"],["Weather","(15)"],["Fuel and other cost recovery","136"],["Retail \u2014 current year","$","5,499","","","$","5,213"],["Wholesale revenues \u2014"],["Non-affiliates","377","","","269"],["Affiliates","171","","","46"],["Total wholesale revenues","548","","","315"],["Other operating revenues","366","","","302"],["Total operating revenues","$","6,413","","","$","5,830"]] [[/GREPCENT_TABLE]] Retail revenues increased $286 million, or 5.5%, in 2021 as compared to 2020. The significant factors driving this change are shown in the preceding table. The increase was primarily due to a Rate RSE increase effective January 1, 2021, increases in fuel and other cost recovery, and increases in commercial and industrial sales primarily due to the negative impacts of the COVID-19 pandemic on energy demand being more severe in 2020. These increases were offset by an increase in the accrual for a Rate RSE customer refund and milder weather in 2021 when compared to 2020. See Note 2 to the financial statements under "Alabama Power – Rate RSE" for additional information. See "Energy Sales" herein for a discussion of changes in the volume of energy sold, including changes related to sales growth and weather. Electric rates include provisions to recognize the recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income. See Note 2 to the financial statements under "Alabama Power" for additional information. Wholesale revenues from sales to non-affiliated utilities were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Capacity and other","$","173","","","$","127"],["Energy","204","","","142"],["Total non-affiliated","$","377","","","$","269"]] [[/GREPCENT_TABLE]] In 2021, wholesale revenues from sales to non-affiliates increased $108 million, or 40.1%, as compared to 2020 due to a $46 million increase in capacity revenues primarily related to a power sales agreement that began in September 2020 and a $62 million increase in energy revenues primarily due to higher natural gas prices. See Notes 2 and 15 to the financial statements under "Alabama Power – Certificates of Convenience and Necessity" and "Alabama Power," respectively, for additional information. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These II-19     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy. In 2021, wholesale revenues from sales to affiliates increased $125 million, or 271.7%, as compared to 2020. The revenue increase reflects a 110.0% increase in 2021 KWH sales due to higher demand for Alabama Power's available lower cost generation and a 75.8% increase in the price of energy, primarily natural gas. Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales and purchases are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power's energy cost recovery clause. In 2021, other operating revenues increased $64 million, or 21.2%, as compared to 2020 primarily due to a $29 million increase in unregulated sales of products and services, a $13 million increase in customer fees largely resulting from the COVID-19 pandemic-related temporary suspensions of disconnections and late fees in 2020, a $10 million increase in cogeneration steam revenue associated with higher natural gas prices, and an $8 million increase in transmission revenues primarily related to open access transmission tariff sales. Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2021 and the percent change from 2020 were as follows: [[GREPCENT_TABLE]] [["","2021"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","17.5","","","(0.9)","%","","(0.7)","%"],["Commercial","12.7","","","2.3","","","2.9"],["Industrial","20.8","","","2.2","","","2.2"],["Other","0.1","","","(13.8)","","","(13.8)"],["Total retail","51.1","","","1.1","","","1.3","%"],["Wholesale"],["Non-affiliates","9.8","","","53.8"],["Affiliates","5.2","","","110.0"],["Total wholesale","15.0","","","69.6"],["Total energy sales","66.1","","","11.3","%"]] [[/GREPCENT_TABLE]] (*)Weather-adjusted KWH sales are estimated using statistical models of the historical relationship between temperatures and energy sales, and then removing the estimated effect of deviations from the normal temperature conditions. Normal temperature conditions are defined as those experienced in Alabama Power's service territory over a specified historical period. This metric is useful because it allows trends in historical operations to be evaluated apart from the influence of weather conditions. Management also considers this metric in developing long-term capital and financial plans. Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales increased in 2021 when compared to 2020. In 2021, weather-adjusted residential KWH sales decreased 0.7% primarily due to safer-at-home guidelines in effect during 2020. Weather-adjusted commercial KWH sales increased 2.9% and industrial KWH sales increased 2.2% primarily due to the negative impacts of the COVID-19 pandemic on energy sales being more severe in 2020. See "Operating Revenues" above for a discussion of significant changes in wholesale revenues from sales to non-affiliates and wholesale revenues from sales to affiliated companies related to changes in price and KWH sales. Fuel and Purchased Power Expenses The mix of fuel sources for generation of electricity is determined primarily by the unit cost of fuel consumed, demand, and the availability of generating units. Additionally, Alabama Power purchases a portion of its electricity needs from the wholesale market. II-20     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Details of Alabama Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["Total generation (in billions of KWHs)(a)","58.5","","53.8"],["Total purchased power (in billions of KWHs)","6.4","","6.9"],["Sources of generation (percent)(a) \u2014"],["Coal","46","","","40"],["Nuclear","26","","","28"],["Gas","19","","","22"],["Hydro","9","","","10"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Coal","2.77","","","2.74"],["Nuclear","0.70","","","0.75"],["Gas(a)","2.89","","","2.13"],["Average cost of fuel, generated (in cents per net KWH)(a)","2.22","","","1.98"],["Average cost of purchased power (in cents per net KWH)(b)","6.52","","","4.82"]] [[/GREPCENT_TABLE]] (a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel as its fuel is provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" for additional information. (b)Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider. Fuel and purchased power expenses were $1.6 billion in 2021, an increase of $314 million, or 24.4%, compared to 2020. The increase was primarily due to a $196 million increase in the average cost of fuel and purchased power and a $117 million net increase related to the volume of KWHs generated and purchased. Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. Alabama Power, along with the Alabama PSC, continuously monitors the under/over recovered balance to determine whether adjustments to billing rates are required. See Note 2 to the financial statements under "Alabama Power – Rate ECR" for additional information. Fuel Fuel expense was $1.2 billion in 2021, an increase of $265 million, or 27.3%, compared to 2020. The increase was primarily due to a 35.7% increase in the average cost of natural gas per KWH generated, which excludes tolling agreements, a 25.1% increase in the volume of KWHs generated by coal, and an 8.8% decrease in the volume of KWHs generated by hydro, partially offset by a 6.7% decrease in the average cost of nuclear fuel per KWH generated and a 3.6% decrease in the volume of KWHs generated by natural gas. Purchased Power – Non-Affiliates Purchased power expense from non-affiliates was $221 million in 2021, an increase of $30 million, or 15.7%, compared to 2020. The increase was primarily due to a 19.4% increase in the amount of energy purchased due to a new PPA that began in September 2020 and a 10.6% increase in the average cost of purchased power per KWH as a result of higher natural gas prices. Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. Purchased Power – Affiliates Purchased power expense from affiliates was $147 million in 2021, an increase of $19 million, or 14.8%, compared to 2020. The increase was primarily due to an 87.4% increase in the average cost of purchased power per KWH as a result of higher natural gas prices, partially offset by a 38.8% decrease in the volume of KWH purchased as Alabama Power's units generally dispatched at a lower cost than other available Southern Company system resources. II-21     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Energy purchases from affiliates will vary depending on demand for energy and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $116 million, or 7.2%, in 2021 as compared to 2020. A portion of the increase in 2021 compared to 2020 reflects cost containment activities implemented to help offset the effects of the recessionary economy resulting from the beginning of the COVID-19 pandemic. The increase was primarily due to a $59 million increase in generation expenses associated with scheduled outages and Rate CNP Compliance-related expenses primarily related to the addition of new environmental systems in 2021. Also contributing to the increase were increases of $55 million in transmission and distribution line maintenance expenses related to reliability NDR credits applied in 2020 and vegetation management expenses, $22 million in compensation and benefit expenses, and $11 million related to unregulated products and services, as well as a $10 million decrease in nuclear property insurance refunds. The increase was partially offset by a $36 million decrease in bad debt expense and a net decrease of $35 million to the NDR accrual in 2021 when compared to 2020. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and " – Rate CNP Compliance" for additional information. Depreciation and Amortization Depreciation and amortization increased $47 million, or 5.8%, in 2021 as compared to 2020 primarily due to additional plant in service, including the purchase of the Central Alabama Generating Station in August 2020. See Notes 5 and 15 to the financial statements for additional information. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $2 million, or 0.6%, in 2021 as compared to 2020 primarily due to an increase of approximately $17 million associated with higher average outstanding borrowings, largely offset by a decrease of approximately $16 million related to lower interest rates. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net increased $7 million, or 7.0%, in 2021 as compared to 2020 primarily due to an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information. Income Taxes Income taxes increased $35 million, or 10.4%, in 2021 as compared to 2020 primarily due to higher pre-tax earnings. See Note 10 to the financial statements for additional information. Georgia Power Georgia Power's 2021 net income was $584 million, representing a $991 million, or 62.9%, decrease from the previous year. The decrease was primarily due to a $1.0 billion increase in after-tax charges related to the construction of Plant Vogtle Units 3 and 4. Also contributing to the decrease were higher non-fuel operations and maintenance costs, partially offset by higher retail revenues associated with sales growth. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on the construction of Plant Vogtle Units 3 and 4. II-22     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report A condensed income statement for Georgia Power follows: [[GREPCENT_TABLE]] [["","2021","","Increase(Decrease)from 2020"],["","(in millions)"],["Operating revenues","$","9,260","","","$","951"],["Fuel","1,449","","","308"],["Purchased power","1,491","","","442"],["Other operations and maintenance","2,213","","","260"],["Depreciation and amortization","1,371","","","(54)"],["Taxes other than income taxes","476","","","32"],["Estimated loss on Plant Vogtle Units 3 and 4","1,692","","","1,367"],["Total operating expenses","8,692","","","2,355"],["Operating income","568","","","(1,404)"],["Allowance for equity funds used during construction","127","","","36"],["Interest expense, net of amounts capitalized","421","","","(4)"],["Other income (expense), net","142","","","53"],["Income taxes (benefit)","(168)","","","(320)"],["Net income","$","584","","","$","(991)"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues for 2021 were $9.3 billion, reflecting a $951 million, or 11.4%, increase from 2020. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Retail \u2014 prior year","$","7,609"],["Estimated change resulting from \u2014"],["Rates and pricing","80"],["Sales growth","152"],["Weather","(59)"],["Fuel cost recovery","696"],["Retail \u2014 current year","8,478","","","$","7,609"],["Wholesale revenues","197","","","115"],["Other operating revenues","585","","","585"],["Total operating revenues","$","9,260","","","$","8,309"]] [[/GREPCENT_TABLE]] Retail revenues increased $869 million, or 11.4%, in 2021 as compared to 2020. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing was primarily due to higher contributions from commercial and industrial customers with variable demand-driven pricing, fixed residential customer bill programs, the effects of higher KWH sales on ECCR tariff revenues, and base tariff increases in accordance with the 2019 ARP, partially offset by a decrease in the NCCR tariff, both effective January 1, 2021. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to the sales growth in 2021. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses and do not affect net income. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information. II-23     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Wholesale revenues from power sales were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Capacity and other","$","63","","","$","51"],["Energy","134","","","64"],["Total","$","197","","","$","115"]] [[/GREPCENT_TABLE]] In 2021, wholesale revenues increased $82 million, or 71.3%, as compared to 2020 largely due to increases of $52 million related to the average cost of fuel primarily due to higher natural gas prices, $12 million in capacity revenues primarily from shared Southern Company power pool sales in accordance with the IIC, and $10 million in KWH sales associated with higher market demand. Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms and provide for recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above Georgia Power's variable cost of energy. Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost. Other operating revenues were flat in 2021 compared to 2020. Increases of $33 million in unregulated sales associated with power delivery construction and maintenance projects and outdoor lighting and $13 million in customer fees, largely resulting from the COVID-19 pandemic-related temporary suspension of disconnections and late fees in 2020, were largely offset by decreases of $26 million in pole attachment revenues, $9 million associated with the timing of certain unregulated energy conservation projects, and $5 million from retail solar programs. Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2021 and the percent change from 2020 were as follows: [[GREPCENT_TABLE]] [["","2021"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","27.8","","","0.1","%","","","","1.3","%"],["Commercial","31.3","","","2.9","","","","","3.4"],["Industrial","23.3","","","5.6","","","","","5.7"],["Other","0.5","","","(2.3)","","","","","(2.4)"],["Total retail","82.9","","","2.6","","","","","3.3","%"],["Wholesale","3.2","","","18.1"],["Total energy sales","86.1","","","3.1","%"]] [[/GREPCENT_TABLE]] (*)Weather-adjusted KWH sales are estimated using statistical models of the historical relationship between temperatures and energy sales, and then removing the estimated effect of deviations from normal temperature conditions. Normal temperature conditions are defined as those experienced in Georgia Power's service territory over a specified historical period. This metric is useful because it allows trends in historical operations to be evaluated apart from the influence of weather conditions. Management also considers this metric in developing long-term capital and financial plans. Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales increased in 2021 when compared to 2020. In 2021, weather-adjusted residential KWH sales increased 1.3% compared to 2020 primarily due to customer growth, partially offset by decreased customer usage largely due to shelter-in-place orders in effect during 2020. Weather-adjusted commercial KWH sales increased 3.4% and II-24     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report weather-adjusted industrial KWH sales increased 5.7% primarily due to the negative impacts of the COVID-19 pandemic on energy sales being more severe in 2020. See "Operating Revenues" above for a discussion of significant changes in wholesale sales to non-affiliates and affiliated companies. Fuel and Purchased Power Expenses Fuel costs constitute one of the largest expenses for Georgia Power. The mix of fuel sources for the generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, Georgia Power purchases a portion of its electricity needs from the wholesale market. Details of Georgia Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["Total generation (in billions of KWHs)","58.1","","56.8"],["Total purchased power (in billions of KWHs)","31.7","","30.5"],["Sources of generation (percent) \u2014"],["Gas","48","","","52"],["Nuclear","28","","","27"],["Coal","20","","","16"],["Hydro and other","4","","","5"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Gas","3.05","","","2.19"],["Nuclear","0.79","","","0.80"],["Coal","2.99","","","3.23"],["Average cost of fuel, generated (in cents per net KWH)","2.39","","","1.96"],["Average cost of purchased power (in cents per net KWH)(*)","5.07","","","3.69"]] [[/GREPCENT_TABLE]] (*) Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider. Fuel and purchased power expenses were $2.9 billion in 2021, an increase of $750 million, or 34.2%, compared to 2020. The increase was due to an increase of $651 million related to the average cost of fuel and purchased power and an increase of $99 million related to the volume of KWHs generated and purchased. Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues through Georgia Power's fuel cost recovery mechanism. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information. Fuel Fuel expense was $1.4 billion in 2021, an increase of $308 million, or 27.0%, compared to 2020. The increase was primarily due to a 39.3% increase in the average cost of natural gas per KWH generated and a 27.8% increase in the volume of KWHs generated by coal, partially offset by a 7.4% decrease in the average cost of coal per KWH generated and a decrease of 5.2% in the volume of KWHs generated by natural gas. Purchased Power - Non-Affiliates Purchased power expense from non-affiliates was $632 million in 2021, an increase of $92 million, or 17.0%, compared to 2020. The increase was primarily due to an increase of 23.4% in the average cost per KWH purchased primarily due to higher natural gas prices, partially offset by a decrease of 3.5% in the volume of KWHs purchased as Georgia Power units and Southern Company system resources generally dispatched at a lower cost than available market resources. 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. II-25     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Purchased Power - Affiliates Purchased power expense from affiliates was $859 million in 2021, an increase of $350 million, or 68.8%, compared to 2020. The increase was primarily due to an increase of 53.4% in the average cost per KWH purchased primarily due to higher natural gas prices and an increase of 8.4% in the volume of KWHs purchased due to lower cost Southern Company system resources as compared to available Georgia Power-owned generation and market resources. Energy purchases from affiliates will vary depending on the demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by the FERC. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $260 million, or 13.3%, in 2021 as compared to 2020. A portion of the increase in 2021 compared to 2020 reflects cost containment activities implemented to help offset the effects of the recessionary economy resulting from the beginning of the COVID-19 pandemic. The increase was primarily due to increases of $104 million in transmission and distribution expenses associated with vegetation and asset management activities, $63 million in generation expenses associated with outage and non-outage maintenance costs and environmental projects, $28 million in certain compensation and benefit expenses, and $8 million in maintenance costs at corporate and field support facilities, as well as an $8 million decrease in nuclear property insurance refunds. Depreciation and Amortization Depreciation and amortization decreased $54 million, or 3.8%, in 2021 as compared to 2020 primarily due to an $88 million decrease in amortization of regulatory assets related to CCR AROs under the terms of the 2019 ARP, partially offset by a $39 million increase in depreciation associated with additional plant in service. See Note 2 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" for additional information. Taxes Other Than Income Taxes Taxes other than income taxes increased $32 million, or 7.2%, in 2021 as compared to 2020 primarily due to a $25 million increase in municipal franchise fees largely related to higher retail revenues and a $9 million increase in property taxes primarily resulting from an increase in the assessed value of property. Estimated Loss on Plant Vogtle Units 3 and 4 Estimated probable loss on Plant Vogtle Units 3 and 4 increased $1.4 billion in 2021 as compared to 2020. The losses in each year were recorded to reflect revisions to the total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Allowance for Equity Funds Used During Construction Allowance for equity funds used during construction increased $36 million, or 39.6%, in 2021 as compared to 2020 primarily due to a higher AFUDC base largely associated with the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized decreased $4 million, or 0.9%, in 2021 as compared to 2020 primarily due to an increase of $16 million in amounts capitalized largely associated with the construction of Plant Vogtle Units 3 and 4, partially offset by an $11 million increase in interest expense primarily associated with higher average outstanding borrowings. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein and Note 8 to the financial statements for additional information on borrowings and Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4. Other Income (Expense), Net Other income (expense), net increased $53 million, or 59.6%, in 2021 as compared to 2020 primarily due to a $50 million increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information on Georgia Power's net periodic pension and other postretirement benefit costs. II-26     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Income Taxes (Benefit) In 2021, income tax benefit was $168 million compared to income tax expense of $152 million for 2020, a change of $320 million. The change was primarily due to lower pre-tax earnings resulting from higher charges in 2021 associated with the construction of Plant Vogtle Units 3 and 4, partially offset by an increase in a valuation allowance on certain state tax credit carryforwards. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" and Note 10 to the financial statements for additional information. Mississippi Power Mississippi Power's net income was $159 million in 2021 compared to $152 million in 2020. The increase was primarily due to revenues resulting from an increase in base rates that became effective for the first billing cycle of April 2021 and higher customer usage, as well as an increase in other income (expense), net, partially offset by an increase in operations and maintenance expenses. A condensed income statement for Mississippi Power follows: [[GREPCENT_TABLE]] [["","2021","","Increase(Decrease)from 2020"],["","(in millions)"],["Operating revenues","$","1,322","","","$","150"],["Fuel","470","","","120"],["Purchased power","26","","","4"],["Other operations and maintenance","313","","","29"],["Depreciation and amortization","180","","","(3)"],["Taxes other than income taxes","128","","","4"],["Total operating expenses","1,117","","","154"],["Operating income","205","","","(4)"],["Interest expense, net of amounts capitalized","60","","","\u2014"],["Other income (expense), net","35","","","18"],["Income taxes","21","","","7"],["Net income","$","159","","","$","7"]] [[/GREPCENT_TABLE]] II-27     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Operating Revenues Operating revenues for 2021 were $1.3 billion, reflecting a $150 million, or 12.8%, increase from 2020. