# SOUTHERN CO (SO) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from SOUTHERN CO's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/92122/000009212224000009/so-20231231.htm Accession: 0000092122-24-000009 Filing date: 2024-02-15 Report date: 2023-12-31 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/ Previous year: /company/SO/mda/fy2022/ (FY 2022) Next year: /company/SO/mda/fy2024/ (FY 2024) COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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 many factors that could impact the Registrants' future results of operations, financial condition, and liquidity. Recent Developments Alabama Power On March 24, 2023, Alabama Power filed Rate CNP New Plant with the Alabama PSC to recover costs associated with the acquisition of the Central Alabama Generating Station. The filing reflected an annual increase in retail revenues of $78 million, or 1.1%, effective with June 2023 billings. Through May 2023, Alabama Power recovered substantially all costs associated with the Central Alabama Generating Station through Rate RSE, offset by revenues from a power sales agreement. On May 24, 2023, the Central Alabama Generating Station was placed into retail service. On November 1, 2023, Alabama Power placed Plant Barry Unit 8 in service. On December 1, 2023, Alabama Power filed Rate CNP New Plant with the Alabama PSC to recover costs associated with Plant Barry Unit 8. The filing reflected an annual increase in retail revenues of $91 million, or 1.4%, effective with January 2024 billings. On June 14, 2023, the Alabama PSC issued an order approving modifications to Alabama Power's Renewable Generation Certificate. The modifications authorized Alabama Power to procure an additional 2,400 MWs of renewable capacity and energy by June 14, 2029 and to market the related energy and environmental attributes to customers and other third parties. The modifications also increased the size of allowable renewable projects from 80 MWs to 200 MWs and increased the annual approval limit from 160 MWs to 400 MWs. On July 11, 2023, the Alabama PSC issued an order authorizing Alabama Power to expand the existing authority of its reliability reserve to include certain production-related expenses that are intended to maintain reliability in between scheduled generating unit maintenance outages. II-3     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS On August 18, 2023, Alabama Power notified the Alabama PSC of its intent to use a portion of its reliability reserve balance in 2023. During the fourth quarter 2023, Alabama Power used $75 million of the reliability reserve for reliability-related transmission, distribution, and generation expenses and nuclear production-related expenses. At December 31, 2023, Alabama Power accrued $52 million to its reliability reserve. On October 3, 2023, the Alabama PSC issued an order modifying its December 2022 order related to excess federal accumulated deferred income taxes and authorizing Alabama Power to (i) flow back in 2023 approximately $24 million of certain federal excess accumulated deferred income taxes resulting from the Tax Cuts and Jobs Act of 2017 and (ii) make available any remaining balance of excess accumulated deferred income taxes at the end of 2023 for the benefit of customers in 2024 and/or 2025. At December 31, 2023, the remaining balance was $81 million, of which approximately $67 million and $14 million will flow back in 2024 and 2025, respectively, for the benefit of customers. On November 9, 2023, the Alabama PSC approved a decrease to Rate ECR of approximately $126 million annually, effective with December 2023 billings. On December 1, 2023, Alabama Power submitted calculations to the Alabama PSC for Rate CNP Compliance for 2024, which resulted in an annual revenue decrease of approximately $23 million, or 0.3%, effective with January 2024 billings. For the year ended December 31, 2023, Alabama Power's weighted common equity return exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $15 million for Rate RSE refunds, which will be refunded to customers through bill credits in April 2024. 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 Georgia Power placed Plant Vogtle Unit 3 in service on July 31, 2023 and continues construction on Plant Vogtle Unit 4 (each with electric generating capacity of approximately 1,100 MWs), in which it holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast to complete Plant Vogtle Units 3 and 4, including contingency, through the second quarter 2024 is $10.8 billion. Hot functional testing for Unit 4 was completed on May 1, 2023. On July 20, 2023, Southern Nuclear announced that all Unit 4 ITAACs had been submitted to the NRC, and, on July 28, 2023, the NRC published its 103(g) finding that the accepted criteria in the combined license for Unit 4 had been met, which allowed nuclear fuel to be loaded and start-up testing to begin. Fuel load for Unit 4 was completed on August 19, 2023. On October 6, 2023, Georgia Power announced that during start-up and pre-operational testing for Unit 4, Southern Nuclear identified a motor fault in one of four reactor coolant pumps (RCPs). This RCP was replaced with an on-site spare RCP from inventory. On February 1, 2024, Georgia Power announced that during start-up and pre-operational testing for Unit 4, Southern Nuclear identified, and has remediated, vibrations associated with certain piping within the cooling system. Considering the remaining pre-operational testing, Unit 4 is projected to be placed in service during the second quarter 2024. On February 14, 2024, Unit 4 achieved self-sustaining nuclear fission, commonly referred to as initial criticality. The projected schedule for Unit 4 significantly depends on the progression of start-up and pre-operational testing, which may be impacted by equipment or other operational failures. In addition, any findings related to the root cause of the motor fault on the single Unit 4 RCP could require engineering changes or remediation related to the other seven Unit 3 and Unit 4 RCPs. Any further delays could result in a later in-service date and cost increases. As of December 31, 2023, based on completion of construction work and the assessment of start-up and pre-operational testing remaining, Southern Nuclear has an estimated $36 million for construction contingency remaining in the estimate to complete. This contingency is projected to be allocated in the future to address any further Unit 4 schedule extensions or remediation of other issues discovered during start-up testing. In September 2022, Georgia Power and MEAG Power reached an agreement to resolve a dispute regarding 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"). Under the terms of the agreement, among other items, (i) MEAG Power will not exercise its tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4; (ii) Georgia Power will reimburse a portion of MEAG Power's costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will total approximately $92 million based on the current project capital cost forecast; and (iii) Georgia Power will reimburse 20% of MEAG Power's costs of construction with respect to any amounts over the current project capital cost forecast, with no further adjustment for force majeure costs. II-4     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS On October 5, 2023 and October 17, 2023, Georgia Power reached agreements with OPC and Dalton, respectively, to resolve its respective dispute with each of OPC and Dalton regarding the cost-sharing and tender provisions of the Global Amendments. Under the terms of the agreements with OPC and Dalton, among other items, (i) each of OPC and Dalton retracted its exercise of the tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4, (ii) Georgia Power made payments immediately after execution of the agreements of $308 million and $17 million to OPC and Dalton, respectively, representing payment for a portion of each of OPC's and Dalton's costs of construction for Plant Vogtle Units 3 and 4 previously incurred, (iii) Georgia Power will pay a portion of each of OPC's and Dalton's further costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will be in an aggregate amount of approximately $105 million and $6 million for OPC and Dalton, respectively, based on the current project capital cost forecast, and (iv) Georgia Power will pay 66% of each of OPC's and Dalton's costs of construction with respect to any amounts above the current project capital cost forecast, with no further adjustment for force majeure costs. Georgia Power recorded pre-tax charges to income through the fourth quarter 2022 of $407 million ($304 million after tax) associated with the cost-sharing provisions of the Global Amendments, including the settlement with MEAG Power. Based on the current project capital cost forecast and the settlements with OPC and Dalton described above, Georgia Power recorded a pre-tax charge to income of approximately $160 million ($120 million after tax) in the third quarter 2023. These charges are included in the total project capital cost forecast and will not be recovered from retail customers. The ultimate impact of these matters on the construction schedule for Plant Vogtle Unit 4 and project capital cost forecast 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 Units 3 and 4 Rate and Prudency Proceedings In compliance with a Georgia PSC order approved in 2021, Georgia Power increased annual retail base rates by $318 million effective August 1, 2023 based on the in-service date of July 31, 2023 for Unit 3. On December 19, 2023, the Georgia PSC voted to approve the application to adjust rates to include reasonable and prudent Plant Vogtle Units 3 and 4 costs (Application) as modified by the related stipulated agreement (Prudency Stipulation) among Georgia Power, the staff of the Georgia PSC, and certain intervenors. Under the terms of the approved Prudency Stipulation, Georgia Power will recover $7.562 billion