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Retail \u2014 prior year","$","821"],["Estimated change resulting from \u2014"],["Rates and pricing","14"],["Sales growth","7"],["Weather","(1)"],["Fuel and other cost recovery","34"],["Retail \u2014 current year","875","","","$","821"],["Wholesale revenues \u2014"],["Non-affiliates","230","","","215"],["Affiliates","188","","","111"],["Total wholesale revenues","418","","","326"],["Other operating revenues","29","","","25"],["Total operating revenues","$","1,322","","","$","1,172"]] [[/GREPCENT_TABLE]] Total retail revenues for 2021 increased $54 million, or 6.6%, compared to 2020 primarily due to an increase in fuel and other cost recovery revenues primarily as a result of higher recoverable fuel costs, an increase in revenues in accordance with new PEP rates that became effective for the first billing cycle of April 2021, and an increase in customer usage. See Note 2 to the financial statements under "Mississippi Power" for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to sales and weather. Electric rates for Mississippi Power include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel and emissions portion of wholesale revenues from energy sold to customers outside Mississippi Power's service territory. See Note 2 to the financial statements under "Mississippi Power – Fuel Cost Recovery" for additional information. Wholesale revenues from power sales to non-affiliated utilities, including FERC-regulated MRA sales as well as market-based sales, were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Capacity and other","$","3","","","$","3"],["Energy","227","","","212"],["Total non-affiliated","$","230","","","$","215"]] [[/GREPCENT_TABLE]] Wholesale revenues from sales to non-affiliates increased $15 million, or 7.0%, compared to 2020. The increase was primarily associated with higher natural gas prices. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 14.3% of II-28     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Mississippi Power's total operating revenues in 2021 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers. Short-term opportunity energy sales are also included in sales for resale to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Mississippi Power's variable cost to produce the energy. Wholesale revenues from sales to affiliates increased $77 million, or 69.4%, in 2021 compared to 2020. The increase was primarily due to an $86 million increase associated with higher natural gas prices, partially offset by a $10 million decrease associated with lower KWH sales. Wholesale revenues from sales to affiliates will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost. Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2021 and the percent change from 2020 were as follows: [[GREPCENT_TABLE]] [["","2021"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in millions)"],["Residential","2,047","","","1.2","%","","0.2","%"],["Commercial","2,559","","","1.8","","","2.7"],["Industrial","4,615","","","1.3","","","1.3"],["Other","34","","","(3.3)","%","","(3.3)"],["Total retail","9,255","","","1.4","%","","1.4","%"],["Wholesale"],["Non-affiliated","3,611","","","(4.6)"],["Affiliated","4,742","","","(9.3)"],["Total wholesale","8,353","","","(7.3)"],["Total energy sales","17,608","","","(2.9)","%"]] [[/GREPCENT_TABLE]] (*)Weather-adjusted KWH sales are estimated using statistical models of the historical relationship between temperatures and energy sales, and then removing the estimated effect of deviations from normal temperature conditions. Normal temperature conditions are defined as those experienced in Mississippi Power's service territory over a specified historical period. This metric is useful because it allows trends in historical operations to be evaluated apart from the influence of weather conditions. Management also considers this metric in developing long-term capital and financial plans. Changes in retail energy sales are generally the result of changes in electricity usage by customers, weather, and the number of customers. Revenues attributable to changes in sales increased in 2021 when compared to 2020. Weather-adjusted residential KWH sales increased 0.2% compared to 2020 due to increased customer growth, partially offset by decreased customer usage. Weather-adjusted commercial KWH sales increased 2.7% and industrial KWH sales increased 1.3% primarily due to the negative impacts of the COVID-19 pandemic on energy sales being more severe in 2020. See "Operating Revenues" above for a discussion of significant changes in wholesale revenues to affiliated companies. Fuel and Purchased Power Expenses The mix of fuel sources for generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Additionally, Mississippi Power purchases a portion of its electricity needs from the wholesale market. II-29     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Details of Mississippi Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["Total generation (in millions of KWHs)","17,377","","","17,833"],["Total purchased power (in millions of KWHs)","675","","","688"],["Sources of generation (percent) \u2013"],["Gas","92","","","94"],["Coal","8","","","6"],["Cost of fuel, generated (in cents per net KWH) \u2013"],["Gas","2.85","","","1.97"],["Coal","3.24","","","3.62"],["Average cost of fuel, generated (in cents per net KWH)","2.88","","","2.08"],["Average cost of purchased power (in cents per net KWH)","3.90","","","3.27"]] [[/GREPCENT_TABLE]] Fuel and purchased power expenses were $496 million in 2021, an increase of $124 million, or 33.3%, as compared to 2020. The increase was primarily due to an increase in the average cost of natural gas. Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clauses. See Note 2 to the financial statements under "Mississippi Power – Fuel Cost Recovery" and Note 1 to the financial statements under "Fuel Costs" for additional information. Fuel expense increased $120 million, or 34.3%, in 2021 compared to 2020 primarily due to a 44.7% increase in the average cost of natural gas per KWH generated, partially offset by a 4.8% decrease in the volume of KWHs generated by natural gas. Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. These purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $29 million, or 10.2%, in 2021 compared to 2020. A portion of the increase in 2021 compared to 2020 reflects cost containment activities implemented to help offset the effects of the recessionary economy resulting from the beginning of the COVID-19 pandemic. The increase was primarily due to increases of $7 million associated with the Kemper County energy facility (primarily related to increases in dismantlement activities and less salvage proceeds in 2021), $7 million in generation expenses associated with outage and non-outage maintenance, $6 million in distribution operations and maintenance, and $6 million in compensation and benefit expenses. Other Income (Expense), Net Other income (expense), net increased $18 million, or 105.9%, in 2021 compared to 2020. The increase was primarily due to a $9 million decrease in charitable donations and increases of $6 million in non-service cost-related retirement benefits income and $3 million in interest associated with a sales-type lease. See Notes 9 and 11 to the financial statements for additional information. Income Taxes Income taxes increased $7 million, or 50.0%, in 2021 compared to 2020 due to higher pre-tax earnings and an increase associated with lower flowback of excess deferred income taxes associated with new PEP rates that became effective for the first billing cycle of April 2021. See Note 2 to the financial statements under "Mississippi Power – Performance Evaluation Plan" and Note 10 to the financial statements for additional information. II-30     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Southern Power Net income attributable to Southern Power for 2021 was $266 million, a $28 million increase from 2020. The increase was primarily due to a net increase in revenues associated with new PPAs and a tax benefit due to changes in state apportionment methodology resulting from tax legislation enacted by the State of Alabama in February 2021, partially offset by an increase in other operations and maintenance expenses primarily associated with scheduled outages and maintenance and a gain recorded in 2020 associated with the Roserock solar facility litigation. See Note 10 to the financial statements for additional information. A condensed statement of income follows: [[GREPCENT_TABLE]] [["","2021","","Increase(Decrease)from 2020"],["","(in millions)"],["Operating revenues","$","2,216","","","$","483"],["Fuel","802","","","332"],["Purchased power","139","","","65"],["Other operations and maintenance","423","","","70"],["Depreciation and amortization","517","","","23"],["Taxes other than income taxes","45","","","6"],["Loss on sales-type leases","40","","","40"],["Gain on dispositions, net","(41)","","","(2)"],["Total operating expenses","1,925","","","534"],["Operating income","291","","","(51)"],["Interest expense, net of amounts capitalized","147","","","(4)"],["Other income (expense), net","10","","","(9)"],["Income taxes (benefit)","(13)","","","(16)"],["Net income","167","","","(40)"],["Net loss attributable to noncontrolling interests","(99)","","","(68)"],["Net income attributable to Southern Power","$","266","","","$","28"]] [[/GREPCENT_TABLE]] Operating Revenues Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities, and PPA energy revenues from Southern Power's generation facilities. To the extent Southern Power has capacity not contracted under a PPA, it may sell power into an accessible wholesale market, or, to the extent those generation assets are part of the FERC-approved IIC, it may sell power into the Southern Company power pool. Natural Gas Capacity and Energy Revenue Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment. Energy is generally sold at variable cost or is indexed to published natural gas indices. Energy revenues will vary depending on the energy demand of Southern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost of Southern Power's energy. Energy revenues also include fees for support services, fuel storage, and unit start charges. Increases and decreases in energy revenues under PPAs that are driven by fuel or purchased power prices are accompanied by an increase or decrease in fuel and purchased power costs and do not have a significant impact on net income. Solar and Wind Energy Revenue Southern Power's energy sales from solar and wind generating facilities are predominantly through long-term PPAs that do not have capacity revenue. Customers either purchase the energy output of a dedicated renewable facility through an energy charge or pay a fixed price related to the energy generated from the respective facility and sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. II-31     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report 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: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["PPA capacity revenues","$","408","","","$","384"],["PPA energy revenues","1,311","","","1,019"],["Total PPA revenues","1,719","","","1,403"],["Non-PPA revenues","467","","","316"],["Other revenues","30","","","14"],["Total operating revenues","$","2,216","","","$","1,733"]] [[/GREPCENT_TABLE]] Operating revenues for 2021 were $2.2 billion, a $483 million, or 28% increase from 2020. The increase in operating revenues was primarily due to the following: •PPA capacity revenues increased $24 million, or 6%, primarily due to a net increase in sales associated with new natural gas PPAs and increased capacity sales under existing natural gas PPAs. •PPA energy revenues increased $292 million, or 29%, primarily due to an increase in sales under existing natural gas PPAs resulting from a $206 million increase in the price of fuel and purchased power and a $79 million net increase in sales associated with new natural gas PPAs. Also contributing to the increase was $15 million related to new wind PPAs which began during 2020 and 2021, partially offset by an $11 million decrease in sales under existing wind PPAs. •Non-PPA revenues increased $151 million, or 48%, due to a $197 million increase in the market price of energy, partially offset by a $46 million decrease in the volume of KWHs sold through short-term sales. •Other revenues increased $16 million, or 114%, primarily due to transmission revenues related to new PPAs. Fuel and Purchased Power Expenses Details of Southern Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","Total KWHs","Total KWH % Change","Total KWHs"],["","2021","","2020"],["","(in billions of KWHs)"],["Generation","44","","44"],["Purchased power","3","","3"],["Total generation and purchased power","47","\u2014%","47"],["Total generation and purchased power (excluding solar, wind, fuel cells, and tolling agreements)","28","\u2014%","28"]] [[/GREPCENT_TABLE]] Southern Power's PPAs for natural gas generation generally provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel relating to the energy delivered under such PPAs. Consequently, changes in such fuel costs are generally accompanied by a corresponding change in related fuel revenues and do not have a significant impact on net income. Southern Power is responsible for the cost of fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the wholesale market or into the Southern Company power pool for capacity owned directly by Southern Power. Purchased power expenses will vary depending on demand, availability, and the cost of generating resources throughout the Southern Company system and other contract resources. Load requirements are submitted to the Southern Company power pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is generation owned by Southern Power, an affiliate company, or external parties. Such purchased power costs are generally recovered through PPA revenues. II-32     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Details of Southern Power's fuel and purchased power expenses were as follows: [[GREPCENT_TABLE]] [["","2021","","2020"],["","(in millions)"],["Fuel","$","802","","","$","470"],["Purchased power","139","","","74"],["Total fuel and purchased power expenses","$","941","","","$","544"]] [[/GREPCENT_TABLE]] In 2021, total fuel and purchased power expenses increased $397 million, or 73%, compared to 2020. Fuel expense increased $332 million, or 71%, primarily due to an increase in the average cost of fuel. Purchased power expense increased $65 million, or 88%, due to an increase associated with the average cost of purchased power. Other Operations and Maintenance Expenses In 2021, other operations and maintenance expenses increased $70 million, or 20%, compared to 2020. The increase was primarily due to increases of $21 million in scheduled outage and maintenance expenses, $15 million in transmission expenses primarily related to new PPAs, $10 million in compensation and benefit expenses, $8 million in expenses associated with new wind facilities placed in service during 2020 and 2021, and $5 million related to the allocation of uncollected settlements by the Energy Reliability Council of Texas market as a result of Winter Storm Uri. Depreciation and Amortization In 2021, depreciation and amortization increased $23 million, or 5%, compared to 2020 primarily due to new wind facilities placed in service during 2020 and 2021. Loss on Sales-Type Leases In 2021, a $40 million loss on sales-type leases was recorded upon commencement of the Garland and Tranquillity battery energy storage facilities' PPAs, $26 million of which was allocated through noncontrolling interests to Southern Power's partners in the projects. The loss was due to ITCs retained and expected to be realized by Southern Power and its partners. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power," respectively, for additional information. Gain on Dispositions, Net In 2021, gain on dispositions, net increased $2 million, or 5%, compared to 2020. Gains on dispositions totaled $41 million in 2021 primarily due to contributions of wind turbine equipment to various equity method investments in the first quarter 2021. A $39 million gain was also recorded in the first quarter 2020 related to the sale of Plant Mankato. See Notes 7 and 15 to the financial statements under "Southern Power" and "Southern Power – Sales of Natural Gas and Biomass Plants," respectively, for additional information. Other Income (Expense), Net In 2021, other income (expense), net decreased $9 million, or 47%, compared to 2020 primarily due to a $12 million gain recorded in the third quarter 2020 associated with the Roserock solar facility litigation. Income Taxes (Benefit) In 2021, income tax benefit was $13 million compared to income tax expense of $3 million for 2020, a change of $16 million. The change was primarily due to changes in state apportionment methodology resulting from tax legislation enacted by the State of Alabama in February 2021 and the tax impact from the sale of Plant Mankato in January 2020. See Notes 1, 10, and 15 to the financial statements under "Income Taxes," "Effective Tax Rate," and "Southern Power," respectively, for additional information. Net Loss Attributable to Noncontrolling Interests In 2021, net loss attributable to noncontrolling interests increased $68 million compared to 2020. The increased loss was primarily due to loss allocations to the partners in the Garland and Tranquillity battery energy storage facilities, including $26 million allocated from the loss on sales-type leases. In addition, the increased loss was due to higher HLBV loss allocations to wind tax equity partners, including new partnerships entered into during 2020 and 2021, and lower income allocations to solar equity partners, totaling $29 million. See Notes 9 and 15 to the financial statements under "Lessor" and "Southern Power," respectively, for additional information. II-33     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Southern Company Gas Operating Metrics Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold. Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas on Southern Company Gas' distribution system. Southern Company Gas has various regulatory mechanisms, such as weather and revenue normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utility's respective service territory. Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather. The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations and gas marketing services' customers are primarily located in Georgia and Illinois. Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas. 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. Prior to the sale of Sequent on July 1, 2021, wholesale gas services' operating revenues occasionally were impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Thus, Southern Company Gas' operating results can vary significantly from quarter to quarter as a result of seasonality, which is illustrated in the table below. [[GREPCENT_TABLE]] [["","","Percent Generated During Heating Season"],["","","Operating Revenues","","","","Net Income"],["2021","","70","%","","","","102","%"],["2020","","68","%","","","","86","%"]] [[/GREPCENT_TABLE]] Net Income Net income attributable to Southern Company Gas in 2021 was $539 million, a decrease of $51 million, or 8.6%, compared to 2020. The decrease was primarily due to $85 million of deferred income taxes and an $80 million decrease at gas pipeline investments primarily due to impairment charges related to the PennEast Pipeline project, partially offset by a $93 million increase at wholesale gas services primarily due to the gain on the sale of Sequent and a $22 million increase at gas distribution operations primarily due to base rate increases and continued investment in infrastructure replacement. See Note 7 to the financial statements under "Southern Company Gas" for additional information on the PennEast Pipeline project and Note 15 to the financial statements under "Southern Company Gas" for additional information on the sale of Sequent. II-34     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report A condensed income statement for Southern Company Gas follows: [[GREPCENT_TABLE]] [["","2021","","Increase (Decrease) from 2020"],["","(in millions)"],["Operating revenues","$","4,380","","","$","946"],["Cost of natural gas","1,619","","","647"],["Other operations and maintenance","1,072","","","106"],["Depreciation and amortization","536","","","36"],["Taxes other than income taxes","225","","","19"],["Gain on dispositions, net","(127)","","","(105)"],["Total operating expenses","3,325","","","703"],["Operating income","1,055","","","243"],["Earnings from equity method investments","50","","","(91)"],["Interest expense, net of amounts capitalized","238","","","7"],["Other income (expense), net","(53)","","","(94)"],["Income taxes","275","","","102"],["Net Income","$","539","","","$","(51)"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues in 2021 were $4.4 billion, reflecting a $946 million, or 27.5%, increase compared to 2020. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2021"],["","(in millions)"],["Operating revenues \u2013 prior year","$","3,434"],["Estimated change resulting from \u2013"],["Infrastructure replacement programs and base rate changes","146"],["Gas costs and other cost recovery","675"],["Wholesale gas services","114"],["Other","11"],["Operating revenues \u2013 current year","$","4,380"]] [[/GREPCENT_TABLE]] Revenues at the natural gas distribution utilities increased in 2021 due to rate increases and continued investment in infrastructure replacement. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Revenues associated with gas costs and other cost recovery increased in 2021 primarily due to higher natural gas cost recovery as a result of higher volumes of natural gas sold and an increase in natural gas prices. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. See "Cost of Natural Gas" herein for additional information. Revenues from wholesale gas services increased in 2021 primarily due to higher volumes of natural gas sold and higher commercial activities as a result of Winter Storm Uri, partially offset by derivative losses, all prior to the sale of Sequent. See "Segment Information – Wholesale Gas Services" herein and Note 15 to the financial statements under "Southern Company Gas" for additional information. Heating Degree Days Southern Company Gas' natural gas distribution utilities have various regulatory mechanisms that limit their exposure to weather changes. Southern Company Gas also uses hedges for any remaining exposure to warmer-than-normal weather in Illinois for gas II-35     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report distribution operations and in Illinois and Georgia for gas marketing services; therefore, weather typically does not have a significant net income impact. The following table presents Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","","2021 vs. normal","","2021 vs. 2020"],["","","Normal(*)","","2021","","2020","","","","(warmer)","","(warmer)"],["","","(in thousands)"],["Illinois","","5,747","","","5,326","","","5,477","","","","","(7.3)","%","","(2.8)","%"],["Georgia","","2,371","","","2,113","","","2,122","","","","","(10.9)","%","","(0.4)","%"]] [[/GREPCENT_TABLE]] (*)Normal represents the 10-year average from January 1, 2011 through December 31, 2020 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. Customer Count The following table provides the number of customers served by Southern Company Gas at December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","","2021","","2020"],["","","(in thousands, except market share %)"],["Gas distribution operations","","4,337","","","4,308"],["Gas marketing services"],["Energy customers(*)","","603","","","666"],["Market share of energy customers in Georgia","","28.7","%","","28.9","%"]] [[/GREPCENT_TABLE]] (*)Gas marketing services' customers are primarily located in Georgia and Illinois. December 31, 2020 also includes approximately 50,000 customers in Ohio contracted through an annual auction process to serve for 12 months beginning April 1, 2020. Southern Company Gas anticipates customer growth and uses a variety of targeted marketing programs to attract new customers and to retain existing customers. Cost of Natural Gas Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, gas distribution operations charges its utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. Gas distribution operations defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 86.3% of the total cost of natural gas for 2021. Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives. In 2021, cost of natural gas was $1.6 billion, an increase of $647 million, or 66.6%, compared to 2020, which reflects higher gas cost recovery in 2021 as a result of higher volumes sold and a 91.2% increase in natural gas prices compared to 2020. II-36     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Volumes of Natural Gas Sold The following table details the volumes of natural gas sold during all periods presented. [[GREPCENT_TABLE]] [["","","","2021 vs. 2020"],["","2021","","2020","","% Change"],["Gas distribution operations (mmBtu in millions)"],["Firm","656","","","623","","","5.3","%"],["Interruptible","98","","","92","","","6.5"],["Total","754","","","715","","","5.5","%"],["Wholesale gas services (mmBtu in millions/day)"],["Daily physical sales(*)","6.6","","","6.9","","","(4.3)","%"],["Gas marketing services (mmBtu in millions)"],["Firm:"],["Georgia","34","","","33","","","3.0","%"],["Illinois","7","","","9","","","(22.2)"],["Other","11","","","13","","","(15.4)"],["Interruptible large commercial and industrial","14","","","14","","","\u2014"],["Total","66","","","69","","","(4.3)","%"]] [[/GREPCENT_TABLE]] (*) Daily physical sales for 2021 reflect amounts through the sale of Sequent on July 1, 2021. Other Operations and Maintenance Expenses In 2021, other operations and maintenance expenses increased $106 million, or 11.0%, compared to 2020. The increase was primarily due to increases of $60 million in compensation expenses, $30 million of which was at Sequent, $10 million in facility costs, and $10 million in bad debt expense, which is passed through directly to customers and has no impact on net income. Depreciation and Amortization In 2021, depreciation and amortization increased $36 million, or 7.2%, compared to 2020. The increase was primarily due to continued infrastructure investments at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information. Taxes Other Than Income Taxes In 2021, taxes other than income taxes increased $19 million, or 9.2%, compared to 2020. The increase was primarily due to a $15 million increase in revenue tax expenses as a result of higher natural gas revenues at Nicor Gas, which are passed through directly to customers and have no impact on net income. Gain on Dispositions, Net In 2021, gain on dispositions, net increased $105 million compared to 2020. In 2021, Southern Company Gas recorded a $121 million gain on the sale of Sequent, as well as an additional $5 million gain from the sale of Pivotal LNG. In 2020, Southern Company Gas recorded a $22 million gain on the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information. Earnings from Equity Method Investments In 2021, earnings from equity method investments decreased $91 million, or 64.5%, compared to 2020. The decrease was primarily due to impairment charges in 2021 totaling $84 million related to the PennEast Pipeline project. See Note 7 to the financial statements under "Southern Company Gas" for additional information. Other Income (Expense), Net In 2021, other income (expense), net decreased $94 million compared to 2020. The decrease was largely due to $101 million in charitable contributions by Sequent prior to its sale. II-37     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Income Taxes In 2021, income taxes increased $102 million, or 59.0%, compared to 2020. The increase was primarily due to $114 million in additional tax expense resulting from the sale of Sequent, including changes in state tax apportionment rates, and higher pre-tax earnings at gas distribution operations, partially offset by $18 million of tax benefit resulting from the PennEast Pipeline project impairment charges in the second and third quarters of 2021 at gas pipeline investments. See Notes 7 and 15 to the financial statements under "Southern Company Gas" and Note 10 to the financial statements for additional information. Segment Information [[GREPCENT_TABLE]] [["","","2021","","2020"],["","","Operating Revenues","","Operating Expenses","","Net Income (Loss)","","Operating Revenues","","Operating Expenses","","Net Income (Loss)"],["","","(in millions)","","(in millions)"],["Gas distribution operations","","$","3,679","","","$","2,971","","","$","412","","","$","2,952","","","$","2,297","","","$","390"],["Gas pipeline investments","","32","","","11","","","19","","","32","","","12","","","99"],["Wholesale gas services","","188","","","(53)","","","107","","","74","","","54","","","14"],["Gas marketing services","","475","","","350","","","88","","","408","","","289","","","89"],["All other","","38","","","78","","","(87)","","","36","","","43","","","(2)"],["Intercompany eliminations","","(32)","","","(32)","","","\u2014","","","(68)","","","(73)","","","\u2014"],["Consolidated","","$","4,380","","","$","3,325","","","$","539","","","$","3,434","","","$","2,622","","","$","590"]] [[/GREPCENT_TABLE]] Gas Distribution Operations Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by regulatory agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas with the opportunity to generate revenues to recover the cost of natural gas delivered to its customers and its fixed and variable costs, including depreciation, interest expense, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments. With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various regulatory and other mechanisms, such as weather and revenue normalization mechanisms and weather derivative instruments, that limit its exposure to changes in customer consumption, including weather changes within typical ranges in its natural gas distribution utilities' service territories. In 2021, net income increased $22 million, or 5.6%, compared to 2020. Operating revenues increased $727 million primarily due to higher gas cost recovery, rate increases, and continued investment in infrastructure replacement. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas. Operating expenses increased $674 million primarily due to a $540 million increase in cost of gas as a result of higher natural gas prices and higher volumes sold, largely as a result of colder weather in the first quarter 2021 compared to 2020, higher depreciation resulting from additional assets placed in service, higher taxes other than income taxes due to higher pass through taxes, and higher compensation expenses. Other income and expense decreased $10 million primarily due to a decrease in non-service cost-related retirement benefits income. Interest expense, net of amounts capitalized increased $15 million primarily due to additional debt issued to finance continued investments. Income taxes increased $6 million primarily due to higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" and " – Infrastructure Replacement Programs and Capital Projects" for additional information. Also see Note 11 to the financial statements for additional information on retirement benefits. II-38     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Gas Pipeline Investments Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG, PennEast Pipeline, Dalton Pipeline, and Atlantic Coast Pipeline (until its sale on March 24, 2020). In 2021, net income decreased $80 million, or 80.8%, compared to 2020. The decrease was primarily due to impairment charges totaling $84 million ($67 million after tax) related to the PennEast Pipeline project. See Note 7 to the financial statements under "Southern Company Gas" for information regarding the September 2021 cancellation of the PennEast Pipeline project. Wholesale Gas Services Prior to the sale of Sequent, wholesale gas services was 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 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 increased, wholesale gas services was positioned to capture significant value and generate stronger results. Operating expenses primarily reflected employee compensation and benefits. See Note 15 to the financial statements under "Southern Company Gas" for information regarding the sale of Sequent. In 2021, net income increased $93 million compared to 2020. The increase was primarily due to a $114 million increase in operating revenues due to higher commercial activity driven by natural gas price volatility that was generated by cold weather, partially offset by unfavorable storage and transportation derivatives due to widening transportation spreads, as well as a $121 million gain on the sale of Sequent, partially offset by a $14 million increase in other operating expenses primarily related to an increase in variable compensation, a $101 million decrease in other income and (expense) related to higher charitable contributions, and a $29 million increase in income tax expense due to higher pre-tax earnings. Gas Marketing Services Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts. In 2021, net income decreased $1 million, or 1.1%, compared to 2020. The decrease was primarily due to an increase in operating expenses primarily related to a $73 million increase in the cost of gas in 2021 resulting from higher natural gas prices, largely offset by a $67 million increase in operating revenues due to higher natural gas prices and increased retail price spreads. All Other All other includes natural gas storage businesses, including Jefferson Island through its sale on December 1, 2020, fuels operations through the sale of Southern Company Gas' interest in Pivotal LNG on March 24, 2020, 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. In 2021, net loss increased $85 million compared to 2020. The increase was primarily due to additional tax expense due to changes in state apportionment rates as a result of the sale of Sequent. See Note 10 to the financial statements and Note 15 to the financial statements under "Southern Company Gas" for additional information. FUTURE EARNINGS POTENTIAL General Prices for electric service provided by the traditional electric operating companies and natural gas distributed by the natural gas distribution utilities to retail customers are set by state PSCs or other applicable state regulatory agencies under cost-based regulatory principles. Retail rates and earnings are reviewed through various regulatory mechanisms and/or processes and may be adjusted periodically within certain limitations. Effectively operating pursuant to these regulatory mechanisms and/or processes and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge the traditional electric operating companies and natural gas distribution utilities for the foreseeable future. Prices for wholesale electricity sales, interconnecting transmission lines, and the exchange of electric power are regulated by the FERC. Southern Power continues to focus on long-term PPAs. See ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates – Utility Regulation" herein and Note 2 to the financial statements for additional information about regulatory matters. II-39     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Each Registrant's results of operations are not necessarily indicative of its future earnings potential. The disposition activities described in Note 15 to the financial statements have reduced earnings for the applicable Registrants. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein. For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, including those related to projected long-term demand growth, stringent environmental standards, including CCR rules, safety, system reliability and resiliency, fuel, restoration following major storms, and capital expenditures, including constructing new electric generating plants and expanding and improving the transmission and distribution systems; continued customer growth; and the trend of reduced electricity usage per customer, especially in residential and commercial markets. For Georgia Power, completing construction of Plant Vogtle Units 3 and 4 and the related cost recovery proceedings is another major factor. Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce transactions, which could contribute to a net reduction in customer usage. Global and U.S. economic conditions have been significantly affected by a series of demand and supply shocks that caused a global and national economic recession in 2020. Most prominently, the COVID-19 pandemic has negatively impacted global supply chains and business operations as suppliers continue to experience difficulties keeping up with strong demand for factory goods, which is being driven by low business inventories. In addition, rising inflation in 2021 and 2022 has resulted in increasing costs for many goods and services. The combination of rising inoculation rates in the U.S. population and the federal COVID-19 relief package contributed to increased economic recovery in 2021; however, fiscal support of business and personal incomes is declining. The drivers, speed, and depth of the 2020 economic contraction were unprecedented and have reduced energy demand across the Southern Company system's service territory, primarily in the commercial and industrial classes. Retail electric revenues attributable to changes in sales increased in 2021 when compared to 2020 primarily due to the normalization of economic activity; however, retail electric sales continued to be negatively impacted by the COVID-19 pandemic when compared to pre-pandemic trends. Recovery is expected to continue in 2022, but the impacts of new COVID-19 variants, as well as responses to the COVID-19 pandemic by both customers and governments, could significantly affect the pace of recovery. The ultimate extent of the negative impact on revenues depends on the depth and duration of the economic contraction in the Southern Company system's service territory and cannot be determined at this time. See RESULTS OF OPERATIONS herein for information on COVID-19-related impacts on energy demand in the Southern Company system's service territory during 2021. The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including the parameters of the wholesale market and the efficient operation of its wholesale generating assets; Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs; regulatory matters; customer creditworthiness; total electric generating capacity available in Southern Power's market areas; Southern Power's ability to successfully remarket capacity as current contracts expire; renewable portfolio standards; availability of federal and state ITCs and PTCs, which could be impacted by future tax legislation; transmission constraints; cost of generation from units within the Southern Company power pool; and operational limitations. See "Income Tax Matters" herein, Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Power" for additional information. The level of future earnings for Southern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments and gas marketing services sectors depends on numerous factors. These factors include the natural gas distribution utilities' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, including those related to projected long-term demand growth, safety, system reliability and resilience, natural gas, and capital expenditures, including expanding and improving the natural gas distribution systems; the completion and subsequent operation of ongoing infrastructure and other construction projects; customer creditworthiness; certain city-wide bans on the use of natural gas in new construction; and Southern Company Gas' ability to re-contract storage rates at favorable prices. The volatility of natural gas prices has an impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services business to capture value from locational and seasonal spreads. Additionally, changes in commodity prices, primarily driven by tight gas supplies and diminished gas production, subject a portion of Southern Company Gas' operations to earnings variability. Additional economic factors may contribute to this environment. If current economic conditions continue to improve, the demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis. Alternatively, a significant drop in oil and natural gas prices could lead to a consolidation of natural gas producers or reduced levels of natural gas production. II-40     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, government incentives to reduce overall energy usage, the prices of electricity and natural gas, and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings. Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 14.3% of Mississippi Power's total operating revenues in 2021 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers. As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of, or the sale of interests in, certain assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, Southern Power and Southern Company Gas regularly consider and evaluate joint development arrangements as well as acquisitions and dispositions of businesses and assets as part of their business strategies. See Note 15 to the financial statements for additional information. 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, avian and other wildlife and habitat protection, and other natural resources. The Southern Company system maintains comprehensive environmental compliance and GHG strategies to assess both current and upcoming requirements and compliance costs associated with these environmental laws and regulations. New or revised environmental laws and regulations could further affect many areas of operations for the Subsidiary Registrants. The costs required to comply with environmental laws and regulations and to achieve stated goals, including capital expenditures, operations and maintenance costs, and costs reflected in ARO liabilities, may impact future electric generating unit retirement and replacement decisions (which are subject to approval from the traditional electric operating companies' respective state PSCs), results of operations, cash flows, and/or financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, or changing fuel sources for certain existing units, as well as related upgrades to the Southern Company system's transmission and distribution (electric and natural gas) systems. A major portion of these costs is expected to be recovered through retail and wholesale rates, including existing ratemaking and billing provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed herein cannot be determined at this time and will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed technology, fuel prices, the outcome of pending and/or future legal challenges, and the ability to continue recovering the related costs, through rates for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power. Alabama Power and Mississippi Power recover environmental compliance costs through separate mechanisms, Rate CNP Compliance and the ECO Plan, respectively. Georgia Power's base rates include an ECCR tariff that allows for the recovery of environmental compliance costs. The natural gas distribution utilities of Southern Company Gas generally recover environmental remediation expenditures through rate mechanisms approved by their applicable state regulatory agencies. See Notes 2 and 3 to the financial statements for additional information. Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations. Since Southern Power's units are generally newer natural gas and renewable generating facilities, costs associated with environmental compliance for these facilities have been less significant than for similarly situated coal or older natural gas generating facilities. Environmental, natural resource, and land use concerns, including the applicability of air quality limitations, the potential presence of wetlands or threatened and endangered species, the availability of water withdrawal rights, uncertainties regarding impacts such as increased light or noise, and concerns about potential adverse health impacts can, however, increase the cost of siting and operating any type of future facility. The impact of such laws, regulations, and other considerations on Southern Power and subsequent recovery through PPA provisions cannot be determined at this time. II-41     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report 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 may have the potential to affect their demand for electricity and natural gas. Although the timing, requirements, and estimated costs could change as environmental laws and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are initiated or completed, estimated capital expenditures through 2026 based on the current environmental compliance strategy for the Southern Company system and the traditional electric operating companies are as follows: [[GREPCENT_TABLE]] [["","2022","2023","2024","2025","2026","Total"],["","(in millions)"],["Southern Company","$","98","","$","111","","$","146","","$","72","","$","58","","$","485"],["Alabama Power","49","","35","","50","","33","","28","","195"],["Georgia Power","37","","75","","91","","34","","25","","262"],["Mississippi Power","12","","1","","5","","5","","5","","28"]] [[/GREPCENT_TABLE]] These estimates do not include any costs associated with potential regulation of GHG emissions. See "Global Climate Issues" herein for additional information. The Southern Company system also anticipates substantial expenditures associated with ash pond closure and groundwater monitoring under the CCR Rule and related state rules, which are reflected in the applicable Registrants' ARO liabilities. See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" herein and Note 6 to the financial statements for additional information. Environmental Laws and Regulations Air Quality The Southern Company system reduced SO2 and NOX air emissions by 99% and 93%, respectively, from 1990 to 2020. The Southern Company system reduced mercury air emissions by 98% from 2005 to 2020. The EPA finalized regional haze regulations in 2005 and 2017. These regulations require states and various federal agencies to develop and implement plans to reduce pollutants that impair visibility and demonstrate reasonable progress toward the goal of restoring natural visibility conditions in certain areas, including national parks and wilderness areas. States were required to submit state implementation plans for the second 10-year planning period (2018 through 2028) by July 31, 2021; however, plans have not yet been submitted by the applicable states in the Southern Company system's service territory. These plans could require further reductions in particulate matter, SO2, and/or NOX, which could result in increased compliance costs at affected electric generating units. Water Quality In 2014, the EPA finalized requirements under Section 316(b) of the Clean Water Act (CWA) to regulate cooling water intake structures (CWIS) to minimize their effects on fish and other aquatic life at existing power plants. The regulation requires plant-specific studies to determine applicable CWIS changes to protect organisms. The results of these plant-specific studies, which are ongoing within the Southern Company system, are being submitted with each plant's next National Pollutant Discharge Elimination System (NPDES) permit cycle. The Southern Company system anticipates applicable CWIS changes may include fish-friendly CWIS screens with fish return systems and minor additions of monitoring equipment at certain plants. The impact of this rule will depend on the outcome of these plant-specific studies, any additional protective measures required to be incorporated into each plant's NPDES permit based on site-specific factors, and the outcome of any legal challenges. In October 2020, the EPA published the final steam electric ELG reconsideration rule (ELG Reconsideration Rule), a reconsideration of the 2015 ELG rule's limits on bottom ash transport water and flue gas desulfurization wastewater that extends the latest applicability date for both discharges to December 31, 2025. The ELG Reconsideration Rule also updates the voluntary incentive program and provides new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. As required by the ELG Reconsideration Rule, on October 13, 2021, Alabama Power and Georgia Power each submitted initial notices of planned participation (NOPP) for applicable units seeking to qualify for these subcategories. Alabama Power submitted its NOPP to the Alabama Department of Environmental Management (ADEM) indicating plans to retire Plant Barry Unit 5 (700 MWs) and to cease using coal and begin operating solely on natural gas at Plant Barry Unit 4 (350 II-42     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report MWs) and Plant Gaston Unit 5 (880 MWs). Alabama Power, as agent for SEGCO, indicated plans to retire Plant Gaston Units 1 through 4 (1,000 MWs). These plans are expected to be completed on or before the compliance date of December 31, 2028. The NOPP submittals are subject to the review of the ADEM. Retirement of Plant Barry Unit 5 could occur as early as 2023, subject to completion of the acquisition of the Calhoun Generating Station and certain operating conditions. See Notes 2 and 7 to the financial statements under "Alabama Power – Certificates of Convenience and Necessity" and "SEGCO," respectively, for additional information. The assets for which Alabama Power has indicated retirement, due to early closure or repowering of the unit to natural gas, have net book values totaling approximately $1.5 billion (excluding capitalized asset retirement costs which are recovered through Rate CNP Compliance) at December 31, 2021. Based on an Alabama PSC order, Alabama Power is authorized to establish a regulatory asset to record the unrecovered investment costs, including the plant asset balance and the site removal and closure costs, associated with unit retirements caused by environmental regulations (Environmental Accounting Order). Under the Environmental Accounting Order, the regulatory asset would be amortized and recovered over an affected unit's remaining useful life, as established prior to the decision regarding early retirement, through Rate CNP Compliance. See Note 2 to the financial statements under "Alabama Power – Rate CNP Compliance" and " – Environmental Accounting Order" for additional information. Georgia Power submitted its NOPP to the Georgia Environmental Protection Division (EPD) indicating plans to retire Plant Wansley Units 1 and 2 (926 MWs based on 53.5% ownership), Plant Bowen Units 1 and 2 (1,400 MWs), and Plant Scherer Unit 3 (614 MWs based on 75% ownership) on or before the compliance date of December 31, 2028. Georgia Power intends to pursue compliance with the ELG Reconsideration Rule for Plant Scherer Units 1 and 2 (137 MWs based on 8.4% ownership) through the voluntary incentive program by no later than December 31, 2028. Georgia Power intends to comply with the ELG Rules for Plant Bowen Units 3 and 4 through the generally applicable requirements by December 31, 2025; therefore, no NOPP submission was required for these units. The NOPP submittals and generally applicable requirements are subject to the review of the Georgia EPD. The units for which Georgia Power has indicated early retirement plans have net book values totaling approximately $2.2 billion (excluding capitalized asset retirement costs which are recovered through the ECCR tariff) at December 31, 2021. A final decision regarding the future operation of Georgia Power's impacted units and the timing of any retirements are subject to review by the Georgia PSC as a part of Georgia Power's 2022 IRP proceeding. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plan" for additional information. The ultimate outcome of these matters cannot be determined at this time. The ELG Reconsideration Rule is expected to require capital expenditures and increased operational costs for the traditional electric operating companies and SEGCO. However, the ultimate impact of the ELG Reconsideration Rule will depend on the Southern Company system's final assessment of compliance options, the incorporation of these assessments into each of the traditional electric operating company's IRP process, the incorporation of these new requirements into each plant's NPDES permit, and the outcome of legal challenges. The ELG Reconsideration Rule has been challenged by several environmental organizations and the cases have been consolidated in the U.S. Court of Appeals for the Fourth Circuit. The case is being held in abeyance while the EPA undertakes a new rulemaking to revise the ELG Reconsideration Rule. A proposed rule is expected in the fall of 2022. Any revisions could require changes in the traditional electric operating companies' compliance strategies. Coal Combustion Residuals In 2015, the EPA finalized non-hazardous solid waste regulations for the management and disposal of CCR, including coal ash and gypsum, in landfills and surface impoundments (ash ponds) at active electric generating power plants. The CCR Rule requires landfills and ash ponds to be evaluated against a set of performance criteria and potentially closed if certain criteria are not met. Closure of existing landfills and ash ponds requires installation of equipment and infrastructure to manage CCR in accordance with the CCR Rule. In addition to the federal CCR Rule, the States of Alabama and Georgia finalized state regulations regarding the management and disposal of CCR within their respective states. In 2019, the State of Georgia received partial approval from the EPA for its state CCR permitting program. The State of Mississippi has not developed a state CCR permit program. The Holistic Approach to Closure: Part A rule, finalized in August 2020, revised the deadline to stop sending CCR and non-CCR wastes to unlined surface impoundments to April 11, 2021 and established a process for the EPA to approve extensions to the deadline. The traditional electric operating companies stopped sending CCR and non-CCR wastes to their unlined impoundments prior to April 11, 2021 and, therefore, did not submit requests for extensions. On January 11, 2022, the EPA proposed determinations on deadline extension requests for other non-affiliated facilities, which reflected its positions on a variety of CCR Rule compliance requirements including closure standards, groundwater monitoring, and corrective action. The traditional electric operating companies are in the process of reviewing these determinations to determine how the EPA's current positions may II-43     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report impact their closure plans and groundwater monitoring efforts. The ultimate impact of the EPA's announced positions on the traditional electric operating companies cannot be determined at this time, but may be material. Based on requirements for closure and monitoring of landfills and ash ponds pursuant to the CCR Rule and applicable state rules, the traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to closure methodologies, schedules, and/or costs becomes available. Some of these updates have been, and future updates may be, material. Additionally, the closure designs and plans in the States of Alabama and Georgia are subject to approval by environmental regulatory agencies. Absent continued recovery of ARO costs through regulated rates, results of operations, cash flows, and financial condition for Southern Company and the traditional electric operating companies could be materially impacted. See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements," Note 2 to the financial statements under "Georgia Power – Rate Plans," and Note 6 to the financial statements for additional information. Environmental Remediation The Southern Company system must comply with environmental laws and regulations governing the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the Southern Company system could incur substantial costs to clean up affected sites. The traditional electric operating companies and Southern Company Gas conduct studies to determine the extent of any required cleanup and have recognized the estimated costs to clean up known impacted sites in their financial statements. Amounts for cleanup and ongoing monitoring costs were not material for any year presented. The traditional electric operating companies and the natural gas distribution utilities in Illinois and Georgia (which represent substantially all of Southern Company Gas' accrued remediation costs) have all received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental remediation costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies. The traditional electric operating companies and Southern Company Gas may be liable for some or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements under "Environmental Remediation" for additional information. Global Climate Issues In 2019, the EPA published the final Affordable Clean Energy rule (ACE Rule), which would have required states to develop unit-specific CO2 emission rate standards for existing coal-fired units based on heat-rate efficiency improvements. On January 19, 2021, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the ACE Rule back to the EPA. On October 29, 2021, the U.S. Supreme Court granted four petitions for writs of certiorari asking the court to review the District of Columbia Circuit's decision. The U.S. Supreme Court's review will focus on the extent of the EPA's authority to regulate GHG emissions from the power sector under Section 111(d) of the Clean Air Act. On February 19, 2021, the United States officially rejoined the Paris Agreement. The Paris Agreement establishes a non-binding universal framework for addressing GHG emissions based on nationally determined emissions reduction contributions and sets in place a process for tracking progress towards the goals every five years. On April 22, 2021 President Biden announced a new target for the United States to achieve a 50% to 52% reduction in economy-wide GHG emissions from 2005 levels by 2030. The target was accepted by the United Nations as the United States' nationally determined emissions reduction contribution under the Paris Agreement. Additional GHG policies, including legislation, may emerge in the future requiring the United States to transition to a lower GHG emitting economy; however, associated impacts are currently unknown. The Southern Company system has transitioned from an electric generating mix of 70% coal and 15% natural gas in 2007 to a mix of 22% coal and 48% natural gas in 2021. This transition has been supported in part by the Southern Company system retiring over 5,600 MWs of coal-fired generating capacity since 2010 and converting over 3,400 MWs of generating capacity from coal to natural gas since 2015, as well as constructing and/or acquiring over 11,000 MWs of renewable resource capacity since 2010. See "Environmental Laws and Regulations – Water Quality" herein for information on plans to retire or convert to natural gas additional coal-fired generating capacity. In addition, Southern Company Gas has replaced over 6,000 miles of pipe material that was more prone to fugitive emissions (unprotected steel and cast-iron pipe), resulting in mitigation of more than 3.3 million metric tons of CO2 equivalents from its natural gas distribution system since 1998. II-44     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The following table provides the Registrants' 2020 and preliminary 2021 GHG emissions based on equity share of facilities: [[GREPCENT_TABLE]] [["","2020","Preliminary 2021"],["","(in million metric tons of CO2 equivalent)"],["Southern Company(*)","75","82"],["Alabama Power(*)","28","34"],["Georgia Power","21","23"],["Mississippi Power","8","8"],["Southern Power","12","11"],["Southern Company Gas(*)","1","1"]] [[/GREPCENT_TABLE]] (*)Includes GHG emissions attributable to disposed assets through the date of the applicable disposition and to acquired assets beginning with the date of the applicable acquisition. See Note 15 to the financial statements for additional information. Southern Company system management has established an intermediate goal of a 50% reduction in GHG emissions from 2007 levels by 2030 and a long-term goal of net zero GHG emissions by 2050. Based on the preliminary 2021 emissions, the Southern Company system has achieved an estimated GHG emission reduction of 47% since 2007. In 2020, the COVID-19 pandemic resulted in reduced electricity usage by customers, which led to a higher than expected decline in GHG emissions. In 2021, increased customer demand combined with increased utilization of the coal generating fleet due to higher natural gas prices resulted in an increase in GHG emissions from 2020 levels. Southern Company system management expects to achieve sustained GHG emissions reductions of at least 50% as early as 2025. Southern Company system management, working with applicable regulators, plans to transition its generating fleet in a manner responsible to customers, communities, employees, and other stakeholders. Achievement of these goals is dependent on many factors, including natural gas prices and the pace and extent of development and deployment of low- to no-GHG energy technologies and negative carbon concepts. Southern Company system management plans to continue to pursue a diverse portfolio including low-carbon and carbon-free resources and energy efficiency resources; continue to transition the Southern Company system's generating fleet and make the necessary related investments in transmission and distribution systems; continue its research and development with a particular focus on technologies that lower GHG emissions, including methods of removing carbon from the atmosphere; and constructively engage with policymakers, regulators, investors, customers, and other stakeholders to support outcomes leading to a net zero future. Regulatory Matters See OVERVIEW – "Recent Developments" herein and Note 2 to the financial statements for a discussion of regulatory matters related to Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas, including items that could impact the applicable registrants' future earnings, cash flows, and/or financial condition. Construction Programs The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Also see Note 2 to the financial statements under "Alabama Power – Certificates of Convenience and Necessity" for information regarding Alabama Power's construction of Plant Barry Unit 8. See Note 15 to the financial statements under "Southern Power" for information about costs relating to Southern Power's construction of renewable energy facilities. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information on Southern Company Gas' construction program. II-45     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements" herein for additional information regarding the Registrants' capital requirements for their construction programs, including estimated totals for each of the next five years. Southern Power's Power Sales Agreements General Southern Power has PPAs with some of the traditional electric operating companies, other investor-owned utilities, IPPs, municipalities, and other load-serving entities, as well as commercial and industrial customers. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms. Many of Southern Power's PPAs have provisions that require Southern Power or the counterparty to post collateral or an acceptable substitute guarantee if (i) S&P or Moody's downgrades the credit ratings of the respective company to an unacceptable credit rating, (ii) the counterparty is not rated, or (iii) the counterparty fails to maintain a minimum coverage ratio. Southern Power is working to maintain and expand its share of the wholesale markets. During 2021, Southern Power continued to be successful in remarketing up to 2,025 MWs of annual natural gas generation capacity to load-serving entities through several PPAs extending over the next 16 years. Market demand is being driven by load-serving entities replacing expired purchase contracts and/or retired generation, as well as planning for future growth. Natural Gas Southern Power's electricity sales from natural gas facilities are primarily through long-term PPAs that consist of two types of agreements. The first type, referred to as a unit or block sale, is a customer purchase from a dedicated generating unit where all or a portion of the generation from that unit is reserved for that customer. Southern Power typically has the ability to serve the unit or block sale customer from an alternate resource. The second type, referred to as requirements service, provides that Southern Power serve the customer's capacity and energy requirements from a combination of the customer's own generating units and from Southern Power resources not dedicated to serve unit or block sales. Southern Power has rights to purchase power provided by the requirements customers' resources when economically viable. As a general matter, substantially all of the PPAs provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel or purchased power relating to the energy delivered under such PPAs. To the extent a particular generating facility does not meet the operational requirements contemplated in the PPAs, Southern Power may be responsible for excess fuel costs. With respect to fuel transportation risk, most of Southern Power's PPAs provide that the counterparties are responsible for the availability of fuel transportation to the particular generating facility. Capacity charges that form part of the PPA payments are designed to recover fixed and variable operation and maintenance costs based on dollars-per-kilowatt year. In general, to reduce Southern Power's exposure to certain operation and maintenance costs, Southern Power has LTSAs. See Note 1 to the financial statements under "Long-Term Service Agreements" for additional information. Solar and Wind Southern Power's electricity sales from solar and wind generating facilities are also primarily through long-term PPAs; however, these solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or provide Southern Power a certain fixed price for the electricity sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors. Generally, under the renewable generation PPAs, the purchasing party retains the right to keep or resell the renewable energy credits. Income Tax Matters Consolidated Income Taxes The impact of certain tax events at Southern Company and/or its other subsidiaries can, and does, affect each Registrant's ability to utilize certain tax credits. See "Tax Credits" and ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates – Accounting for Income Taxes" herein and Note 10 to the financial statements for additional information. II-46     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Tax Credits The Tax Reform Legislation, as modified by the 2021 Consolidated Appropriations Act signed into law in December 2020, retained solar energy incentives as described in the following table: [[GREPCENT_TABLE]] [["ITC Percentage","Date Project Commenced Construction"],["30%","Prior to December 31, 2019"],["26%","From 2020 through 2022"],["22%","During 2023"]] [[/GREPCENT_TABLE]] A permanent 10% ITC will remain for projects that commence construction on or after January 1, 2024 and any projects placed in service after December 31, 2025, regardless of when construction began. In addition, various tax legislation has retained or extended wind energy incentives as described in the following table: [[GREPCENT_TABLE]] [["PTC Percentage","Year Project Commenced Construction"],["100%","2016"],["80%","2017"],["60%","2018"],["40%","2019"],["60%","2020 or 2021"],["0%","2022 and after"]] [[/GREPCENT_TABLE]] Southern Company has received ITCs and PTCs in connection with investments in solar, wind, fuel cell facilities, and battery energy storage facilities (co-located with existing solar facilities) primarily at Southern Power and Georgia Power. Southern Power's ITCs relate to its investment in new solar facilities and battery energy storage facilities (co-located with existing solar facilities) that are acquired or constructed and its PTCs relate to the first 10 years of energy production from its wind facilities, which have had, and may continue to have, a material impact on Southern Power's cash flows and net income. At December 31, 2021, Southern Company and Southern Power had approximately $1.2 billion and $0.8 billion, respectively, of unutilized federal ITCs and PTCs, which are currently expected to be fully utilized by 2024, but could be further delayed. Since 2018, Southern Power has been utilizing tax equity partnerships for wind, solar, and battery energy storage projects, where the tax partner takes significantly all of the respective federal tax benefits. These tax equity partnerships are consolidated in Southern Company's and Southern Power's financial statements using the HLBV methodology to allocate partnership gains and losses. See Note 1 to the financial statements under "General" for additional information on the HLBV methodology and Note 1 to the financial statements under "Income Taxes" and Note 10 to the financial statements under "Deferred Tax Assets and Liabilities – Tax Credit Carryforwards" and "Effective Tax Rate" for additional information regarding utilization and amortization of credits and the tax benefit related to associated basis differences. General Litigation and Other Matters The Registrants are involved in various matters being litigated and/or regulatory and other matters that could affect future earnings, cash flows, and/or financial condition. The ultimate outcome of such pending or potential litigation against each Registrant and any subsidiaries or regulatory and other matters cannot be determined at this time; however, for current proceedings and/or matters not specifically reported herein or in Notes 2 and 3 to the financial statements, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings and/or matters would have a material effect on such Registrant's financial statements. See Notes 2 and 3 to the financial statements for a discussion of various contingencies, including matters being litigated, regulatory matters, and other matters which may affect future earnings potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates The Registrants prepare their financial statements in accordance with GAAP. Significant accounting policies are described in the notes to the financial statements. In the application of these policies, certain estimates are made that may have a material impact on the results of operations and related disclosures of the applicable Registrants (as indicated in the section descriptions herein). Different assumptions and measurements could produce estimates that are significantly different from those recorded in the II-47     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report financial statements. Senior management has reviewed and discussed the following critical accounting policies and estimates with the Audit Committee of Southern Company's Board of Directors. Utility Regulation (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas) The traditional electric operating companies and the natural gas distribution utilities are subject to retail regulation by their respective state PSCs or other applicable state regulatory agencies and wholesale regulation by the FERC. These regulatory agencies set the rates the traditional electric operating companies and the natural gas distribution utilities are permitted to charge customers based on allowable costs, including a reasonable ROE. As a result, the traditional electric operating companies and the natural gas distribution utilities apply accounting standards which require the financial statements to reflect the effects of rate regulation. Through the ratemaking process, the regulators may require the inclusion of costs or revenues in periods different than when they would be recognized by a non-regulated company. This treatment may result in the deferral of expenses and the recording of related regulatory assets based on anticipated future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities. The application of the accounting standards for rate regulated entities also impacts their financial statements as a result of the estimates of allowable costs used in the ratemaking process. These estimates may differ from those actually incurred by the traditional electric operating companies and the natural gas distribution utilities; therefore, the accounting estimates inherent in specific costs such as depreciation, AROs, and pension and other postretirement benefits have less of a direct impact on the results of operations and financial condition of the applicable Registrants than they would on a non-regulated company. Revenues related to regulated utility operations as a percentage of total operating revenues in 2021 for the applicable Registrants were as follows: 88% for Southern Company, 98% for Alabama Power, 96% for Georgia Power, 99.7% for Mississippi Power, and 84% for Southern Company Gas. As reflected in Note 2 to the financial statements, significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability of these regulatory assets and any requirement to refund these regulatory liabilities based on applicable regulatory guidelines and GAAP. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact the financial statements of the applicable Registrants. Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4 (Southern Company and Georgia Power) In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which resolved certain prudency matters in connection with Georgia Power's fifteenth VCM report. In 2017, the Georgia PSC approved Georgia Power's seventeenth VCM report, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor, as well as a modification of the Vogtle Cost Settlement Agreement. The Georgia PSC's related order stated that under the modified Vogtle Cost Settlement Agreement, (i) none of the $3.3 billion of costs incurred through December 31, 2015 should be disallowed as imprudent; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the $0.3 billion paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs; (iv) Georgia Power would have the burden of proof to show that any capital costs above $5.68 billion were prudent; (v) Georgia Power's total project capital cost forecast of $7.3 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds) was found reasonable and did not represent a cost cap; and (vi) a prudence proceeding on cost recovery will occur subsequent to achieving fuel load for Unit 4. In its order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction. As of December 31, 2021, Georgia Power revised its total project capital cost forecast to $10.4 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds). This forecast includes construction contingency of $150 million and is based on projected in-service dates at the end of the first quarter 2023 and the fourth quarter 2023 for Units 3 and 4, respectively. Since 2018, established construction contingency and additional costs totaling $2.2 billion have been assigned to the base capital cost forecast. Although Georgia Power believes these incremental costs are reasonable and necessary to complete the project and the Georgia PSC's order in the seventeenth VCM proceeding specifically states that the construction of Plant Vogtle Units 3 and 4 is not subject to a cost cap, Georgia Power will not seek rate recovery for the $0.7 billion increase to the base capital cost forecast included in the nineteenth VCM report and charged to income by Georgia Power in the second quarter 2018 and has not sought rate recovery for the construction contingency costs. After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these II-48     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in these future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $1.1 billion ($0.8 billion after tax) in the second quarter 2018; $149 million ($111 million after tax) and $176 million ($131 million after tax) in the second quarter and the fourth quarter 2020, respectively; and $48 million ($36 million after tax), $460 million ($343 million after tax), $264 million ($197 million after tax), and $480 million ($358 million after tax) in the first quarter 2021, the second quarter 2021, the third quarter 2021, and the fourth quarter 2021, respectively. Georgia Power and the other Vogtle Owners do not agree on either the starting dollar amount for the determination of cost increases subject to the cost-sharing and tender provisions of the Global Amendments (as defined in Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Joint Owner Contracts") or the extent to which COVID-19-related costs impact the calculation. Based on the definition in the Global Amendments, Georgia Power believes the starting dollar amount is $18.38 billion and the current project capital cost forecast has triggered the cost-sharing provisions. The other Vogtle Owners have asserted that the project cost increases have reached the cost-sharing thresholds and have triggered the tender provisions under the Global Amendments. Georgia Power recorded an additional pre-tax charge to income in the fourth quarter 2021 of approximately $440 million ($328 million after tax) associated with these cost-sharing and tender provisions, which is included in the total project capital cost forecast. Georgia Power may be required to record further pre-tax charges to income of up to approximately $460 million associated with these provisions based on the current project capital cost forecast. The incremental charges associated with these provisions will not be recovered from retail customers. On October 29, 2021, Georgia Power and the other Vogtle Owners entered into an agreement to clarify the process for the tender provisions of the Global Amendments to provide for a decision between 120 and 180 days after the tender option is triggered, which the other Vogtle Owners assert occurred on February 14, 2022. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Joint Owner Contracts" for additional information on the Global Amendments. As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of engineering support, commodity installation, system turnovers and related test results, and workforce statistics. Georgia Power estimates the productivity impacts of the COVID-19 pandemic have consumed approximately three to four months of schedule margin previously embedded in the site work plan for Unit 3 and Unit 4. As Unit 3 completes system turnover from construction and moves to testing and transition to operations, ongoing and potential future challenges include completion of construction remediation work, completion of work packages, including inspection records, and other documentation necessary to submit the remaining ITAACs and begin fuel load, and final component and pre-operational tests. As Unit 4 progresses through construction and continues to transition into testing, ongoing and potential future challenges include the pace and quality of electrical installation, availability of craft and supervisory resources, including the temporary diversion of such resources to support Unit 3 construction efforts, and the pace of work package closures and system turnovers. As construction, including subcontract work, continues on both Units 3 and 4, ongoing or future challenges include management of contractors and vendors; subcontractor performance; supervision of craft labor and related productivity, particularly in the installation of electrical, mechanical, and instrumentation and controls commodities, ability to attract and retain craft labor, and/or related cost escalation; and procurement and related installation. New challenges may arise, particularly as Units 3 and 4 move into initial testing and start-up, which may result in required engineering changes or remediation related to plant systems, structures, or components (some of which are based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale). The ongoing and potential future challenges described above may change the projected schedule and estimated cost. In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4. There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to ensure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. Findings resulting from such inspections could require additional remediation and/or further NRC oversight. In addition, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, have arisen or may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs, are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs. The ultimate outcome of these matters cannot be determined at this time. However, any extension of the in-service date beyond the first quarter 2023 for Unit 3 or the fourth quarter 2023 for Unit 4, including the current level of cost sharing described in Note II-49     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report 2, is estimated to result in additional base capital costs for Georgia Power of up to $60 million per month for Unit 3 and $40 million per month for Unit 4, as well as the related AFUDC and any additional related construction, support resources, or testing costs. While Georgia Power is not precluded from seeking retail recovery of any future capital cost forecast increase other than the amounts related to the cost-sharing and tender provisions of the joint ownership agreements described above, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material. Given the significant complexity involved in estimating the future costs to complete construction and start-up of Plant Vogtle Units 3 and 4 and the significant management judgment necessary to assess the related uncertainties surrounding future rate recovery of any projected cost increases, as well as the potential impact on results of operations and cash flows, Southern Company and Georgia Power consider these items to be critical accounting estimates. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Accounting for Income Taxes (Southern Company, Mississippi Power, Southern Power, and Southern Company Gas) The consolidated income tax provision and deferred income tax assets and liabilities, as well as any unrecognized tax benefits and valuation allowances, require significant judgment and estimates. These estimates are supported by historical tax return data, reasonable projections of taxable income, the ability and intent to implement tax planning strategies if necessary, and interpretations of applicable tax laws and regulations across multiple taxing jurisdictions. The effective tax rate reflects the statutory tax rates and calculated apportionments for the various states in which the Southern Company system operates. Southern Company files a consolidated federal income tax return and the Registrants file various state income tax returns, some of which are combined or unitary. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and each subsidiary is allocated an amount of tax similar to that which would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability. Certain deductions and credits can be limited or utilized at the consolidated or combined level resulting in tax credit and/or state NOL carryforwards that would not otherwise result on a stand-alone basis. Utilization of these carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of Southern Company's and its subsidiaries' current financial position and results of operations, including currently available information about future years, to estimate when future taxable income will be realized. Current and deferred state income tax liabilities and assets are estimated based on laws of multiple states that determine the income to be apportioned to their jurisdictions. States have various filing methodologies and utilize specific formulas to calculate the apportionment of taxable income. The calculation of deferred state taxes considers apportionment factors and filing methodologies that are expected to apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on the financial statements of the applicable Registrants. Given the significant judgment involved in estimating tax credit and/or state NOL carryforwards and multi-state apportionments for all subsidiaries, the applicable Registrants consider deferred income tax liabilities and assets to be critical accounting estimates. Asset Retirement Obligations (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas) AROs are computed as the present value of the estimated costs for an asset's future retirement and are recorded in the period in which the liability is incurred. The estimated costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities. The ARO liabilities for the traditional electric operating companies primarily relate to facilities that are subject to the CCR Rule and the related state rules, principally ash ponds. In addition, Alabama Power and Georgia Power have retirement obligations related to the decommissioning of nuclear facilities (Alabama Power's Plant Farley and Georgia Power's ownership interests in Plant Hatch and Plant Vogtle Units 1 and 2). Other significant AROs include various landfill sites and asbestos removal for Alabama Power, Georgia Power, and Mississippi Power and gypsum cells and mine reclamation for Mississippi Power. The traditional electric operating companies and Southern Company Gas also have identified other retirement obligations, such as obligations related to certain electric transmission and distribution facilities, certain asbestos-containing material within long-term assets not subject to ongoing repair and maintenance activities, certain wireless communication towers, the disposal of polychlorinated biphenyls in certain transformers, leasehold improvements, equipment on customer property, and property II-50     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report associated with the Southern Company system's rail lines and natural gas pipelines. However, liabilities for the removal of these assets have not been recorded because the settlement timing for certain retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these retirement obligations will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO. The cost estimates for AROs related to the disposal of CCR are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule and the related state rules. The traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to these assumptions becomes available. Some of these updates have been, and future updates may be, material. See Note 6 to the financial statements for additional information, including increases to AROs related to ash ponds recorded during 2021 by certain Registrants. Given the significant judgment involved in estimating AROs, the applicable Registrants consider the liabilities for AROs to be critical accounting estimates. Pension and Other Postretirement Benefits (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas) The applicable Registrants' calculations of pension and other postretirement benefits expense are dependent on a number of assumptions. These assumptions include discount rates, healthcare cost trend rates, expected long-term rate of return (LRR) on plan assets, mortality rates, expected salary and wage increases, and other factors. Components of pension and other postretirement benefits expense include interest and service cost on the pension and other postretirement benefit plans, expected return on plan assets, and amortization of certain unrecognized costs and obligations. Actual results that differ from the assumptions utilized are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the applicable Registrants believe the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect their pension and other postretirement benefit costs and obligations. Key elements in determining the applicable Registrants' pension and other postretirement benefit expense are the LRR and the discount rate used to measure the benefit plan obligations and the periodic benefit plan expense for future periods. For purposes of determining the applicable Registrants' liabilities related to the pension and other postretirement benefit plans, Southern Company discounts the future related cash flows using a single-point discount rate for each plan developed from the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to expected benefit payments. The discount rate assumption impacts both the service cost and non-service costs components of net periodic benefit costs as well as the projected benefit obligations. The LRR on pension and other postretirement benefit plan assets is based on Southern Company's investment strategy, as described in Note 11 to the financial statements, historical experience, and expectations that consider external actuarial advice, and represents the average rate of earnings expected over the long term on the assets invested to provide for anticipated future benefit payments. Southern Company determines the amount of the expected return on plan assets component of non-service costs by applying the LRR of various asset classes to Southern Company's target asset allocation. The LRR only impacts the non-service costs component of net periodic benefit costs for the following year and is set annually at the beginning of the year. II-51     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The following table illustrates the sensitivity to changes in the applicable Registrants' long-term assumptions with respect to the discount rate, salary increases, and the long-term rate of return on plan assets: [[GREPCENT_TABLE]] [["","Increase/(Decrease) in"],["25 Basis Point Change in:","Total Benefit Expense for 2022","","Projected Obligation for Pension Plan at December 31, 2021","","Projected Obligation forOther PostretirementBenefit Plans at December 31, 2021"],["","(in millions)"],["Discount rate:"],["Southern Company","$44/$(43)","","$610/$(575)","","$53/$(51)"],["Alabama Power","$12/$(12)","","$149/$(140)","","$14/$(13)"],["Georgia Power","$12/$(12)","","$180/$(170)","","$18/$(17)"],["Mississippi Power","$2/$(2)","","$27/$(26)","","$2/$(2)"],["Southern Company Gas","$\u2013/$\u2013","","$40/$(38)","","$6/$(6)"],["Salaries:"],["Southern Company","$26/$(24)","","$131/$(127)","","$\u2013/$\u2013"],["Alabama Power","$8/$(7)","","$37/$(36)","","$\u2013/$\u2013"],["Georgia Power","$7/$(7)","","$37/$(36)","","$\u2013/$\u2013"],["Mississippi Power","$1/$(1)","","$6/$(6)","","$\u2013/$\u2013"],["Southern Company Gas","$\u2013/$\u2013","","$2/$(2)","","$\u2013/$\u2013"],["Long-term return on plan assets:"],["Southern Company","$41/$(41)","","N/A","","N/A"],["Alabama Power","$10/$(10)","","N/A","","N/A"],["Georgia Power","$13/$(13)","","N/A","","N/A"],["Mississippi Power","$2/$(2)","","N/A","","N/A"],["Southern Company Gas","$3/$(3)","","N/A","","N/A"]] [[/GREPCENT_TABLE]] See Note 11 to the financial statements for additional information regarding pension and other postretirement benefits. Asset Impairment (Southern Company, Southern Power, and Southern Company Gas) Goodwill (Southern Company and Southern Company Gas) The acquisition method of accounting requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. The applicable Registrants have recognized goodwill as of the date of their acquisitions, as a residual over the fair values of the identifiable net assets acquired. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter of the year as well as on an interim basis as events and changes in circumstances occur, including, but not limited to, a significant change in operating performance, the business climate, legal or regulatory factors, or a planned sale or disposition of a significant portion of the business. A reporting unit is the operating segment, or a business one level below the operating segment (a component), if discrete financial information is prepared and regularly reviewed by management. Components are aggregated if they have similar economic characteristics. As part of the impairment tests, the applicable Registrant may perform an initial qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount before applying the quantitative goodwill impairment test. If the applicable Registrant elects to perform the qualitative assessment, it evaluates relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market conditions, cost factors, financial performance, entity specific events, and events specific to each reporting unit. If the applicable Registrant determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or it elects not to perform a qualitative assessment, it compares the fair value of the reporting unit to its carrying value to determine if the fair value is greater than its carrying value. Goodwill for Southern Company and Southern Company Gas was $5.3 billion and $5.0 billion, respectively, at December 31, 2021. For its 2021 annual impairment test, Southern Company Gas performed the quantitative assessment and confirmed that the II-52     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report fair value of all of its reporting units with goodwill exceeded their carrying value. For its 2020 and 2019 annual impairment tests, Southern Company Gas performed the qualitative assessment and determined that it was more likely than not that the fair value of all of its reporting units with goodwill exceeded their carrying amounts, and therefore no quantitative assessment was required. For its annual impairment tests for PowerSecure, Southern Company performed the quantitative assessment, which resulted in the fair value of goodwill at PowerSecure exceeding its carrying value in all years presented. However, Southern Company recorded goodwill impairment charges totaling $34 million in 2019 as a result of its decision to sell certain PowerSecure business units. See Note 15 to the financial statements under "Southern Company" for additional information. The COVID-19 pandemic and the related impacts on the worldwide economy have disrupted supply chains, reduced labor availability and productivity, and reduced economic activity in the United States. These effects have had a variety of adverse impacts on Southern Company and its subsidiaries, including PowerSecure. If these factors continue to negatively affect the operating results of PowerSecure and its businesses, a portion of the associated goodwill of $263 million may become impaired. The ultimate outcome of this matter cannot be determined at this time. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact the applicable Registrant's results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. As the determination of an asset's fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, the applicable Registrants consider these estimates to be critical accounting estimates. See Note 1 to the financial statements under "Goodwill and Other Intangible Assets and Liabilities" for additional information regarding the applicable Registrants' goodwill. Long-Lived Assets (Southern Company, Southern Power, and Southern Company Gas) The applicable Registrants assess their other long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. If an indicator exists, the asset is tested for recoverability by comparing the asset carrying value to the sum of the undiscounted expected future cash flows directly attributable to the asset's use and eventual disposition. If the estimate of undiscounted future cash flows is less than the carrying value of the asset, the fair value of the asset is determined and a loss is recorded equal to the difference between the carrying value and the fair value of the asset. In addition, when assets are identified as held for sale, an impairment loss is recognized to the extent the carrying value of the assets or asset group exceeds their fair value less cost to sell. A high degree of judgment is required in developing estimates related to these evaluations, which are based on projections of various factors, some of which have been quite volatile in recent years. Impairments of long-lived assets of the traditional electric utilities and natural gas distribution utilities are generally related to specific regulatory disallowances. Southern Power's investments in long-lived assets are primarily generation assets. Excluding the natural gas distribution utilities, Southern Company Gas' investments in long-lived assets are primarily natural gas transportation and storage facility assets, whether in service or under construction. For Southern Power, examples of impairment indicators could include significant changes in construction schedules, current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in market prices, the inability to remarket generating capacity for an extended period, the unplanned termination of a customer contract, or the inability of a customer to perform under the terms of the contract. For Southern Company Gas, examples of impairment indicators could include, but are not limited to, significant changes in the U.S. natural gas storage market, construction schedules, current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in market prices, the inability to renew or extend customer contracts or the inability of a customer to perform under the terms of the contract, attrition rates, or the inability to deploy a development project. As the determination of the expected future cash flows generated from an asset, an asset's fair value, and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, the applicable Registrants consider these estimates to be critical accounting estimates. During 2021 and 2020, Southern Company recorded impairment charges totaling $7 million ($6 million after tax) and $206 million ($105 million after tax), respectively, related to its leveraged lease investments. During 2021, Southern Company Gas recorded total pre-tax charges of $84 million ($67 million after tax) related to its equity method investment in the PennEast Pipeline project. During 2019, Southern Company Gas recorded pre-tax impairment charges of $91 million ($69 million after-tax) related to a natural gas storage facility and approximately $24 million ($17 million after tax) related to the sale of Pivotal LNG. See Notes 7 and 9 to the financial statements under "Southern Company Gas" and "Southern Company Leveraged Lease," respectively, and Note 15 to the financial statements for additional information on recent asset impairments. II-53     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Revenue Recognition (Southern Power) Southern Power's power sale transactions, which include PPAs, are classified in one of four general categories: leases, non-derivatives or normal sale derivatives, derivatives designated as cash flow hedges, and derivatives not designated as hedges. Southern Power's revenues are dependent upon significant judgments used to determine the appropriate transaction classification, which must be documented upon the inception of each contract. The two categories with the most judgment required for Southern Power are described further below. Lease Transactions Southern Power considers the terms of a sales contract to determine whether it should be accounted for as a lease. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. If the contract meets the criteria for a lease, Southern Power performs further analysis to determine whether the lease is classified as operating, financing, or sales-type. Generally, Southern Power's power sales contracts that are determined to be leases are accounted for as operating leases and the capacity revenue is recognized on a straight-line basis over the term of the contract and is included in Southern Power's operating revenues. Energy revenues and other contingent revenues are recognized in the period the energy is delivered or the service is rendered. For those contracts that are determined to be sales-type leases, capacity revenues are recognized by accounting for interest income on the net investment in the lease and are included in Southern Power's operating revenues. See Note 9 to the financial statements for additional information. Non-Derivative and Normal Sale Derivative Transactions If the power sales contract is not classified as a lease, Southern Power further considers whether the contract meets the definition of a derivative. If the contract does meet the definition of a derivative, Southern Power will assess whether it can be designated as a normal sale contract. The determination of whether a contract can be designated as a normal sale contract requires judgment, including whether the sale of electricity involves physical delivery in quantities within Southern Power's available generating capacity and that the purchaser will take quantities expected to be used or sold in the normal course of business. Contracts that do not meet the definition of a derivative or are designated as normal sales are accounted for as executory contracts. For contracts that have a capacity charge, the revenue is generally recognized in the period that it becomes billable. Revenues related to energy and ancillary services are recognized in the period the energy is delivered or the service is rendered. See Note 4 to the financial statements for additional information. Acquisition Accounting (Southern Power) Southern Power may acquire generation assets as part of its overall growth strategy. At the time of an acquisition, Southern Power will assess if these assets and activities meet the definition of a business. For acquisitions that meet the definition of a business, the purchase price, including any contingent consideration, is allocated based on the fair value of the identifiable assets acquired and liabilities assumed (including any intangible assets, primarily related to acquired PPAs). Assets acquired that do not meet the definition of a business are accounted for as an asset acquisition. The purchase price of each asset acquisition is allocated based on the relative fair value of assets acquired. Determining the fair value of assets acquired and liabilities assumed requires management judgment and Southern Power may engage independent valuation experts to assist in this process. Fair values are determined by using market participant assumptions, and typically include the timing and amounts of future cash flows, incurred construction costs, the nature of acquired contracts, discount rates, power market prices, and expected asset lives. Any due diligence or transition costs incurred by Southern Power for potential or successful acquisitions are expensed as incurred. See Note 13 to the financial statements for additional fair value information and Note 15 to the financial statements for additional information on recent acquisitions. Variable Interest Entities (Southern Power) Southern Power enters into partnerships with varying ownership structures. Upon entering into these arrangements, membership interests and other variable interests are evaluated to determine if the legal entity is a VIE. If the legal entity is a VIE, Southern Power will assess if it has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, making it the primary beneficiary. Making this determination may require significant management judgment. If Southern Power is the primary beneficiary and is considered to have a controlling ownership, the assets, liabilities, and results of operations of the entity are consolidated. If Southern Power is not the primary beneficiary, the legal entity is generally accounted for under the equity method of accounting. Southern Power reconsiders its conclusions as to whether the legal entity is II-54     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report a VIE and whether it is the primary beneficiary for events that impact the rights of variable interests, such as ownership changes in membership interests. Southern Power has controlling ownership in certain legal entities for which the contractual provisions represent profit-sharing arrangements because the allocations of cash distributions and tax benefits are not based on fixed ownership percentages. For these arrangements, the noncontrolling interest is accounted for under a balance sheet approach utilizing the HLBV method. The HLBV method calculates each partner's share of income based on the change in net equity the partner can legally claim in a HLBV at the end of the period compared to the beginning of the period. Contingent Obligations (All Registrants) The Registrants are subject to a number of federal and state laws and regulations, as well as other factors and conditions that subject them to environmental, litigation, and other risks. See FUTURE EARNINGS POTENTIAL herein and Notes 2 and 3 to the financial statements for more information regarding certain of these contingencies. The Registrants periodically evaluate their exposure to such risks and record reserves for those matters where a non-tax-related loss is considered probable and reasonably estimable. The adequacy of reserves can be significantly affected by external events or conditions that can be unpredictable; thus, the ultimate outcome of such matters could materially affect the results of operations, cash flows, or financial condition of the Registrants. Recently Issued Accounting Standards In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR, which began phasing out on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The new guidance (i) simplifies accounting analyses under current GAAP for contract modifications; (ii) simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue; and (iii) allows a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform. An entity may elect to apply the amendments prospectively from March 12, 2020 through December 31, 2022 by accounting topic. The Registrants have elected to apply the amendments to modifications of debt arrangements that meet the scope of ASU 2020-04. The Registrants currently reference LIBOR for certain debt and hedging arrangements. In addition, certain provisions in PPAs at Southern Power include references to LIBOR. Contract language has been, or is expected to be, incorporated into each of these agreements to address the transition to an alternative rate for agreements that will be in place at the transition date. While no material impacts are expected from modifications to the arrangements and effective hedging relationships are expected to continue, the Registrants will continue to evaluate the provisions of ASU 2020–04 and the impacts of transitioning to an alternative rate, and the ultimate outcome of the transition cannot be determined at this time. See FINANCIAL CONDITION AND LIQUIDITY – "Overview" and "Financing Activities" herein and Note 14 to the financial statements under "Interest Rate Derivatives" for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview The financial condition of each Registrant remained stable at December 31, 2021. The Registrants' cash requirements primarily consist of funding ongoing operations, including unconsolidated subsidiaries, as well as common stock dividends, capital expenditures, and debt maturities. Southern Power's cash requirements also include distributions to noncontrolling interests. Capital expenditures and other investing activities for the traditional electric operating companies include investments to build new generation facilities to meet projected long-term demand requirements and to replace units being retired as part of the generation fleet transition, to maintain existing generation facilities, to comply with environmental regulations including adding environmental modifications to certain existing generating units and closures of ash ponds, to expand and improve transmission and distribution facilities, and for restoration following major storms. Southern Power's capital expenditures and other investing activities may include acquisitions or new construction associated with its overall growth strategy and to maintain its existing generation fleet's performance. Southern Company Gas' capital expenditures and other investing activities include investments to meet projected long-term demand requirements, to maintain existing natural gas distribution systems as well as to update and expand these systems, and to comply with environmental regulations. See "Cash Requirements" herein for additional information. Operating cash flows provide a substantial portion of the Registrants' cash needs. During 2021, Southern Power utilized tax credits, which provided $288 million in operating cash flows. For the three-year period from 2022 through 2024, each Registrant's II-55     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report projected stock dividends, capital expenditures, and debt maturities, as well as distributions to noncontrolling interests for Southern Power, are expected to exceed its operating cash flows. Southern Company plans to finance future cash needs in excess of its operating cash flows through one or more of the following: accessing borrowings from financial institutions, issuing debt and hybrid securities in the capital markets, and/or through its stock plans. Each Subsidiary Registrant plans to finance its future cash needs in excess of its operating cash flows primarily through external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Power plans to utilize tax equity partnership contributions. The Registrants plan to use commercial paper to manage seasonal variations in operating cash flows and for other working capital needs and continue to monitor their access to short-term and long-term capital markets as well as their bank credit arrangements to meet future capital and liquidity needs. See "Sources of Capital" and "Financing Activities" herein for additional information. To facilitate an orderly transition from LIBOR to alternative benchmark rate(s), the Registrants have established an initiative to assess and mitigate risks associated with the discontinuation of LIBOR. As part of this initiative, several alternative benchmark rates have been, and continue to be, evaluated and implemented. Substantially all of the Registrants' credit facilities allow for LIBOR to be phased out and replaced with the Secured Overnight Financing Rate and interest rate derivatives address the LIBOR transition through the adoption of the ISDA 2020 IBOR Fallbacks Protocol and subsequent amendments. None of the Registrants expects the transition from LIBOR to have a material impact. The Registrants' investments in their qualified pension plans and Alabama Power's and Georgia Power's investments in their nuclear decommissioning trust funds increased in value at December 31, 2021 as compared to December 31, 2020. No contributions to the qualified pension plan were made during 2021 and no mandatory contributions to the qualified pension plans are anticipated during 2022. See Notes 6 and 11 to the financial statements under "Nuclear Decommissioning" and "Pension Plans," respectively, for additional information. At the end of 2021, the market price of Southern Company's common stock was $68.58 per share (based on the closing price as reported on the NYSE) and the book value was $26.30 per share, representing a market-to-book value ratio of 261%, compared to $61.43, $26.48, and 232%, respectively, at the end of 2020. Cash Requirements Capital Expenditures Total estimated capital expenditures, including LTSA and nuclear fuel commitments, for the Registrants through 2026 based on their current construction programs are as follows: [[GREPCENT_TABLE]] [["","2022","2023","2024","2025","2026"],["","(in billions)"],["Southern Company(a)(b)(c)","$","8.7","","$","8.6","","$","7.5","","$","7.2","","$","7.1"],["Alabama Power(a)","1.9","","1.8","","1.7","","1.7","","1.7"],["Georgia Power(b)","4.4","","4.5","","3.5","","3.5","","3.4"],["Mississippi Power","0.3","","0.3","","0.2","","0.2","","0.2"],["Southern Power(c)","0.1","","0.2","","0.1","","0.1","","0.1"],["Southern Company Gas","1.7","","1.7","","1.8","","1.7","","1.7"]] [[/GREPCENT_TABLE]] (a)Includes expenditures of approximately $0.3 billion and $0.1 billion for the construction of Plant Barry Unit 8 in 2022 and 2023, respectively. See Note 2 to the financial statements under "Alabama Power" for additional information. (b)Includes expenditures of approximately $1.3 billion and $0.9 billion for the construction of Plant Vogtle Units 3 and 4 in 2022 and 2023, respectively. (c)Excludes approximately $0.3 billion in 2022, $0.5 billion in 2023, and $0.8 billion per year for 2024 through 2026 for Southern Power's planned acquisitions and placeholder growth, which may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. These capital expenditures include estimates to comply with environmental laws and regulations, but do not include any potential compliance costs associated with any future regulation of CO2 emissions from fossil fuel-fired electric generating units. See FUTURE EARNINGS POTENTIAL – "Environmental Matters" herein for additional information. At December 31, 2021, significant purchase commitments were outstanding in connection with the Registrants' construction programs. II-56     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The traditional electric operating companies also anticipate expenditures associated with closure and monitoring of ash ponds and landfills in accordance with the CCR Rule and the related state rules, which are reflected in the applicable Registrants' ARO liabilities. The cost estimates for Alabama Power and Mississippi Power are based on closure-in-place for all ash ponds. The cost estimates for Georgia Power are based on a combination of closure-in-place for some ash ponds and closure by removal for others. These anticipated costs are likely to change, and could change materially, as assumptions and details pertaining to closure are refined and compliance activities continue. Current estimates of these costs through 2026 are provided in the table below. Material expenditures in future years for ARO settlements will also be required for ash ponds, nuclear decommissioning (for Alabama Power and Georgia Power), and other liabilities reflected in the applicable Registrants' AROs, as discussed further in Note 6 to the financial statements. Also see FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" herein. [[GREPCENT_TABLE]] [["","2022","2023","2024","2025","2026"],["","(in millions)"],["Southern Company","$","687","","$","688","","$","767","","$","907","","$","888"],["Alabama Power","320","","330","","346","","364","","299"],["Georgia Power","317","","307","","368","","489","","555"],["Mississippi Power","16","","20","","23","","30","","16"]] [[/GREPCENT_TABLE]] 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 and/or regulation; the cost, availability, and efficiency of construction labor, equipment, and materials; project scope and design changes; abnormal weather; delays in construction due to judicial or regulatory action; storm impacts; and the cost of capital. The continued impacts of the COVID-19 pandemic could also impair the ability to develop, construct, and operate facilities, as discussed further in Item 1A herein. In addition, there can be no assurance that costs related to capital expenditures and AROs will be fully recovered. Additionally, expenditures associated with Southern Power's planned acquisitions may vary due to market opportunities and the execution of its growth strategy. See Note 15 to the financial statements under "Southern Power" for additional information regarding Southern Power's plant acquisitions and construction projects. The construction program of Georgia Power includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures. See FUTURE EARNINGS POTENTIAL – "Construction Programs" herein for additional information. Other Significant Cash Requirements Long-term debt maturities and the interest payable on long-term debt each represent a significant cash requirement for the Registrants. See Note 8 to the financial statements for information regarding the Registrants' long-term debt at December 31, 2021, the weighted average interest rate applicable to each long-term debt category, and a schedule of long-term debt maturities over the next five years. The Registrants plan to continue, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit. II-57     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Fuel and purchased power costs represent a significant component of funding ongoing operations for the traditional electric operating companies and Southern Power. See Note 3 to the financial statements under "Commitments" for information on Southern Company Gas' commitments for pipeline charges, storage capacity, and gas supply. Total estimated costs for fuel and purchased power commitments at December 31, 2021 for the applicable Registrants are provided in the table below. Fuel costs include purchases of coal (for the traditional electric operating companies) and natural gas (for the traditional electric operating companies and Southern Power), as well as the related transportation and storage. In most cases, these contracts contain provisions for price escalation, minimum purchase levels, and other financial commitments. Natural gas purchase commitments are based on various indices at the time of delivery; the amounts reflected below have been estimated based on the NYMEX future prices at December 31, 2021. As discussed under "Capital Expenditures" herein, estimated expenditures for nuclear fuel are included in the applicable Registrants' construction programs for the years 2022 through 2026. Nuclear fuel commitments at December 31, 2021 that extend beyond 2026 are included in the table below. Purchased power costs represent estimated minimum obligations for various PPAs for the purchase of capacity and energy, except for those accounted for as leases, which are discussed in Note 9 to the financial statements. [[GREPCENT_TABLE]] [["","2022","2023","2024","2025","2026","Thereafter"],["","(in millions)"],["Southern Company(*)","$","3,740","","$","1,983","","$","1,302","","$","969","","$","753","","$","5,803"],["Alabama Power","1,170","","581","","446","","358","","203","","1,182"],["Georgia Power(*)","1,405","","795","","440","","348","","329","","4,118"],["Mississippi Power","539","","235","","168","","109","","98","","491"],["Southern Power","626","","372","","248","","154","","123","","12"]] [[/GREPCENT_TABLE]] (*)Excludes capacity payments related to Plant Vogtle Units 1 and 2, which are discussed in Note 3 to the financial statements under "Commitments." Georgia Power's 2022 IRP filing included a request for six PPAs, which are expected to be accounted for as leases, that are contingent upon approval by the Georgia PSC. Five of the six PPAs are with Southern Power and are also contingent upon approval by the FERC. The expected capacity payments associated with the PPAs total $6 million in 2024, $79 million in 2025, $86 million in 2026, and $908 million thereafter, of which $5 million in 2024, $68 million in 2025, $75 million in 2026, and $748 million thereafter relate to the affiliate PPAs with Southern Power. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plan" for additional information. The traditional electric operating companies and Southern Power have entered into LTSAs for the purpose of securing maintenance support for certain of their generating facilities. See Note 1 to the financial statements under "Long-term Service Agreements" for additional information. As discussed under "Capital Expenditures" herein, estimated expenditures related to LTSAs are included in the applicable Registrants' construction programs for the years 2022 through 2026. Total estimated payments for LTSA commitments at December 31, 2021 that extend beyond 2026 are provided in the following table and include price escalation based on inflation indices: [[GREPCENT_TABLE]] [["","Southern Company","Alabama Power","Georgia Power","Mississippi Power","Southern Power"],["","(in millions)"],["LTSA commitments (after 2026)","$","1,918","","$","203","","$","347","","$","137","","$","1,231"]] [[/GREPCENT_TABLE]] In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2021 are provided in the table below. [[GREPCENT_TABLE]] [["","2022","2023","2024","2025","2026","Thereafter"],["","(in millions)"],["Southern Power's operations and maintenance agreements","$","77","","$","65","","$","62","","$","47","","$","36","","$","303"]] [[/GREPCENT_TABLE]] See Note 9 to the financial statements for information on the Registrants' operating lease obligations, including a maturity analysis of the lease liabilities over the next five years and thereafter. II-58     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report 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. 