in total construction and capital costs and associated retail rate base items of $1.02 billion, which includes AFUDC financing costs above $4.418 billion (the Georgia PSC-certified amount) up to $7.562 billion. Georgia Power will also recover projected operations and maintenance expenses, depreciation expense, nuclear decommissioning accruals, and property taxes, net of projected PTCs. After considering construction and capital costs already in retail base rates of $2.1 billion and $362 million of associated retail rate base items (approved by the Georgia PSC in 2021) and upon achieving commercial operation of Unit 4, Georgia Power will include in retail rate base the remaining $5.462 billion of construction and capital costs as well as $656 million of associated retail rate base items. Under the Prudency Stipulation, if commercial operation for Unit 4 is not achieved by March 31, 2024, Georgia Power's ROE used to determine the NCCR tariff and calculate AFUDC will be reduced to zero, which will result in an estimated negative impact to earnings of approximately $30 million per month until the month following the date commercial operation for Unit 4 is achieved. The ultimate outcome of this matter cannot be determined at this time. Annual retail base revenues will increase approximately $729 million and the average retail base rates will be adjusted by approximately 5% (net of the elimination of the NCCR tariff described above) effective the first day of the month after Unit 4 achieves commercial operation. The approval of the Application and the Prudency Stipulation resolves all issues for determination by the Georgia PSC regarding the reasonableness, prudence, and cost recovery for the remaining Plant Vogtle Units 3 and 4 construction and capital costs not already in retail base rates. As a result of the Georgia PSC's approval of the Prudency Stipulation, Georgia Power recorded a pre-tax credit to income of approximately $228 million ($170 million after tax) in the fourth quarter 2023 to recognize CWIP costs previously charged to income, which are now recoverable through retail rates. Associated AFUDC on these costs was also recognized. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Regulatory Matters" for additional information. Rate Plans On November 16, 2023, in accordance with the terms of the 2022 ARP, the Georgia PSC approved tariff adjustments effective January 1, 2024 that resulted in a net increase in rates of $191 million. II-5     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Georgia Power expects to submit a compliance filing in the fourth quarter 2024 to request tariff adjustments approved pursuant to the 2022 ARP effective January 1, 2025. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Rate Plans – 2022 ARP" for additional information. Fuel Cost Recovery On May 16, 2023, the Georgia PSC approved a stipulation agreement between Georgia Power and the staff of the Georgia PSC to increase annual fuel billings by 54%, or approximately $1.1 billion, effective June 1, 2023. The increase reflects a three-year recovery period for $2.2 billion of Georgia Power's under recovered fuel balance at May 31, 2023. Changes in fuel rates have no significant effect on Southern Company's or Georgia Power's net income but do impact the related operating cash flows. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information. Integrated Resource Plans On October 27, 2023, Georgia Power filed an updated IRP (2023 IRP Update) with the Georgia PSC, which sets forth a plan to support the recent increase in the state of Georgia's projected energy needs since the 2022 IRP. Georgia Power expects the Georgia PSC to render a final decision on the 2023 IRP Update on April 16, 2024. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plans" for additional information. Mississippi Power On October 27, 2023, the FERC approved a settlement agreement filed by Mississippi Power and Cooperative Energy on July 31, 2023 related to Mississippi Power's July 2022 request for a $23 million increase in annual wholesale base revenues under the MRA tariff. The settlement agreement provides for a $16 million increase in annual wholesale base revenues, effective September 14, 2022, and a refund to customers of approximately $6 million primarily related to the difference between the approved rates and interim rates. In October 2023, Mississippi Power signed an affiliate PPA with Georgia Power for 750 MWs of capacity, which began January 1, 2024 and will continue through December 2028. In order to fulfill this PPA and serve the interests of customers, Mississippi Power now expects electric generating units identified in its 2021 IRP to remain in service beyond the previously indicated dates. Mississippi Power is expected to file its next IRP in April 2024 in accordance with the rules and orders of the Mississippi PSC. The ultimate outcome of this matter cannot be determined at this time. On February 6, 2024, the Mississippi PSC approved Mississippi Power's request to increase retail fuel revenues by $18 million annually effective with the first billing cycle of March 2024. On February 12, 2024, Mississippi Power submitted its annual ECO Plan filing to the Mississippi PSC, which requested a $9 million annual increase in revenues. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Mississippi Power" for additional information. II-6     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Southern Power On September 20, 2023, Southern Power acquired 100% of the membership interests in the 200-MW Millers Branch solar project located in Haskell County, Texas from EDF Renewables Development, Inc. and is continuing construction. The facility's output is contracted under a 20-year PPA and commercial operation is expected to occur in the fourth quarter 2025. The project includes an option to expand capacity up to an additional 300 MWs. Subsequent to December 31, 2023, Southern Power committed to expand the construction of the facility through a second phase adding up to 205 MWs, with commercial operation expected to occur in the second quarter 2026. On September 22, 2023, Southern Power acquired 100% of the membership interests in the 150-MW South Cheyenne solar project located in Laramie County, Wyoming from Hanwha Q Cells USA Corp. and is continuing construction. The facility's output is contracted under a 20-year PPA and commercial operation is expected to occur in the second quarter 2024. The ultimate outcome of these matters cannot be determined at this time. 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 facilities under construction, as well as other capacity and energy contracts, Southern Power's average investment coverage ratio at December 31, 2023 was 97% through 2028 and 89% through 2033, with an average remaining contract duration of approximately 12 years. See Note 15 to the financial statements under "Southern Power" for additional information. Southern Company Gas On June 15, 2023, the Illinois Commission concluded its review of the Qualifying Infrastructure Plant (QIP) capital investments by Nicor Gas for calendar year 2019 under the QIP rider, also referred to as Investing in Illinois program. The Illinois Commission disallowed $32 million of the $415 million of capital investments commissioned in 2019, together with the related return on investment. Nicor Gas recorded a pre-tax charge to income in the second quarter 2023 of $38 million ($28 million after tax) associated with the disallowance of capital investments placed in service in 2019. The disallowance is reflected on the statement of income as an $8 million reduction to revenues and $30 million in estimated loss on regulatory disallowance. On August 3, 2023, the Illinois Commission denied a rehearing request filed by Nicor Gas. On August 24, 2023, Nicor Gas filed a notice of appeal with the Illinois Appellate Court. Nicor Gas defends these investments in infrastructure as prudently incurred. On November 16, 2023, the Illinois Commission approved a $223 million annual base rate increase for Nicor Gas, which became effective December 1, 2023. The base rate increase was based on a return on equity of 9.51% and an equity ratio of 50.00%. In connection with Nicor Gas' general base rate case proceeding, the Illinois Commission disallowed $126.8 million of capital investments that have been completed or planned to be completed through December 31, 2024. This includes $31 million for capital investments placed in service in 2022 and 2023 under the Investing in Illinois program and $95.9 million for other transmission and distribution capital investments. Nicor Gas recorded a pre-tax charge to income in the fourth quarter 2023 of $58 million ($44 million after tax) associated with the disallowances, with the remaining $69 million related to prospective projects that will be postponed and/or reevaluated. The disallowance is reflected on the statement of income in estimated loss on regulatory disallowance. On January 3, 2024, the Illinois Commission denied a request by Nicor Gas for rehearing on the base rate case disallowances associated with capital investment, as well as on other issues determined in the Illinois Commission's November 16, 2023 base rate case decision. On February 6, 2024, Nicor Gas filed a notice of appeal with the Illinois Appellate Court related to the Illinois Commission's rate case ruling. Any further cost disallowances by the Illinois Commission in the pending cases could be material to the financial statements of Southern Company Gas. The ultimate outcome of these matters cannot be determined at this time. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for additional information. On December 19, 2023, the Georgia PSC approved Atlanta Gas Light's annual GRAM filing, which resulted in an annual base rate increase of $53 million effective January 1, 2024. On February 1, 2024, Atlanta Gas Light filed its triennial Integrated Capacity and Delivery Plan (i-CDP) with the Georgia PSC, which included a series of ongoing and proposed pipeline safety, reliability, and growth programs for the next 10 years (2025 through 2034), as well as the required capital investments and related costs to implement the programs. The i-CDP reflected II-7     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS capital investments totaling approximately $0.7 billion to $1.0 billion annually. Atlanta Gas Light expects the Georgia PSC to issue a final order on this matter in the third quarter 2024. The ultimate outcome of this matter cannot be determined at this time. On August 28, 2023, the Virginia Commission approved a stipulation agreement related to Virginia Natural Gas' August 2022 general base rate case filing, which allowed for a $48 million increase in annual base rate revenues based on a ROE of 9.70% and an equity ratio of 49.06%. Interim rates became effective as of January 1, 2023, subject to refund, based on Virginia Natural Gas' original requested increase of approximately $69 million. Refunds to customers related to the difference between the approved rates effective September 1, 2023 and the interim rates were completed during the fourth quarter 2023. On February 9, 2024, Virginia Natural Gas filed with the Virginia Commission a request to extend the existing SAVE program through 2029. The request includes investments of $70 million in each year from 2025 through 2029, with a potential variance of up to $5 million allowed for the program, for a maximum total investment over the five-year extension (2025 through 2029) of $355 million. Virginia Natural Gas expects the Virginia Commission to issue a final order on this matter in the second quarter 2024. The ultimate outcome of this matter cannot be determined at this time. Key Performance Indicators In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.9 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. 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 Company Gas also 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. See RESULTS OF OPERATIONS – "Southern Company Gas" for additional information on Southern Company Gas' operating metrics. 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-8     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Southern Company Consolidated net income attributable to Southern Company was $4.0 billion in 2023, an increase of $452 million, or 12.8%, from 2022. The increase was primarily due to lower non-fuel operations and maintenance costs, an increase in retail electric revenues associated with rates and pricing, a decrease in income tax expense, a decrease in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, an increase in other revenues, an increase in natural gas revenues from rate increases and continued infrastructure replacement, and a goodwill impairment charge in 2022 at PowerSecure, partially offset by higher depreciation and amortization, higher interest expense, and a decrease in retail electric revenues associated with milder weather in 2023 compared to 2022. See Notes 1 and 2 to the financial statements under "Goodwill and Other Intangible Assets" and "Georgia Power – Nuclear Construction," respectively, for additional information. Basic EPS was $3.64 in 2023 and $3.28 in 2022. Diluted EPS, which factors in additional shares related to stock-based compensation, was $3.62 in 2023 and $3.26 in 2022. EPS for 2023 and 2022 was negatively impacted by $0.06 and $0.04 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 $2.78 in 2023 and $2.70 in 2022. In January 2024, Southern Company declared a quarterly dividend of 70 cents per share. For 2023, the dividend payout ratio was 76% compared to 82% for 2022. Discussion of Southern Company's results of operations is divided into three parts – the Southern Company system's primary business of electricity sales, its gas business, and its other business activities. [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Electricity business","$","3,994","","","$","3,672"],["Gas business","615","","","572"],["Other business activities","(633)","","","(720)"],["Net Income","$","3,976","","","$","3,524"]] [[/GREPCENT_TABLE]] II-9     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Electricity Business Southern Company's electric utilities generate and sell electricity to retail and wholesale customers. A condensed statement of income for the electricity business follows: [[GREPCENT_TABLE]] [["","2023","","Increase (Decrease) from 2022"],["","(in millions)"],["Electric operating revenues","$","19,998","","","$","(2,875)"],["Fuel","4,365","","","(2,470)"],["Purchased power","883","","","(710)"],["Cost of other sales","171","","","57"],["Other operations and maintenance","4,679","","","(550)"],["Depreciation and amortization","3,865","","","836"],["Taxes other than income taxes","1,159","","","34"],["Estimated loss on Plant Vogtle Units 3 and 4","(68)","","","(251)"],["Total electric operating expenses","15,054","","","(3,054)"],["Operating income","4,944","","","179"],["Allowance for equity funds used during construction","247","","","37"],["Interest expense, net of amounts capitalized","1,274","","","207"],["Other income (expense), net","533","","","17"],["Income taxes","583","","","(265)"],["Net income","3,867","","","291"],["Less:"],["Dividends on preferred stock of subsidiaries","\u2014","","","(11)"],["Net loss attributable to noncontrolling interests","(127)","","","(20)"],["Net Income Attributable to Southern Company","$","3,994","","","$","322"]] [[/GREPCENT_TABLE]] Electric Operating Revenues Electric operating revenues for 2023 were $20.0 billion, reflecting a $2.9 billion, or 12.6%, decrease from 2022. Details of electric operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Retail electric \u2014 prior year","$","18,197"],["Estimated change resulting from \u2014"],["Rates and pricing","437"],["Sales decline","(33)"],["Weather","(229)"],["Fuel and other cost recovery","(2,029)"],["Retail electric \u2014 current year","$","16,343","","","$","18,197"],["Wholesale electric revenues","2,467","","","3,641"],["Other electric revenues","792","","","747"],["Other revenues","396","","","288"],["Electric operating revenues","$","19,998","","","$","22,873"]] [[/GREPCENT_TABLE]] Retail electric revenues decreased $1.9 billion, or 10.2%, in 2023 as compared to 2022. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2023 was primarily due to base tariff increases in accordance with Georgia Power's 2022 ARP, revenue reductions in 2022 resulting from Georgia Power's retail ROE exceeding the allowed II-10     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS retail ROE range, an increase in Rate CNP Compliance revenues at Alabama Power, and a lower Rate RSE customer refund accrual in 2023 compared to 2022 at Alabama Power, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing and a decrease in the revenues recognized under the NCCR tariff, both at Georgia Power. Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of PPA costs, and do not affect net income. The traditional electric operating companies each have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPA capacity costs. See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" for additional information. Also see "Energy Sales" herein for a discussion of changes in the volume of energy sold, including estimated changes related to sales and weather. Wholesale electric revenues from power sales were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Capacity and other","$","630","","","$","625"],["Energy","1,837","","","3,016"],["Total","$","2,467","","","$","3,641"]] [[/GREPCENT_TABLE]] In 2023, wholesale electric revenues decreased $1.2 billion, or 32.2%, as compared to 2022 primarily due to a decrease in energy revenues. Energy revenues decreased $884 million at Southern Power and $295 million at the traditional electric operating companies primarily due to fuel and purchased power price decreases compared to 2022. Also contributing to the Southern Power decrease was a net decrease in the volume of KWHs sold primarily associated with natural gas PPAs. 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. Other Electric Revenues Other electric revenues increased $45 million, or 6.0%, in 2023 as compared to 2022. The increase was primarily due to increases of $23 million in outdoor lighting sales at Georgia Power, $18 million resulting from receipts of liquidated damages associated with generation facility production guarantees and an arbitration award at Southern Power, $17 million in realized gains associated with price stability products for retail customers on variable demand-driven pricing tariffs at Georgia Power, and $17 million in retail solar program fees at Georgia Power, partially offset by decreases of $25 million in cogeneration steam revenues associated with lower natural gas prices at Alabama Power and $14 million in rent revenues primarily at Alabama Power. II-11     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2023 and the percent change from 2022 were as follows: [[GREPCENT_TABLE]] [["","2023"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","47.1","","","(5.1)","%","","(0.5)","%"],["Commercial","48.3","","","0.1","","","1.3"],["Industrial","48.6","","","(1.9)","","","(1.9)"],["Other","0.5","","","(7.2)","","","(6.8)"],["Total retail","144.5","","","(2.3)","","","(0.4)","%"],["Wholesale","51.0","","","(9.4)"],["Total energy sales","195.5","","","(4.3)","%"]] [[/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 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 decreased 587 million KWHs in 2023 as compared to 2022. Weather-adjusted residential KWH sales decreased 0.5% primarily due to decreased customer usage, partially offset by customer growth. Weather-adjusted commercial KWH sales increased 1.3% primarily due to increased customer usage and customer growth. Industrial KWH sales decreased 1.9% primarily due to decreases in the chemicals, forest products, and textiles sectors. 