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 2026 but may issue equity through its stock plans during this time. See Note 8 to the financial statements under "Equity Units" for information on stock purchase contracts associated with Southern Company's equity units. The Subsidiary Registrants plan to obtain the funds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Power plans to utilize tax equity partnership contributions (as discussed further herein). The amount, type, and timing of any financings in 2022, as well as in subsequent years, will be contingent on investment opportunities and the Registrants' capital requirements and will depend upon prevailing market conditions, regulatory approvals (for certain of the Subsidiary Registrants), and other factors. See "Cash Requirements" herein for additional information. Southern Power utilizes tax equity partnerships as one of its financing sources, where the tax partner takes significantly all of the federal tax benefits. These tax equity partnerships are consolidated in Southern Power's financial statements and are accounted for using HLBV methodology to allocate partnership gains and losses. During 2021, Southern Power obtained tax equity funding for the Deuel Harvest wind facility, the Garland and Tranquillity battery energy storage facilities, and existing tax equity partnerships totaling $299 million. See Notes 1 and 15 to the financial statements under "General" and "Southern Power," respectively, for additional information. The issuance of securities by the traditional electric operating companies and Nicor Gas is generally subject to the approval of the applicable state PSC or other applicable state regulatory agency. The issuance of all securities by Mississippi Power and short-term securities by Georgia Power is generally subject to regulatory approval by the FERC. Additionally, with respect to the public offering of securities, Southern Company, the traditional electric operating companies, and Southern Power (excluding its subsidiaries), Southern Company Gas Capital, and Southern Company Gas (excluding its other subsidiaries) file registration statements with the SEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the appropriate regulatory authorities, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets. The Registrants generally obtain financing separately without credit support from any affiliate. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information. The Southern Company system does not maintain a centralized cash or money pool. Therefore, funds of each company are not commingled with funds of any other company in the Southern Company system, except in the case of Southern Company Gas, as described below. The traditional electric operating companies and SEGCO may utilize a Southern Company subsidiary organized to issue and sell commercial paper at their request and for their benefit. Proceeds from such issuances for the benefit of an individual company are loaned directly to that company. The obligations of each traditional electric operating company and SEGCO under these arrangements are several and there is no cross-affiliate credit support. Alabama Power also maintains its own separate commercial paper program. Southern Company Gas Capital obtains external financing for Southern Company Gas and its subsidiaries, other than Nicor Gas, which obtains financing separately without credit support from any affiliates. Southern Company Gas maintains commercial paper programs at Southern Company Gas Capital and Nicor Gas. Nicor Gas' commercial paper program supports its working capital needs as Nicor Gas is not permitted to make money pool loans to affiliates. All of the other Southern Company Gas subsidiaries benefit from Southern Company Gas Capital's commercial paper program. By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At December 31, 2021, the amount of subsidiary retained earnings restricted to dividend totaled $1.3 billion. This restriction did not impact Southern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations. II-59     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Certain Registrants' current liabilities frequently exceed their current assets because of long-term debt maturities and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. The Registrants generally plan to refinance long-term debt as it matures. See Note 8 to the financial statements for additional information. Also see "Financing Activities" herein for information on financing activities that occurred subsequent to December 31, 2021. The following table shows the amount by which current liabilities exceeded current assets at December 31, 2021 for the applicable Registrants: [[GREPCENT_TABLE]] [["At December 31, 2021","Southern Company","","Georgia Power","Mississippi Power","Southern Power","Southern Company Gas"],["","(in millions)"],["Current liabilities in excess of current assets","$","1,956","","","$","1,544","","$","57","","$","748","","$","471"]] [[/GREPCENT_TABLE]] The Registrants believe the need for working capital can be adequately met by utilizing operating cash flows, as well as commercial paper, lines of credit, and short-term bank notes, as market conditions permit. In addition, under certain circumstances, the Subsidiary Registrants may utilize equity contributions and/or loans from Southern Company. Bank Credit Arrangements At December 31, 2021, the Registrants' unused committed credit arrangements with banks were as follows: [[GREPCENT_TABLE]] [["At December 31, 2021","Southern Company parent","Alabama Power","Georgia Power","Mississippi Power","Southern Power(a)","Southern Company Gas(b)","SEGCO","Southern Company"],["","(in millions)"],["Unused committed credit","$","1,998","","$","1,250","","$","1,726","","$","275","","$","568","","$","1,747","","$","30","","$","7,594"]] [[/GREPCENT_TABLE]] (a)At December 31, 2021, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $12 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities. (b)Includes $1.047 billion and $700 million at Southern Company Gas Capital and Nicor Gas, respectively. Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at December 31, 2021 was approximately $1.5 billion (comprised of approximately $789 million at Alabama Power, $672 million at Georgia Power, and $34 million at Mississippi Power). In addition, at December 31, 2021, Georgia Power had approximately $157 million of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information. II-60     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Short-term Borrowings The Registrants, Nicor Gas, and SEGCO make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Southern Power's subsidiaries are not issuers or obligors under its commercial paper program. Commercial paper and short-term bank term loans are included in notes payable in the balance sheets. Details of the Registrants' short-term borrowings were as follows: [[GREPCENT_TABLE]] [["","Short-term Debt at the End of the Period"],["","Amount Outstanding","","Weighted Average Interest Rate"],["","December 31,","","December 31,"],["","2021","2020","2019","","2021","2020","2019"],["","(in millions)"],["Southern Company","$","1,440","","$","609","","$","2,055","","","0.4","%","0.3","%","2.1","%"],["Georgia Power","\u2014","","60","","365","","","\u2014","","0.3","","2.2"],["Mississippi Power","\u2014","","25","","\u2014","","","\u2014","","0.4","","\u2014"],["Southern Power","211","","175","","549","","","0.3","","0.3","","2.2"],["Southern Company Gas:"],["Southern Company Gas Capital","$","379","","$","220","","$","372","","","0.3","%","0.3","%","2.1","%"],["Nicor Gas","830","","104","","278","","","0.4","%","0.2","","1.8"],["Southern Company Gas Total","$","1,209","","$","324","","$","650","","","0.4","%","0.2","%","2.0","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Short-term Debt During the Period(*)"],["","Average Amount Outstanding","","Weighted Average Interest Rate","","Maximum Amount Outstanding"],["","2021","2020","2019","","2021","2020","2019","","2021","2020","2019"],["","(in millions)","","","","","","(in millions)"],["Southern Company","$","1,141","","$","1,017","","$","1,240","","","0.3","%","1.6","%","2.6","%","","$","1,809","","$","2,113","","$","2,914"],["Alabama Power","27","","20","","17","","","0.1","","1.1","","2.6","","","200","","155","","190"],["Georgia Power","95","","264","","371","","","0.2","","1.7","","2.7","","","407","","478","","935"],["Mississippi Power","15","","9","","\u2014","","","0.2","","1.6","","\u2014","","","81","","40","","\u2014"],["Southern Power","133","","64","","76","","","0.2","","1.5","","2.7","","","520","","550","","578"],["Southern Company Gas:"],["Southern Company Gas Capital","$","206","","$","316","","$","302","","","0.2","%","1.4","%","2.6","%","","$","485","","$","641","","$","490"],["Nicor Gas","420","","49","","91","","","0.4","","1.4","","2.3","","","897","","278","","278"],["Southern Company Gas Total","$","626","","$","365","","$","393","","","0.4","%","1.4","%","2.5","%"]] [[/GREPCENT_TABLE]] (*)    Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2021, 2020, and 2019. II-61     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Analysis of Cash Flows Net cash flows provided from (used for) operating, investing, and financing activities in 2021 and 2020 are presented in the following table: [[GREPCENT_TABLE]] [["Net cash provided from (used for):","Southern Company","Alabama Power","Georgia Power","Mississippi Power","Southern Power","Southern Company Gas"],["","(in millions)"],["2021"],["Operating activities","$","6,169","","$","2,053","","$","2,747","","$","246","","$","951","","$","663"],["Investing activities","(7,353)","","(1,961)","","(3,590)","","(257)","","(803)","","(1,379)"],["Financing activities","1,945","","438","","867","","33","","(195)","","745"],["2020"],["Operating activities","$","6,696","","$","1,742","","$","2,784","","$","298","","$","901","","$","1,207"],["Investing activities","(7,030)","","(2,122)","","(3,503)","","(323)","","374","","(1,417)"],["Financing activities","(576)","","16","","676","","(222)","","(1,372)","","180"]] [[/GREPCENT_TABLE]] Fluctuations in cash flows from financing activities vary from year to year based on capital needs and the maturity or redemption of securities. Southern Company Net cash provided from operating activities decreased $0.5 billion in 2021 as compared to 2020 largely due to decreased fuel cost recovery at the traditional electric operating companies and under recovered natural gas costs at the natural gas distribution utilities, partially offset by customer bill credits issued in 2020 at Georgia Power and the timing of customer receivable collections. The net cash used for investing activities in 2021 and 2020 was primarily related to the Subsidiary Registrants' construction programs. The net cash provided from financing activities in 2021 was primarily related to net issuances of long-term and short-term debt, partially offset by common stock dividend payments. The net cash used for financing activities in 2020 was primarily related to common stock dividend payments and net repayments of short-term bank debt and commercial paper, partially offset by net issuances of long-term debt and issuances of common stock. Alabama Power Net cash provided from operating activities increased $311 million in 2021 as compared to 2020 primarily due to an increase in retail revenues associated with a Rate RSE adjustment effective in January 2021 and higher customer usage, as well as the timing of fossil fuel stock purchases and receivable collections, partially offset by decreased fuel cost recovery. The net cash used for investing activities in 2021 and 2020 was primarily related to gross property additions. The net cash provided from financing activities in 2021 and 2020 was primarily related to capital contributions from Southern Company and net long-term debt issuances, partially offset by common stock dividend payments. Georgia Power Net cash provided from operating activities decreased $37 million in 2021 as compared to 2020 primarily due to decreased fuel cost recovery, partially offset by the timing of customer receivable collections and vendor payments and customer bill credits issued in 2020 associated with Tax Reform and 2018 and 2019 earnings in excess of the allowed retail ROE range. The net cash used for investing activities in 2021 and 2020 was primarily related to gross property additions, including approximately $1.3 billion and $1.4 billion, respectively, related to the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on construction of Plant Vogtle Units 3 and 4. II-62     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The net cash provided from financing activities in 2021 and 2020 was primarily related to capital contributions from Southern Company, borrowings from the FFB for construction of Plant Vogtle Units 3 and 4, and net issuances and reofferings of other debt, partially offset by common stock dividend payments. Mississippi Power Net cash provided from operating activities decreased $52 million in 2021 as compared to 2020 primarily due to the timing of vendor payments and decreased fuel cost recovery, partially offset by the timing of receivable collections. The net cash used for investing activities in 2021 and 2020 was primarily related to gross property additions. The net cash provided from financing activities in 2021 was primarily related to the issuance of senior notes and capital contributions from Southern Company, partially offset by debt redemptions, common stock dividend payments, and a decrease in commercial paper borrowings. The net cash used for financing activities in 2020 was primarily related to debt repayments and redemptions and a return of capital and common stock dividends paid to Southern Company, partially offset by debt issuances and capital contributions from Southern Company. Southern Power Net cash provided from operating activities increased $50 million in 2021 as compared to 2020 primarily due to the timing of vendor payments. The net cash used for investing activities in 2021 was primarily related to the acquisition of the Deuel Harvest wind facility and ongoing construction activities. The net cash provided from investing activities in 2020 was primarily related to proceeds from the disposition of Plant Mankato, partially offset by ongoing construction activities and the acquisition of the Beech Ridge II wind facility. See Note 15 to the financial statements under "Southern Power" for additional information. The net cash used for financing activities in 2021 was primarily related to a return of capital to Southern Company and common stock dividend payments, partially offset by net capital contributions from noncontrolling interests and net issuances of senior notes. The net cash used for financing activities in 2020 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, and net repayments of short-term bank debt and commercial paper, partially offset by net contributions from noncontrolling interests. Southern Company Gas Net cash provided from operating activities decreased $544 million in 2021 as compared to 2020 primarily due to natural gas cost under recovery, reflecting an increase in the cost of gas purchased during Winter Storm Uri, as well as the timing of vendor payments. The net cash used for investing activities in 2021 and 2020 was primarily related to construction of transportation and distribution assets recovered through base rates and infrastructure investment recovered through replacement programs at gas distribution operations, partially offset by proceeds from dispositions. See Note 15 to the financial statements for additional information. The net cash provided from financing activities in 2021 was primarily related to net issuances of long-term and short-term debt and capital contributions from Southern Company, partially offset by common stock dividend payments. The net cash provided from financing activities in 2020 was primarily related to proceeds from issuances of senior notes and first mortgage bonds, as well as capital contributions from Southern Company, partially offset by common stock dividend payments and net repayments of short-term borrowings. Significant Balance Sheet Changes Southern Company Significant balance sheet changes in 2021 for Southern Company included: •an increase of $3.7 billion in long-term debt (including securities due within one year) related to new issuances; •an increase of $3.5 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs (net of pre-tax charges totaling $1.7 billion recorded during 2021 at Georgia Power for estimated probable losses associated with the construction of Plant Vogtle Units 3 and 4); •decreases of $1.8 billion and $0.7 billion in other regulatory assets and employee benefit obligations, respectively, and an increase of $1.7 billion in prepaid pension costs primarily due to actuarial gains related to increases in the assumed discount rates and actual asset returns associated with retirement benefit plans; II-63     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report •increases of $1.0 billion and $0.5 billion in AROs and regulatory assets associated with AROs, respectively, primarily related to cost estimate updates at the traditional electric operating companies for ash pond facilities; •an increase of $0.8 billion in notes payable due to an increase in commercial paper borrowings and short-term bank debt; •an increase of $0.7 billion in accumulated deferred income taxes primarily related to the utilization of tax credits in 2021, an increase in under recovered fuel and natural gas costs, and an increase in property-related timing differences; and •an increase of $0.7 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Company" herein. See "Financing Activities" herein and Notes 2, 5, 6, 8, 10, and 11 to the financial statements for additional information. Alabama Power Significant balance sheet changes in 2021 for Alabama Power included: •an increase of $1.3 billion in total property, plant, and equipment primarily related to construction of distribution and transmission facilities, increases to AROs, construction of Plant Barry Unit 8, and the installation of equipment to comply with environmental standards; •an increase of $0.9 billion in total common stockholder's equity primarily due to capital contributions from Southern Company; •an increase of $0.8 billion in long-term debt (including securities due within one year) primarily due to a net increase in outstanding senior notes; •an increase of $0.5 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Alabama Power" herein; and •an increase of $0.5 billion in prepaid pension and other postretirement benefit costs primarily due to actuarial gains related to increases in the assumed discount rates and actual asset returns associated with retirement benefit plans. See "Financing Activities – Alabama Power" herein and Notes 5, 6, 8, and 11 to the financial statements for additional information. Georgia Power Significant balance sheet changes in 2021 for Georgia Power included: •an increase of $0.9 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities (net of pre-tax charges totaling $1.7 billion for estimated probable losses on Plant Vogtle Units 3 and 4); •an increase of $0.8 billion in long-term debt (including securities due within one year) primarily due to a net increase in outstanding senior notes and borrowings from the FFB for construction of Plant Vogtle Units 3 and 4; •an increase of $0.7 billion in common stockholder's equity related to capital contributions from Southern Company and net income, partially offset by dividends paid to Southern Company; •a decrease of $0.7 billion in other regulatory assets, deferred and an increase of $0.6 billion in prepaid pension costs primarily due to actuarial gains related to increases in the assumed discount rates and actual asset returns associated with retirement benefit plans; •increases of $0.6 billion and $0.4 billion in AROs and regulatory assets associated with AROs, respectively, primarily due to cost estimate updates for ash pond closures; and •an increase of $0.4 billion in deferred under recovered fuel clause revenues resulting from higher fuel and purchased power costs. See "Financing Activities – Georgia Power" herein and Notes 2, 5, 6, 8, and 11 to the financial statements for additional information. II-64     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Mississippi Power Significant balance sheet changes in 2021 for Mississippi Power included: •an increase of $125 million in common stockholder's equity related to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company; •an increase of $92 million in long-term debt (including securities due within one year) primarily due to the issuance of senior notes, partially offset by the redemption of revenue bonds and bank term loans; and •an increase of $79 million in prepaid pension costs and a decrease of $71 million in other regulatory assets, deferred primarily due to actuarial gains related to increases in the assumed discount rates and actual asset returns associated with retirement benefit plans. See "Financing Activities – Mississippi Power" herein and Notes 8 and 11 to the financial statements for additional information. Southern Power Significant balance sheet changes in 2021 for Southern Power included: •an increase of $681 million in property, plant, and equipment in service primarily due to the acquisition of the Deuel Harvest wind facility and the Glass Sands wind facility being placed in service; •a decrease of $262 million in accumulated deferred income tax assets and an increase of $92 million in accumulated deferred income tax liabilities primarily related to the utilization of ITCs in 2021; •a decrease of $173 million in common stockholder's equity primarily due to a return of capital to Southern Company and common stock dividend payments, partially offset by net income; and •an increase of $161 million in net investment in sales-type leases recorded upon commencement of the Garland and Tranquillity battery energy storage facilities' PPAs. See Notes 5, 9, 10, and 15 to the financial statements for additional information. Southern Company Gas Significant balance sheet changes in 2021 for Southern Company Gas included: •an increase of $1.06 billion in total property, plant, and equipment primarily related to the construction of transportation and distribution assets recovered through base rates and infrastructure investment recovered through replacement programs; •an increase of $885 million in notes payable due to issuances of short-term debt and an increase in commercial paper borrowings; •decreases of $516 million in energy marketing receivables and $494 million in energy marketing trade payables due to the sale of Sequent; •an increase of $473 million in natural gas cost under recovery, including $207 million in other regulatory assets, deferred, reflecting an increase in the cost of gas purchased during Winter Storm Uri; •an increase of $290 million in accumulated deferred income taxes primarily due to an increase in natural gas cost under recovery and changes in state apportionment rates as a result of the sale of Sequent; and •an increase of $276 million in long-term debt (including securities due within one year) primarily due to net issuances of senior notes and first mortgage bonds. See "Financing Activities – Southern Company Gas" herein and Notes 2, 5, 8, 10, and 15 to the financial statements for additional information. II-65     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Financing Activities The following table outlines the Registrants' long-term debt financing activities for the year ended December 31, 2021: [[GREPCENT_TABLE]] [["","Issuances/Reofferings","","Maturities, Redemptions, and Repurchases"],["Company","Senior Notes","Revenue Bonds","Other Long-Term Debt","","Senior Notes","Revenue Bonds","Other Long-Term Debt(a)"],["","(in millions)"],["Southern Company parent","$","1,600","","$","\u2014","","$","2,476","","","$","1,500","","$","\u2014","","$","800"],["Alabama Power","1,300","","\u2014","","\u2014","","","200","","65","","207"],["Georgia Power","750","","122","","440","","","325","","69","","105"],["Mississippi Power","525","","\u2014","","\u2014","","","\u2014","","320","","100"],["Southern Power","400","","\u2014","","\u2014","","","300","","\u2014","","\u2014"],["Southern Company Gas","450","","\u2014","","200","","","300","","\u2014","","30"],["Other","\u2014","","\u2014","","\u2014","","","\u2014","","\u2014","","14"],["Elimination(b)","\u2014","","\u2014","","\u2014","","","\u2014","","\u2014","","(7)"],["Southern Company","$","5,025","","$","122","","$","3,116","","","$","2,625","","$","454","","$","1,249"]] [[/GREPCENT_TABLE]] (a)Includes reductions in finance lease obligations resulting from cash payments under finance leases and, for Georgia Power, principal amortization payments for FFB borrowings. (b)Represents reductions in affiliate finance lease obligations at Georgia Power, which are eliminated in Southern Company's consolidated financial statements. Except as otherwise described herein, the Registrants used the proceeds of debt issuances for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including working capital. The Subsidiary Registrants also used the proceeds for their construction programs. In addition to any financings that may be necessary to meet capital requirements and contractual obligations, the Registrants plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit. Southern Company During 2021, Southern Company issued approximately 3.5 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $73 million. In January 2021, Southern Company borrowed $25 million pursuant to a short-term uncommitted bank credit arrangement, which it repaid in March 2021. In February 2021, Southern Company issued $600 million aggregate principal amount of Series 2021A 0.60% Senior Notes due February 26, 2024 and $400 million aggregate principal amount of Series 2021B 1.75% Senior Notes due March 15, 2028. In May 2021, Southern Company issued $1.0 billion aggregate principal amount of Series 2021A 3.75% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due September 15, 2051. Also in May 2021, Southern Company redeemed all of its $1.5 billion aggregate principal amount of 2.35% Senior Notes due July 1, 2021. In September 2021, Southern Company issued €1.25 billion (approximately $1.476 billion) aggregate principal amount of Series 2021B 1.875% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due September 15, 2081. Southern Company's obligations under these notes were effectively converted to fixed-rate U.S. dollars at issuance for the first six years through cross-currency swaps, mitigating foreign currency exchange risk associated with the interest and principal payments during this period. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information. In October 2021, Southern Company redeemed all $800 million aggregate principal amount of its Series 2016A 5.25% Junior Subordinated Notes due October 1, 2076. In November 2021, Southern Company issued $600 million aggregate principal amount of Series 2021C Floating Rate Senior Notes due May 10, 2023. II-66     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Alabama Power In March 2021, Alabama Power extended the maturity dates from March 2021 to March 2026 on its three bank term loan agreements with an aggregate principal amount of $45 million, currently bearing interest based on three-month LIBOR. In June 2021, Alabama Power repaid at maturity $200 million aggregate principal amount of its Series 2011B 3.950% Senior Notes. Also in June 2021, Alabama Power issued $600 million aggregate principal amount of Series 2021A 3.125% Senior Notes due July 15, 2051. In July 2021, Alabama Power redeemed all of its approximately $206 million aggregate principal amount of Series E Junior Subordinated Notes due October 1, 2042. The Series E Junior Subordinated Notes were held by an affiliated trust, Alabama Power Capital Trust V, which applied the redemption proceeds to the simultaneous redemption of (i) its Flexible Trust Preferred Securities totaling approximately $200 million, which were guaranteed by Alabama Power, and (ii) shares of its common securities totaling approximately $6 million that were held by Alabama Power. In November 2021, Alabama Power repaid at maturity $65 million aggregate principal amount of The Industrial Development Board of the Town of Columbia (Alabama) Tax Exempt Variable Rate Demand Revenue Bonds (Alabama Power Company Project), Series 1997. Also in November 2021, Alabama Power issued $700 million aggregate principal amount of Series 2021B 3.00% Senior Notes due March 15, 2052. Subsequent to December 31, 2021, Alabama Power received a capital contribution totaling $625 million from Southern Company and announced the redemption in February 2022 of all $550 million aggregate principal amount of its Series 2017A 2.45% Senior Notes due March 30, 2022. Georgia Power In February 2021, Georgia Power issued $750 million aggregate principal amount of Series 2021A 3.25% Senior Notes due March 15, 2051. An amount equal to the net proceeds of the senior notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects and/or expenditures and programs related to enabling opportunities for diverse and small businesses/suppliers. In March 2021, Georgia Power redeemed all $325 million aggregate principal amount of its Series 2016B 2.40% Senior Notes due April 1, 2021. Also in March 2021, Georgia Power extended the maturity date of its $125 million term loan from June 2021 to June 2022. In June 2021, Georgia Power purchased and held approximately $69 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2008. In August 2021, Georgia Power reoffered these bonds to the public. In June 2021 and December 2021, Georgia Power made the final borrowings under the FFB Credit Facilities in aggregate principal amounts of $371 million and $69 million, respectively, at an interest rate of 2.434% and 2.178%, respectively, through the final maturity date of February 20, 2044. No further borrowings are permitted under the FFB Credit Facilities. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. During 2021, Georgia Power made principal amortization payments of $96 million under the FFB Credit Facilities. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" for additional information. In August 2021, Georgia Power reoffered to the public $53 million aggregate principal amount of Development Authority of Floyd County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Hammond Project), First Series 2010, which it had previously purchased and held. Subsequent to December 31, 2021, Georgia Power redeemed all $400 million aggregate principal amount of its Series 2012B 2.85% Senior Notes due May 15, 2022. II-67     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report Mississippi Power In June 2021, Mississippi Power issued $200 million aggregate principal amount of Series 2021A Floating Rate Senior Notes due June 28, 2024 and $325 million aggregate principal amount of Series 2021B 3.10% Senior Notes due July 30, 2051. An amount equal to the net proceeds of the Series 2021B Senior Notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects and/or expenditures and programs related to enabling opportunities for diverse and small businesses/suppliers. In July 2021, Mississippi Power redeemed all $270 million aggregate principal amount of Mississippi Business Finance Corporation Taxable Revenue Bonds, 7.13% Series 1999A due October 20, 2021 at par plus accrued interest and a make-whole premium. Also in July 2021, Mississippi Power repaid its $60 million and $15 million floating rate bank term loans, with maturity dates in December 2021 and January 2022, respectively. In October 2021, Mississippi Power repaid $25 million previously borrowed under its $125 million revolving credit arrangement that matures in March 2023. In December 2021, Mississippi Power redeemed all $50 million aggregate principal amount of Mississippi Business Finance Corporation Revenue Bonds, First Series 2010 due December 1, 2040. Subsequent to December 31, 2021, Mississippi Power received a capital contribution totaling $50 million from Southern Company. Southern Power In January 2021, Southern Power issued $400 million aggregate principal amount of Series 2021A 0.90% Senior Notes due January 15, 2026. An amount equal to the net proceeds of the senior notes was allocated to finance or refinance, in whole or in part, one or more renewable energy projects. In November 2021, Southern Power redeemed all $300 million aggregate principal amount of its Series 2016E 2.500% Senior Notes due December 15, 2021. Southern Company Gas In February 2021, Atlanta Gas Light repaid at maturity $30 million aggregate principal amount of 9.1% medium-term notes. In March 2021, Nicor Gas entered into three short-term floating rate bank loans in an aggregate principal amount of $300 million, each bearing interest based on one-month LIBOR. In June 2021, Southern Company Gas Capital redeemed all $300 million aggregate principal amount of its 3.50% Senior Notes due September 15, 2021. In August 2021, Nicor Gas issued in a private placement $50 million aggregate principal amount of 1.42% Series First Mortgage Bonds due August 31, 2026 and $50 million aggregate principal amount of 2.19% Series First Mortgage Bonds due August 31, 2033. In October 2021, Nicor Gas issued in a private placement $100 million aggregate principal amount of 1.77% Series First Mortgage Bonds due October 28, 2028. Nicor Gas also entered into an agreement to issue in a private placement additional first mortgage bonds with aggregate principal amounts of $100 million and $75 million expected to be issued in August 2022 and October 2022, respectively. In September 2021, Southern Company Gas Capital, as borrower, and Southern Company Gas, as guarantor, issued $450 million aggregate principal amount of Series 2021A 3.15% Senior Notes due September 30, 2051. Credit Rating Risk At December 31, 2021, the Registrants did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain Registrants to BBB and/or Baa2 or below. These contracts are primarily for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and, for Georgia Power, construction of new generation at Plant Vogtle Units 3 and 4. II-68     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The maximum potential collateral requirements under these contracts at December 31, 2021 were as follows: [[GREPCENT_TABLE]] [["Credit Ratings","Southern Company(*)","Alabama Power","Georgia Power","Mississippi Power","SouthernPower(*)","Southern Company Gas"],["","(in millions)"],["At BBB and/or Baa2","$","41","","$","1","","$","\u2014","","$","\u2014","","$","40","","$","\u2014"],["At BBB- and/or Baa3","419","","2","","61","","1","","357","","\u2014"],["At BB+ and/or Ba1 or below","1,934","","407","","939","","307","","1,186","","9"]] [[/GREPCENT_TABLE]] (*)Southern Power has PPAs that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPAs require credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade. Southern Power had $105 million of cash collateral posted related to PPA requirements at December 31, 2021. The amounts in the previous table for the traditional electric operating companies and Southern Power include certain agreements that could require collateral if either Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of the Registrants to access capital markets and would be likely to impact the cost at which they do so. Mississippi Power and its largest retail customer, Chevron, have agreements under which Mississippi Power provides retail service to the Chevron refinery in Pascagoula, Mississippi through at least 2038. The agreements grant Chevron a security interest in the co-generation assets owned by Mississippi Power located at the refinery that is exercisable upon the occurrence of (i) certain bankruptcy events or (ii) other events of default coupled with specific reductions in steam output at the facility and a downgrade of Mississippi Power's credit rating to below investment grade by two of the three rating agencies. On October 27, 2021, S&P downgraded the Southern Company issuer credit rating to BBB+ from A-. Due to S&P's consolidated rating methodology, the downgrade of Southern Company's issuer credit rating resulted in the downgrade of the senior unsecured long-term debt rating of Alabama Power and the long-term issuer rating of Nicor Gas to A- from A, the senior unsecured long-term debt ratings of Atlanta Gas Light, Georgia Power, Mississippi Power, and Southern Company Gas Capital to BBB+ from A-, and the senior unsecured long-term debt ratings of Southern Company and Southern Power to BBB from BBB+. S&P revised its credit rating outlook for Southern Company and its subsidiaries to stable from negative. Market Price Risk As a result of the sale of Sequent on July 1, 2021, Southern Company Gas' market risk exposure decreased significantly. The other Registrants had no material change in market risk exposure for the year ended December 31, 2021 when compared to the year ended December 31, 2020. See Note 14 to the financial statements for an in-depth discussion of the Registrants' derivatives, as well as Note 1 to the financial statements under "Financial Instruments" for additional information. See Note 15 to the financial statements under "Southern Company Gas" for information regarding the sale of Sequent. Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities that sell natural gas directly to end-use customers continue to have limited exposure to market volatility in interest rates, foreign currency exchange rates, commodity fuel prices, and prices of electricity. The traditional electric operating companies and certain of the natural gas distribution utilities manage fuel-hedging programs implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. Mississippi Power also manages wholesale fuel-hedging programs under agreements with its wholesale customers. Because energy from Southern Power's facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power's exposure to market volatility in commodity fuel prices and prices of electricity is generally limited. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional electric operating companies and Southern Power may enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, financial hedge contracts for natural gas purchases; however, a significant portion of contracts are priced at market. Certain of Southern Company Gas' non-regulated operations (primarily Sequent until its sale on July 1, 2021) routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and OTC energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Southern Company Gas' gas marketing services business also actively II-69     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report manages storage positions through a variety of hedging transactions for the purpose of managing exposures arising from changing natural gas prices. These hedging instruments are used to substantially protect economic margins (as spreads between wholesale and retail natural gas prices widen between periods) and thereby minimize exposure to declining earnings. Some of these economic hedge activities may not qualify, or may not be designated, for hedge accounting treatment. The following table provides information related to variable interest rate exposure on long-term debt (including amounts due within one year) at December 31, 2021 for the applicable Registrants: [[GREPCENT_TABLE]] [["At December 31, 2021","Southern Company(*)","Alabama Power","Georgia Power","Mississippi Power","","Southern Company Gas"],["","(in millions, except percentages)"],["Long-term variable interest rate exposure","$","4,464","","$","834","","$","797","","$","234","","","$","500"],["Weighted average interest rate on long-term variable interest rate exposure","0.84","%","0.21","%","0.21","%","0.32","%","","0.49","%"],["Impact on annualized interest expense of 100 basis point change in interest rates","$","45","","$","8","","$","8","","$","2","","","$","5"]] [[/GREPCENT_TABLE]] (*)Includes $2.0 billion of long-term variable interest rate exposure at the Southern Company parent entity. The Registrants may enter into interest rate derivatives designated as hedges, which are intended to mitigate interest rate volatility related to forecasted debt financings and existing fixed and floating rate obligations. See Note 14 to the financial statements under "Interest Rate Derivatives" for additional information. Southern Company and Southern Power had foreign currency denominated debt at December 31, 2021 and have each mitigated exposure to foreign currency exchange rate risk through the use of foreign currency swaps. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information. Changes in fair value of energy-related derivative contracts for Southern Company and Southern Company Gas for the years ended December 31, 2021 and 2020 are provided in the table below. At December 31, 2021 and 2020, substantially all of the traditional electric operating companies' and certain of the natural gas distribution utilities' energy-related derivative contracts were designated as regulatory hedges and were related to the applicable company's fuel-hedging program. [[GREPCENT_TABLE]] [["","Southern Company(a)","","","","","Southern Company Gas(a)"],["","(in millions)"],["Contracts outstanding at December 31, 2019, assets (liabilities), net","$","(21)","","","","","","$","72"],["Contracts realized or settled","(14)","","","","","","(98)"],["Current period changes(b)","142","","","","","","127"],["Contracts outstanding at December 31, 2020, assets (liabilities), net","$","107","","","","","","$","101"],["Contracts realized or settled","(252)","","","","","","(85)"],["Current period changes(b)","243","","","","","","(84)"],["Sale of Sequent","76","","","","","","76"],["Contracts outstanding at December 31, 2021, assets (liabilities), net","$","174","","","","","","$","8"]] [[/GREPCENT_TABLE]] (a)Excludes cash collateral held on deposit in broker margin accounts of $3 million, $28 million, and $99 million at December 31, 2021, 2020, and 2019, respectively, and immaterial premium and intrinsic value associated with weather derivatives for all periods presented. (b)The changes in fair value of energy-related derivative contracts are substantially attributable to both the volume and the price of natural gas. Current period changes also include the changes in fair value of new contracts entered into during the period, if any. II-70     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The net hedge volumes of energy-related derivative contracts for natural gas purchased (sold) at December 31, 2021 and 2020 for Southern Company and Southern Company Gas were as follows: [[GREPCENT_TABLE]] [["","Southern Company","","","","","Southern Company Gas"],["","mmBtu Volume (in millions)"],["At December 31, 2021:"],["Commodity \u2013 Natural gas swaps","57","","","","","","\u2014"],["Commodity \u2013 Natural gas options","253","","","","","","68"],["Total hedge volume","310","","","","","","68"],["At December 31, 2020:"],["Commodity \u2013 Natural gas swaps","262","","","","","","\u2014"],["Commodity \u2013 Natural gas options","574","","","","","","523"],["Total hedge volume","836","","","","","","523"]] [[/GREPCENT_TABLE]] Southern Company Gas' derivative contracts are comprised of both long and short natural gas positions. A long position is a contract to purchase natural gas, and a short position is a contract to sell natural gas. The volumes presented above for Southern Company Gas represent the net of long natural gas positions of 74 million mmBtu and short natural gas positions of 6 million mmBtu at December 31, 2021 and the net of long natural gas positions of 4.42 billion mmBtu and short natural gas positions of 3.90 billion mmBtu at December 31, 2020. For the Southern Company system, the weighted average swap contract cost per mmBtu was approximately $0.74 per mmBtu below market prices at December 31, 2021 and was equal to market prices at December 31, 2020. The change in option fair value is primarily attributable to the volatility of the market and the underlying change in the natural gas price. Substantially all of the traditional electric operating companies' natural gas hedge gains and losses are recovered through their respective fuel cost recovery clauses. The Registrants use over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2 of the fair value hierarchy. In addition, Southern Company Gas uses exchange-traded market-observable contracts, which are categorized as Level 1. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts for Southern Company and Southern Company Gas at December 31, 2021 were as follows: [[GREPCENT_TABLE]] [["","Fair Value Measurements of Contracts at"],["","December 31, 2021"],["","Total Fair Value","","Maturity"],["","","2022","","2023 \u2013 2024","","2025 \u2013 2026"],["","(in millions)"],["Southern Company"],["Level 1(a)","$","15","","","$","14","","","$","1","","","$","\u2014"],["Level 2(b)","159","","","93","","","65","","","1"],["Southern Company total(c)","$","174","","","$","107","","","$","66","","","$","1"],["Southern Company Gas"],["Level 1(a)","$","15","","","$","14","","","$","1","","","$","\u2014"],["Level 2(b)","(7)","","","(7)","","","\u2014","","","\u2014"],["Southern Company Gas total(c)","$","8","","","$","7","","","$","1","","","$","\u2014"]] [[/GREPCENT_TABLE]] (a)Valued using NYMEX futures prices. (b)Level 2 amounts for Southern Company Gas are valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers. (c)Excludes cash collateral of $3 million as well as immaterial premium and associated intrinsic value associated with weather derivatives. II-71     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2021 Annual Report The Registrants are exposed to risk in the event of nonperformance by counterparties to energy-related and interest rate derivative contracts, as applicable. The Registrants only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P, or with counterparties who have posted collateral to cover potential credit exposure. Therefore, the Registrants do not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments" and Note 14 to the financial statements. Credit Risk Southern Company (except as discussed herein), the traditional electric operating companies, and Southern Power are not exposed to any concentrations of credit risk. Southern Company Gas' exposure to concentrations of credit risk is discussed herein. Southern Company Gas Gas Distribution Operations Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of the 16 Marketers in Georgia. The credit risk exposure to the Marketers varies seasonally, with the lowest exposure in the non-peak summer months and the highest exposure in the peak winter months. Marketers are responsible for the retail sale of natural gas to end-use customers in Georgia. The provisions of Atlanta Gas Light's tariff allow Atlanta Gas Light to obtain credit security support in an amount equal to a minimum of two times a Marketer's highest month's estimated bill from Atlanta Gas Light. For 2021, the four largest Marketers based on customer count, which includes SouthStar, accounted for 15% of Southern Company Gas' operating revenues and 17% of operating revenues for Southern Company Gas' gas distribution operations segment. Several factors are designed to mitigate Southern Company Gas' risks from the increased concentration of credit that has resulted from deregulation. In addition to the security support described above, Atlanta Gas Light bills intrastate delivery service to Marketers in advance rather than in arrears. Atlanta Gas Light accepts credit support in the form of cash deposits, letters of credit/surety bonds from acceptable issuers, and corporate guarantees from investment-grade entities. Southern Company Gas reviews the adequacy of credit support coverage, credit rating profiles of credit support providers, and payment status of each Marketer. Southern Company Gas believes that adequate policies and procedures are in place to properly quantify, manage, and report on Atlanta Gas Light's credit risk exposure to Marketers. Atlanta Gas Light also faces potential credit risk in connection with assignments of interstate pipeline transportation and storage capacity to Marketers. Although Atlanta Gas Light assigns this capacity to Marketers, in the event that a Marketer fails to pay the interstate pipelines for the capacity, the interstate pipelines would likely seek repayment from Atlanta Gas Light. Wholesale Gas Services Following the sale of Sequent on July 1, 2021, Southern Company Gas no longer has exposure to counterparty credit risk for wholesale gas services. See Note 15 to the financial statements under "Southern Company Gas" for information on the sale of Sequent. Gas Marketing Services Southern Company Gas obtains credit scores for its firm residential and small commercial customers using a national credit reporting agency, enrolling only those customers that meet or exceed Southern Company Gas' credit threshold. Southern Company Gas considers potential interruptible and large commercial customers based on reviews of publicly available financial statements and commercially available credit reports. Prior to entering into a physical transaction, Southern Company Gas also assigns physical wholesale counterparties an internal credit rating and credit limit based on the counterparties' Moody's, S&P, and Fitch ratings, commercially available credit reports, and audited financial statements. II-72     Table of Contents                                Index to Financial Statements