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 $108 million, or 37.5%, in 2023 as compared to 2022. The increase was primarily due to increases of $54 million in power delivery construction and maintenance projects at Georgia Power, $34 million in unregulated sales of products and services at Alabama Power, and $25 million associated with energy conservation projects 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-12     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Details of the Southern Company system's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["Total generation (in billions of KWHs)(a)(b)","184","","","186"],["Total purchased power (in billions of KWHs)","18","","","25"],["Sources of generation (percent)(a) \u2014"],["Gas","54","","","51"],["Nuclear(b)","18","","","16"],["Coal","17","","","22"],["Hydro","3","","","3"],["Wind, Solar, and Other","8","","","8"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Gas(a)","2.77","","","5.29"],["Nuclear(b)","0.76","","","0.72"],["Coal","4.33","","","3.67"],["Average cost of fuel, generated (in cents per net KWH)(a)(b)","2.68","","","4.05"],["Average cost of purchased power (in cents per net KWH)(c)","5.17","","","7.66"]] [[/GREPCENT_TABLE]] (a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel through July 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" for additional information. (b)Excludes KWHs generated from test period energy at Plant Vogtle Unit 3 prior to its in-service date. The related fuel costs are charged to CWIP in accordance with FERC guidance. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on Plant Vogtle Units 3 and 4. (c)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. In 2023, total fuel and purchased power expenses were $5.2 billion, a decrease of $3.2 billion, or 37.7%, as compared to 2022. The decrease was primarily the result of a $2.7 billion decrease in the average cost of fuel generated and purchased and a $513 million net decrease in the volume of KWHs generated and purchased. Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See Note 2 to the financial statements 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 2023, fuel expense was $4.4 billion, a decrease of $2.5 billion, or 36.1%, as compared to 2022. The decrease was primarily due to a 47.6% decrease in the average cost of natural gas per KWH generated and a 22.5% decrease in the volume of KWHs generated by coal, partially offset by an 18.2% decrease in the volume of KWHs generated by hydro, an 18.0% increase in the average cost of coal per KWH generated, a 10.8% increase in the volume of KWHs generated by nuclear, and a 6.9% increase in the volume of KWHs generated by natural gas. Purchased Power In 2023, purchased power expense was $883 million, a decrease of $710 million, or 44.6%, as compared to 2022. The decrease was primarily due to a 32.5% decrease in the average cost per KWH purchased primarily due to lower natural gas prices and a 27.5% decrease in the volume of KWHs purchased. 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 $57 million, or 50.0%, in 2023 as compared to 2022. The increase was primarily due to increases of $40 million from unregulated power delivery construction and maintenance projects at Georgia Power and $20 million in expenses related to unregulated products and services at Alabama Power. II-13     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Other Operations and Maintenance Expenses Other operations and maintenance expenses decreased $550 million, or 10.5%, in 2023 as compared to 2022. The decrease reflects a decrease of $189 million associated with the reliability reserve accruals and reliability-related expenditures incurred at Alabama Power. Excluding this decrease, there were decreases of $223 million in transmission and distribution expenses primarily related to line maintenance, $182 million in storm damage recovery as authorized in Georgia Power's 2022 ARP, $91 million in generation non-outage maintenance expenses and planned outages, and $50 million in employee compensation and benefit expenses, partially offset by an $86 million increase in technology infrastructure and application production costs and a $73 million increase in generation environmental projects primarily at Georgia Power. See Note 1 to the financial statements under "Storm Damage and Reliability Reserves" for additional information. Depreciation and Amortization Depreciation and amortization increased $836 million, or 27.6%, in 2023 as compared to 2022. The increase was primarily due to increases of $541 million and $190 million resulting from higher depreciation rates at Alabama Power and Georgia Power, respectively, and $79 million from additional plant in service. See Note 2 to the financial statements under "Alabama Power – Rate CNP Depreciation" for additional information. Taxes Other Than Income Taxes Taxes other than income taxes increased $34 million, or 3.0%, in 2023 as compared to 2022. The increase was primarily due to increases of $62 million in property taxes primarily at Georgia Power resulting from an increase in the assessed value of property and $14 million in utility license taxes at Alabama Power, partially offset by a decrease of $40 million in municipal franchise fees resulting from lower retail revenues at Georgia Power. Estimated Loss on Plant Vogtle Units 3 and 4 Georgia Power recorded pre-tax charges (credits) to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling $(68) million and $183 million in 2023 and 2022, respectively. The charges (credits) to income in each year were recorded to reflect Georgia Power's revisions to the total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4 and the related cost recovery. 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 $37 million, or 17.6%, in 2023 as compared to 2022. The increase was primarily associated with an increase in capital expenditures subject to AFUDC at Georgia Power and an increase in capital expenditures related to hydro production and Plant Barry Unit 8 construction at Alabama Power. See Note 2 to the financial statements under "Alabama Power – Rate CNP New Plant" for additional information. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $207 million, or 19.4%, in 2023 as compared to 2022. The increase reflects approximately $120 million related to higher interest rates and $96 million related to higher average outstanding borrowings. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net increased $17 million, or 3.3%, in 2023 as compared to 2022 primarily due to a $48 million decrease in charitable donations primarily at Georgia Power, a $15 million increase in interest income, and a $14 million decrease in non-operating benefit-related expenses at Alabama Power, partially offset by a $42 million decrease in non-service cost-related retirement benefits income and a $13 million decrease in customer charges related to contributions in aid of construction at Georgia Power. See Note 11 to the financial statements for additional information. Income Taxes Income taxes decreased $265 million, or 31.3%, in 2023 as compared to 2022. The decrease was primarily due to a $252 million increase in the flowback of certain excess deferred income taxes at Alabama Power, an $85 million decrease in charges to a valuation allowance on certain state tax credit carryforwards at Georgia Power, generation of $35 million of advanced nuclear PTCs at Georgia Power, and a $32 million adjustment in 2022 related to a prior year state tax credit carryforward at Georgia Power, partially offset by a $145 million decrease in the flowback of certain excess deferred income taxes at Georgia Power that ended in 2022. See Note 10 to the financial statements for additional information. II-14     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Net Loss Attributable to Noncontrolling Interests Substantially all noncontrolling interests relate to renewable projects at Southern Power. Net loss attributable to noncontrolling interests increased $20 million, or 18.7%, in 2023 as compared to 2022. The increased loss was primarily due to $25 million in higher HLBV loss allocations to Southern Power's wind tax equity partners and $5 million in lower income allocations to Southern Power's equity partners, partially offset by $10 million in lower HLBV loss allocations to Southern Power's battery energy storage partners. Gas Business Southern Company Gas distributes natural gas through utilities in four states and is involved in several other complementary businesses including gas pipeline investments and gas marketing services. A condensed statement of income for the gas business follows: [[GREPCENT_TABLE]] [["","2023","","Increase (Decrease) from 2022"],["","(in millions)"],["Operating revenues","$","4,702","","","$","(1,260)"],["Cost of natural gas","1,644","","","(1,360)"],["Other operations and maintenance","1,194","","","18"],["Depreciation and amortization","582","","","23"],["Taxes other than income taxes","262","","","(20)"],["Impairment charges","\u2014","","","(131)"],["Estimated loss on regulatory disallowance","88","","","88"],["Gain on dispositions, net","(7)","","","(3)"],["Total operating expenses","3,763","","","(1,385)"],["Operating income","939","","","125"],["Earnings from equity method investments","140","","","(8)"],["Interest expense, net of amounts capitalized","310","","","47"],["Other income (expense), net","57","","","4"],["Income taxes","211","","","31"],["Net income","$","615","","","$","43"]] [[/GREPCENT_TABLE]] 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. 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 2023, the percentage of operating revenues and net income generated during II-15     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS the Heating Season (January through March and November through December) were 67% and 73%, respectively. For 2022, the percentage of operating revenues and net income generated during the Heating Season were 67% and 66%, respectively. Operating Revenues Operating revenues in 2023 were $4.7 billion, reflecting a $1.3 billion, or 21.1%, decrease compared to 2022. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023"],["","(in millions)"],["Operating revenues \u2013 prior year","$","5,962"],["Estimated change resulting from \u2013"],["Infrastructure replacement programs and base rate changes","194"],["Gas costs and other cost recovery","(1,323)"],["Gas marketing services","(93)"],["Other","(38)"],["Operating revenues \u2013 current year","$","4,702"]] [[/GREPCENT_TABLE]] Revenues from infrastructure replacement programs and base rate changes increased in 2023 primarily due to rate increases at the natural gas distribution utilities and continued investment in infrastructure replacement, partially offset by lower volumes sold and regulatory disallowances at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Revenues associated with gas costs and other cost recovery decreased in 2023 primarily due to lower natural gas cost recovery associated with lower natural gas prices, the timing of natural gas purchases, and the recovery of those costs from customers. 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 gas marketing services decreased in 2023 primarily due to lower natural gas prices and the timing of unrealized hedge losses. 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 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 Note 2 to the financial statements under "Southern Company Gas – Natural Gas Cost Recovery" for additional information. Cost of natural gas at the natural gas distribution utilities represented 83.5% of the total cost of natural gas for 2023. 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, and gains and losses associated with certain derivatives. Cost of natural gas was $1.6 billion, a decrease of $1.4 billion, or 45.3%, in 2023 compared to 2022, which reflects lower gas cost recovery in 2023 as a result of a 58.8% decrease in natural gas prices compared to 2022. Other Operations and Maintenance Expenses Other operations and maintenance expenses increased $18 million, or 1.5%, in 2023 compared to 2022. The increase was primarily due to increases of $70 million in compensation and benefits and $20 million related to energy service contracts, partially offset by a decrease of $60 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas" for additional information. II-16     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Depreciation and Amortization Depreciation and amortization increased $23 million, or 4.1%, in 2023 compared to 2022. 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 decreased $20 million, or 7.1%, in 2023 compared to 2022. The decrease was primarily due to a $29 million decrease in revenue taxes, partially offset by increases in payroll and property taxes. Impairment Charges In 2022, Southern Company Gas recorded pre-tax impairment charges totaling approximately $131 million ($99 million after tax) as a result of an agreement to sell two natural gas storage facilities. See Note 15 to the financial statements under "Southern Company Gas" for additional information. Estimated Loss on Regulatory Disallowance In 2023, Southern Company Gas recorded pre-tax charges related to the disallowance of certain capital investments at Nicor Gas, $88 million of which was recorded in estimated loss on regulatory disallowance. See Note 2 under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for additional information. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $47 million, or 17.9%, in 2023 compared to 2022. The increase reflects approximately $43 million related to higher interest rates and $8 million related to higher average outstanding borrowings. See Note 8 to the financial statements for additional information. Income Taxes Income taxes increased $31 million, or 17.2%, in 2023 compared to 2022. The increase was primarily due to $33 million of tax benefit in 2022 related to the impairment charges associated with the sale of two natural gas storage facilities and higher taxes related to increased earnings, partially offset by approximately $24 million related to the regulatory disallowances at Nicor Gas. See Notes 2 and 15 to the financial statements under "Southern Company Gas" and Note 10 to the financial statements for additional information. Other Business Activities Southern Company's other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, which provides distributed energy and resilience solutions and deploys microgrids for commercial, industrial, governmental, and utility customers; Southern Holdings, which invests in various projects; and Southern Linc, which provides digital wireless communications for use by the Southern Company system and also markets these services to the public and provides fiber optics services within the Southeast. II-17     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS A condensed statement of operations for Southern Company's other business activities follows: [[GREPCENT_TABLE]] [["","2023","","Increase (Decrease) from 2022"],["","(in millions)"],["Operating revenues","$","554","","","$","110"],["Cost of other sales","355","","","87"],["Other operations and maintenance","175","","","(26)"],["Depreciation and amortization","77","","","2"],["Taxes other than income taxes","4","","","\u2014"],["Impairment charges","\u2014","","","(119)"],["Gain on dispositions, net","\u2014","","","14"],["Total operating expenses","611","","","(42)"],["Operating income (loss)","(57)","","","152"],["Earnings from equity method investments","5","","","2"],["Interest expense","863","","","171"],["Other income (expense), net","(16)","","","39"],["Income taxes (benefit)","(298)","","","(65)"],["Net loss","$","(633)","","","$","87"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues for these other business activities increased $110 million, or 24.8%, in 2023 as compared to 2022 primarily due to increases of $92 million related to distributed infrastructure projects at PowerSecure and $24 million primarily related to sales associated with commercial customers at Southern Linc. Cost of Other Sales Cost of other sales for these other business activities increased $87 million, or 32.5%, in 2023 as compared to 2022 primarily due to increases of $58 million related to distributed infrastructure projects at PowerSecure and $23 million primarily related to sales associated with commercial customers at Southern Linc. Other Operations and Maintenance Other operations and maintenance expenses for these other business activities decreased $26 million, or 12.9%, in 2023 as compared to 2022 primarily due to a decrease at the parent company related to cost containment efforts and lower director compensation expenses. Impairment Charges In 2022, a goodwill impairment charge of $119 million was recorded at PowerSecure. See Note 1 to the financial statements under "Goodwill and Other Intangible Assets" for additional information. Gain on Dispositions, Net In 2022, a $14 million gain was recorded at the parent company as a result of the early termination of the transition services agreement related to the 2019 sale of Gulf Power. Interest Expense Interest expense for these other business activities increased $171 million, or 24.7%, in 2023 as compared to 2022. The increase primarily results from parent company financing activities and includes approximately $112 million related to higher interest rates and $73 million related to higher average outstanding borrowings. See Note 8 to the financial statements for additional information. II-18     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Other Income (Expense), Net Other income (expense), net for these other business activities increased $39 million, or 70.9%, in 2023 as compared to 2022 primarily due to a $29 million decrease in charitable donations and a $12 million increase in interest income, both primarily 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 increased $65 million, or 27.9%, in 2023 as compared to 2022. The increase was primarily due to a $35 million tax benefit in 2023 related to a reversal of an uncertain tax position associated with the 2019 sale of Gulf Power and higher pre-tax losses, both at the parent company. Alabama Power Alabama Power's 2023 net income after dividends on preferred stock was $1.37 billion, representing a $30 million, or 2.2%, increase from 2022. The increase was primarily due to a decrease in income tax expense, an increase in Rate CNP Compliance revenues, a decrease in operations and maintenance expenses primarily related to the reliability reserve, and a lower Rate RSE customer refund accrual in 2023 compared to 2022. These increases to net income were offset by an increase in depreciation rates effective January 2023, a decrease in retail revenues associated with milder weather in Alabama Power's service territory in the first and second quarters of 2023 compared to the corresponding periods in 2022, and increases in capacity-related expenses and interest expense. See Note 2 to the financial statements under "Alabama Power" for additional information. A condensed income statement for Alabama Power follows: [[GREPCENT_TABLE]] [["","2023","","Increase(Decrease)from 2022"],["","(in millions)"],["Operating revenues","$","7,050","","","$","(767)"],["Fuel","1,299","","","(541)"],["Purchased power","504","","","(297)"],["Other operations and maintenance","1,769","","","(166)"],["Depreciation and amortization","1,401","","","526"],["Taxes other than income taxes","442","","","18"],["Total operating expenses","5,415","","","(460)"],["Operating income","1,635","","","(307)"],["Allowance for equity funds used during construction","82","","","12"],["Interest expense, net of amounts capitalized","425","","","43"],["Other income (expense), net","159","","","15"],["Income taxes","81","","","(342)"],["Net income","1,370","","","19"],["Dividends on preferred stock","\u2014","","","(11)"],["Net income after dividends on preferred stock","$","1,370","","","$","30"]] [[/GREPCENT_TABLE]] II-19     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Operating Revenues Operating revenues for 2023 were $7.1 billion, reflecting a $767 million, or 9.8%, decrease from 2022. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Retail \u2014 prior year","$","6,470"],["Estimated change resulting from \u2014"],["Rates and pricing","276"],["Sales decline","(33)"],["Weather","(84)"],["Fuel and other cost recovery","(470)"],["Retail \u2014 current year","$","6,159","","","$","6,470"],["Wholesale revenues \u2014"],["Non-affiliates","424","","","726"],["Affiliates","60","","","202"],["Total wholesale revenues","484","","","928"],["Other operating revenues","407","","","419"],["Total operating revenues","$","7,050","","","$","7,817"]] [[/GREPCENT_TABLE]] Retail revenues decreased $311 million, or 4.8%, in 2023 as compared to 2022. The significant factors driving this change are shown in the preceding table. The decrease was primarily due to a decrease in fuel and other cost recovery, partially offset by an increase in revenues associated with rates and pricing primarily due to an increase in Rate CNP Compliance revenues and a lower Rate RSE customer refund accrual in 2023 compared to 2022. See Note 2 to the financial statements under "Alabama Power – Rate ECR," " – Rate RSE," and " – Rate CNP Compliance" for additional information. See "Energy Sales" herein for a discussion of changes in the volume of energy sold, including estimated changes related to sales and weather. Electric rates include provisions to recognize the recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income. See Note 2 to the financial statements under "Alabama Power" for additional information. Wholesale revenues from sales to non-affiliated utilities were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Capacity and other","$","163","","","$","213"],["Energy","261","","","513"],["Total non-affiliated","$","424","","","$","726"]] [[/GREPCENT_TABLE]] In 2023, wholesale revenues from sales to non-affiliates decreased $302 million, or 41.6%, as compared to 2022. The decrease reflects a 26.0% decrease in the volume of KWHs sold as a result of power sales agreements that ended in May 2023 and a 20.8% decrease in the price of energy primarily as a result of lower 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 Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy. II-20     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS In 2023, wholesale revenues from sales to affiliates decreased $142 million, or 70.3%, as compared to 2022. The revenue decrease reflects a 47.7% decrease in the price of energy due to lower natural gas prices and a 42.9% decrease in KWH sales due to lower customer demand as a result of milder weather in 2023. 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 2023, other operating revenues decreased $12 million, or 2.9%, as compared to 2022 primarily due to decreases of $25 million in cogeneration steam revenue associated with lower natural gas prices and $17 million in rent revenues, partially offset by a $34 million increase in unregulated sales of products and services. Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2023 and the percent change from 2022 were as follows: [[GREPCENT_TABLE]] [["","2023"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","17.4","","","(5.7)","%","","(0.9)","%"],["Commercial","12.9","","","(1.2)","","","0.4"],["Industrial","20.4","","","(2.8)","","","(2.8)"],["Other","0.1","","","(15.5)","","","(15.5)"],["Total retail","50.8","","","(3.4)","","","(1.3)","%"],["Wholesale"],["Non-affiliates","9.3","","","(26.0)"],["Affiliates","2.1","","","(42.9)"],["Total wholesale","11.4","","","(29.9)"],["Total energy sales","62.2","","","(9.7)","%"]] [[/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 decreased in 2023 when compared to 2022. In 2023, weather-adjusted residential KWH sales decreased 0.9% primarily due to decreased customer usage. Weather-adjusted commercial KWH sales increased 0.4% primarily due to increased customer usage and customer growth. Industrial KWH sales decreased 2.8% as a result of a decrease in demand resulting from changes in production levels primarily in the chemicals and forest products sectors. 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-21     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Details of Alabama Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["Total generation (in billions of KWHs)(a)","54.5","","58.3"],["Total purchased power (in billions of KWHs)","10.8","","11.6"],["Sources of generation (percent)(a) \u2014"],["Coal","35","","","46"],["Gas","31","","","24"],["Nuclear","27","","","22"],["Hydro","7","","","8"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Coal","3.46","","","3.39"],["Gas(a)","2.99","","","5.12"],["Nuclear","0.69","","","0.67"],["Average cost of fuel, generated (in cents per net KWH)(a)","2.50","","","3.19"],["Average cost of purchased power (in cents per net KWH)(b)","4.98","","","8.00"]] [[/GREPCENT_TABLE]] (a)Excludes Central Alabama Generating Station KWHs and associated cost of fuel through July 12, 2022 as its fuel was previously provided by the purchaser under a power sales agreement. See Note 15 to the financial statements under "Alabama Power" 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 $1.8 billion in 2023, a decrease of $838 million, or 31.7%, compared to 2022. The decrease was primarily due to a $674 million decrease in the average cost of fuel and purchased power and a $164 million decrease 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 $1.3 billion in 2023, a decrease of $541 million, or 29.4%, compared to 2022. The decrease was primarily due to a 41.6% decrease in the average cost of natural gas per KWH generated, which excludes tolling agreements, and a 29.1% decrease in the volume of KWHs generated by coal, partially offset by a 21.2% increase in the volume of KWHs generated by natural gas, an 18.9% decrease in the volume of KWHs generated by hydro facilities as a result of less rainfall in 2023, and a 13.6% increase in the volume of KWHs generated by nuclear. Purchased Power – Non-Affiliates Purchased power expense from non-affiliates was $253 million in 2023, a decrease of $188 million, or 42.6%, compared to 2022. The decrease was primarily due to a 32.9% decrease in the average cost per KWH purchased primarily due to lower natural gas prices and a 25.5% decrease in the volume of KWHs purchased primarily due to the availability of lower cost generation in the Southern Company system. Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Purchased Power – Affiliates Purchased power expense from affiliates was $251 million in 2023, a decrease of $109 million, or 30.3%, compared to 2022. The decrease was primarily due to a 51.4% decrease in the average cost per KWH purchased primarily due to lower natural gas prices, partially offset by a 43.4% increase in the volume of KWHs purchased due to the availability of lower cost gas generation in the Southern Company system. II-22     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 decreased $166 million, or 8.6%, in 2023 as compared to 2022. The change was primarily due to a decrease of $189 million associated with the reliability reserve accruals and reliability-related expenditures incurred, as well as decreases of $33 million in transmission and distribution expenses and $21 million in certain employee compensation and benefit expenses. These decreases were partially offset by increases of $30 million in technology infrastructure and application production costs and $25 million in expenses related to unregulated products and services, as well as a $14 million decrease in nuclear property insurance refunds. See Note 2 to the financial statements under "Alabama Power – Reliability Reserve Accounting Order" for additional information. Depreciation and Amortization Depreciation and amortization increased $526 million, or 60.1%, in 2023 as compared to 2022 primarily due to an increase in depreciation rates effective in 2023. See Note 2 to the financial statements under "Alabama Power – Rate CNP Depreciation" for additional information. Allowance for Equity Funds Used During Construction Allowance for equity funds used during construction increased $12 million, or 17.1%, in 2023 as compared to 2022 primarily due to increases in capital expenditures related to hydro production and Plant Barry Unit 8 construction. See Note 2 to the financial statements under "Alabama Power – Rate CNP New Plant" for additional information. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $43 million, or 11.3%, in 2023 as compared to 2022. The increase reflects approximately $30 million related to higher average outstanding borrowings and $20 million related to higher interest rates. See Note 8 to the financial statements for additional information. Other Income (Expense), Net Other income (expense), net increased $15 million, or 10.4%, in 2023 as compared to 2022 primarily due to a decrease in non-operating benefit-related expenses and an increase in interest income, partially offset by a decrease in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information. Income Taxes Income taxes decreased $342 million, or 80.9%, in 2023 as compared to 2022 primarily due to a $252 million increase in the flowback of certain excess deferred income taxes and an $84 million decrease due to lower pre-tax earnings. See Note 2 to the financial statements under "Alabama Power – Excess Accumulated Deferred Income Tax Accounting Order" and Note 10 to the financial statements for additional information. Georgia Power Georgia Power's 2023 net income was $2.1 billion, representing a $0.3 billion, or 14.7%, increase from the previous year. The increase was primarily due to lower non-fuel operations and maintenance costs, revenue reductions in 2022 as a result of Georgia Power exceeding its allowed retail return range, a $187 million decrease in after-tax charges related to the construction of Plant Vogtle Units 3 and 4, and an increase in other revenues, partially offset by a decrease in retail revenues associated with lower contributions from customers with variable demand-driven pricing and milder weather in 2023, as well as higher interest expense. Also contributing to the net income growth were the impacts of the 2022 ARP effective January 1, 2023, including increased retail rates, largely offset by higher depreciation and amortization. See Note 2 to the financial statements under "Georgia Power" for additional information. II-23     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS A condensed income statement for Georgia Power follows: [[GREPCENT_TABLE]] [["","2023","","Increase(Decrease)from 2022"],["","(in millions)"],["Operating revenues","$","10,118","","","$","(1,466)"],["Fuel","1,781","","","(705)"],["Purchased power","1,281","","","(976)"],["Other operations and maintenance","2,083","","","(266)"],["Depreciation and amortization","1,681","","","251"],["Taxes other than income taxes","541","","","14"],["Estimated loss on Plant Vogtle Units 3 and 4","(68)","","","(251)"],["Total operating expenses","7,299","","","(1,933)"],["Operating income","2,819","","","467"],["Allowance for equity funds used during construction","165","","","25"],["Interest expense, net of amounts capitalized","626","","","141"],["Other income (expense), net","170","","","(6)"],["Income taxes (benefit)","448","","","78"],["Net income","$","2,080","","","$","267"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues for 2023 were $10.1 billion, reflecting a $1.5 billion, or 12.7%, decrease from 2022. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Retail \u2014 prior year","$","10,792"],["Estimated change resulting from \u2014"],["Rates and pricing","172"],["Sales decline","(10)"],["Weather","(141)"],["Fuel cost recovery","(1,591)"],["Retail \u2014 current year","$","9,222","","","$","10,792"],["Wholesale revenues","188","","","235"],["Other operating revenues","708","","","557"],["Total operating revenues","$","10,118","","","$","11,584"]] [[/GREPCENT_TABLE]] Retail revenues decreased $1.6 billion, or 14.5%, in 2023 as compared to 2022. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing was primarily due to base tariff increases in accordance with the 2022 ARP and revenue reductions in 2022 resulting from Georgia Power's retail ROE exceeding the allowed retail ROE range, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing and a decrease in revenues recognized under the NCCR tariff. See Note 2 to the financial statements under "Georgia Power – Rate Plans" and " – Nuclear Construction" for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including estimated changes related to sales and weather in 2023. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses and do not affect net income. See Note 2 to the financial statements under "Georgia Power – Fuel Cost Recovery" for additional information. II-24     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Wholesale revenues from power sales were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Capacity and other","$","66","","","$","48"],["Energy","122","","","187"],["Total","$","188","","","$","235"]] [[/GREPCENT_TABLE]] In 2023, wholesale revenues decreased $47 million, or 20.0%, as compared to 2022 largely due to an $81 million decrease related to the average cost per KWH sold due to lower Southern Company system fuel and purchased power costs, partially offset by a $21 million increase related to new capacity contracts and a $13 million increase related to the volume of KWH sales associated with higher market demand. Wholesale revenues from sales to non-affiliates consist of PPAs and short-term opportunity sales. Wholesale revenues from PPAs have both capacity and energy components. Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms and provide for recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above Georgia Power's variable cost of energy. Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost. In 2023, other operating revenues increased $151 million, or 27.1%, as compared to 2022 primarily due to an increase of $105 million in unregulated sales associated with power delivery construction and maintenance, outdoor lighting, and energy conservation projects, a net increase of $17 million in realized gains associated with price stability products for retail customers on variable demand-driven pricing tariffs, an increase of $17 million in retail solar program fees, and a $9 million increase in 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 2023 and the percent change from 2022 were as follows: [[GREPCENT_TABLE]] [["","2023"],["","Total KWHs","","Total KWH Percent Change","Weather-Adjusted Percent Change(*)"],["","(in billions)"],["Residential","27.6","","","(5.0)","%","","(0.4)","%"],["Commercial","32.6","","","0.1","","","1.2"],["Industrial","23.5","","","(1.6)","","","(1.4)"],["Other","0.4","","","(4.7)","","","(4.2)"],["Total retail","84.1","","","(2.1)","","","(0.1)","%"],["Wholesale","2.6","","","7.8"],["Total energy sales","86.7","","","(1.9)","%"]] [[/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 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 decreased in 2023 when compared to 2022. Weather-adjusted residential sales decreased 0.4% primarily due to decreased customer usage, largely offset by customer growth. Weather-adjusted commercial KWH sales increased 1.2% primarily due to customer growth. Weather-adjusted industrial KWH sales decreased II-25     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 1.4% primarily due to decreases in the textile, mining, and stone, clay, and glass sectors, partially offset by an increase in the paper sector. 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]] [["","2023","","2022"],["Total generation (in billions of KWHs)(a)","60.3","","59.7"],["Total purchased power (in billions of KWHs)","29.6","","33.6"],["Sources of generation (percent) \u2014"],["Gas","49","","","48"],["Nuclear(a)","29","","","27"],["Coal","19","","","21"],["Hydro and other","3","","","4"],["Cost of fuel, generated (in cents per net KWH) \u2014"],["Gas","3.07","","","5.06"],["Nuclear(a)","0.82","","","0.75"],["Coal","5.59","","","4.12"],["Average cost of fuel, generated (in cents per net KWH)(a)","2.90","","","3.64"],["Average cost of purchased power (in cents per net KWH)(b)","4.63","","","7.88"]] [[/GREPCENT_TABLE]] (a)Excludes KWHs generated from test period energy at Plant Vogtle Unit 3 prior to its in-service date. The related fuel costs are charged to CWIP in accordance with FERC guidance. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on Plant Vogtle Units 3 and 4. (b)Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider. Fuel and purchased power expenses were $3.1 billion in 2023, a decrease of $1.7 billion, or 35.4%, compared to 2022. The decrease was due to decreases of $1.4 billion related to the average cost of fuel and purchased power and $321 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 $1.8 billion in 2023, a decrease of $0.7 billion, or 28.4%, compared to 2022. The decrease was primarily due to decreases of 39.3% in the average cost per KWH generated by natural gas and 8.9% in the volume of KWHs generated by coal, partially offset by increases of 35.7% in the average cost per KWH generated by coal, 9.3% in the average cost per KWH generated by nuclear, 8.5% in the volume of KWHs generated by nuclear, and 2.1% in the volume of KWHs generated by natural gas. Purchased Power – Non-Affiliates Purchased power expense from non-affiliates was $517 million in 2023, a decrease of $339 million, or 39.6%, compared to 2022. The decrease was primarily due to a decrease of 33.9% in the volume of KWHs purchased due to lower demand and the availability of lower cost generation in the Southern Company system and a decrease of 22.3% in the average cost per KWH purchased primarily due to lower natural gas prices. Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. II-26     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Purchased Power – Affiliates Purchased power expense from affiliates was $764 million in 2023, a decrease of $637 million, or 45.5%, compared to 2022. The decrease was primarily due to a decrease of 49.1% in the average cost per KWH purchased primarily due to lower natural gas prices. 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 decreased $266 million, or 11.3%, in 2023 as compared to 2022. The decrease was primarily due to decreases of $182 million in storm damage recovery as authorized in the 2022 ARP, $178 million in transmission and distribution expenses primarily associated with line maintenance, $74 million in generation non-outage maintenance expenses, and $28 million in certain employee compensation and benefit expenses. These decreases were partially offset by increases of $60 million from unregulated power delivery construction and maintenance and energy conservation projects, $59 million in generation environmental projects, $55 million in technology infrastructure and application production costs, and $28 million in planned generation outages. See Note 2 to the financial statements under "Georgia Power – Storm Damage Recovery" for additional information. Depreciation and Amortization Depreciation and amortization increased $251 million, or 17.6%, in 2023 as compared to 2022 primarily due to increases of $190 million resulting from higher depreciation rates as authorized in the 2022 ARP and $75 million associated with additional plant in service, partially offset by a decrease of $15 million in amortization of regulatory assets related to the retirement of certain generating units that ended in 2022. Taxes Other Than Income Taxes Taxes other than income taxes increased $14 million, or 2.7%, in 2023 as compared to 2022 primarily due to an increase of $56 million in property taxes primarily resulting from an increase in the assessed value of property, largely offset by a decrease of $40 million in municipal franchise fees resulting from lower retail revenues. Estimated Loss on Plant Vogtle Units 3 and 4 Georgia Power recorded pre-tax charges (credits) to income for the estimated probable loss on Plant Vogtle Units 3 and 4 totaling $(68) million and $183 million in 2023 and 2022, respectively. The charges (credits) to income 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 and the related cost recovery. 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 $25 million, or 17.9%, in 2023 as compared to 2022 primarily due to an increase in capital expenditures subject to AFUDC. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $141 million, or 29.1%, in 2023 as compared to 2022. The increase primarily reflects approximately $78 million related to higher interest rates and $76 million related to higher average outstanding borrowings, partially offset by the deferral of $14 million in financing costs related to Plant Vogtle Unit 3. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein and Note 8 to the financial statements for additional information. Also see Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on Plant Vogtle Units 3 and 4. Other Income (Expense), Net Other income (expense), net decreased $6 million, or 3.4%, in 2023 as compared to 2022 primarily due to decreases in non-service cost-related retirement benefits income and customer charges related to contributions in aid of construction, partially offset by a decrease in charitable donations. See Note 11 to the financial statements for additional information on Georgia Power's net periodic pension and other postretirement benefit costs. II-27     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Income Taxes (Benefit) Income taxes increased $78 million, or 21.1%, in 2023 as compared to 2022 primarily due to the flowback of $145 million of certain excess deferred income taxes that ended in 2022 and higher pre-tax earnings largely resulting from lower charges associated with the construction of Plant Vogtle Units 3 and 4, partially offset by an $85 million decrease in charges to a valuation allowance on certain state tax credit carryforwards, generation of $35 million of advanced nuclear PTCs, and a $32 million adjustment in 2022 related to a prior year state tax credit carryforward. 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 $188 million in 2023 compared to $164 million in 2022. The increase was primarily due to an increase in affiliate wholesale capacity revenues, changes in power supply agreements, and a decrease in non-fuel operations and maintenance expenses, partially offset by an increase in interest expense. A condensed income statement for Mississippi Power follows: [[GREPCENT_TABLE]] [["","2023","","Increase(Decrease)from 2022"],["","(in millions)"],["Operating revenues","$","1,474","","","$","(220)"],["Fuel and purchased power","538","","","(251)"],["Other operations and maintenance","362","","","(14)"],["Depreciation and amortization","190","","","9"],["Taxes other than income taxes","124","","","\u2014"],["Total operating expenses","1,214","","","(256)"],["Operating income","260","","","36"],["Interest expense, net of amounts capitalized","71","","","15"],["Other income (expense), net","35","","","2"],["Income taxes","36","","","(1)"],["Net income","$","188","","","$","24"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues for 2023 were $1.5 billion, reflecting a $220 million, or 13.0%, decrease from 2022. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Retail \u2014 prior year","$","935"],["Estimated change resulting from \u2014"],["Rates and pricing","(11)"],["Sales growth","11"],["Weather","(4)"],["Fuel and other cost recovery","32"],["Retail \u2014 current year","$","963","","","$","935"],["Wholesale revenues \u2014"],["Non-affiliates","272","","","252"],["Affiliates","200","","","460"],["Total wholesale revenues","472","","","712"],["Other operating revenues","39","","","47"],["Total operating revenues","$","1,474","","","$","1,694"]] [[/GREPCENT_TABLE]] II-28     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Total retail revenues for 2023 increased $28 million, or 3.0%, compared to 2022 primarily due to higher recoverable fuel costs and an increase in customer usage, partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing and lower revenues associated with a tolling arrangement accounted for as a sales-type lease. See Notes 2 and 9 to the financial statements under "Mississippi Power" and "Lessor," respectively, for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including estimated changes related to sales and weather. Electric rates for Mississippi Power include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel and emissions portion of wholesale revenues from energy sold to customers outside Mississippi Power's service territory. See Note 2 to the financial statements under "Mississippi Power – Fuel Cost Recovery" for additional information. Wholesale revenues from power sales to non-affiliated utilities, including FERC-regulated MRA sales as well as market-based sales, were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Capacity and other","$","21","","","$","3"],["Energy","251","","","249"],["Total non-affiliated","$","272","","","$","252"]] [[/GREPCENT_TABLE]] Wholesale revenues from sales to non-affiliates increased $20 million, or 7.9%, compared to 2022. The increase was primarily due to capacity revenues associated with new capacity contracts in 2023. 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 requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 14.0% of Mississippi Power's total operating revenues in 2023. 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. See Note 2 under "Mississippi Power – Municipal and Rural Associations Tariff" for additional information. Wholesale revenues from sales to affiliates decreased $260 million, or 56.5%, in 2023 compared to 2022. The decrease was primarily due to a $293 million decrease associated with lower natural gas prices, partially offset by a $23 million increase in capacity revenues resulting from availability of generation reserves and an increase in pricing and a $10 million increase associated with higher 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. The energy portion of these transactions does not have a significant impact on earnings since this energy is generally sold at marginal cost. In 2023, other operating revenues decreased $8 million, or 17.0%, as compared to 2022 primarily due to decreases of $5 million in unregulated sales associated with power delivery construction and maintenance projects and $3 million in open access transmission tariff revenues. II-29     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Energy Sales Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2023 and the percent change from 2022 were as follows: [[GREPCENT_TABLE]] [["","2023"],["","Total KWHs","","Total KWH Percent Change","","Weather-Adjusted Percent Change(*)"],["","(in millions)"],["Residential","2,092","","","(1.9)","%","","0.7","%"],["Commercial","2,815","","","7.0","","","7.1"],["Industrial","4,721","","","0.7","","","0.7"],["Other","28","","","(11.1)","","","(11.1)"],["Total retail","9,656","","","1.8","%","","2.5","%"],["Wholesale"],["Non-affiliated","3,836","","","10.7"],["Affiliated","5,612","","","2.2"],["Total wholesale","9,448","","","5.5"],["Total energy sales","19,104","","","3.6","%"]] [[/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 2023 when compared to 2022. Weather-adjusted residential KWH sales increased 0.7% due to an increase in customer usage. Weather-adjusted commercial KWH sales increased 7.1% primarily due to customer growth. Industrial KWH sales increased 0.7% primarily due to an increase in the non-manufacturing sector, partially offset by a decrease in the chemicals sector. 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. Details of Mississippi Power's generation and purchased power were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["Total generation (in millions of KWHs)","18,789","","","18,303"],["Total purchased power (in millions of KWHs)","524","","","617"],["Sources of generation (percent) \u2013"],["Gas","92","","","90"],["Coal","8","","","10"],["Cost of fuel, generated (in cents per net KWH) \u2013"],["Gas","2.68","","","4.34"],["Coal","5.46","","","4.13"],["Average cost of fuel, generated (in cents per net KWH)","2.90","","","4.31"],["Average cost of purchased power (in cents per net KWH)","4.27","","","6.91"]] [[/GREPCENT_TABLE]] Fuel and purchased power expenses were $538 million in 2023, a decrease of $251 million, or 31.8%, as compared to 2022. The decrease was primarily due to a $266 million decrease related to the average cost of fuel and purchased power, partially offset by a $15 million net increase related to the volume of KWHs generated and purchased. II-30     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 decreased $230 million, or 30.8%, in 2023 compared to 2022 primarily due to a 38.2% decrease in the average cost of natural gas per KWH generated and a 20.3% decrease in the volume of KWHs generated by coal, partially offset by a 32.2% increase in the average cost of coal per KWHs generated and a 5.4% increase in the volume of KWHs generated by natural gas. Purchased power expense decreased $21 million, or 49.9%, in 2023 compared to 2022 primarily due to a 38.2% decrease in the average cost per KWH purchased primarily due to lower natural gas prices and a 15.1% decrease in the volume of KWHs purchased primarily due to the availability of lower cost generation in the Southern Company system. 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 decreased $14 million, or 3.7%, in 2023 compared to 2022. The decrease was primarily due to decreases of $14 million in reliability reserve accruals, $7 million in generation expenses, and $6 million in unregulated power delivery construction and maintenance projects, partially offset by increases of $5 million in storm reserve accruals and $2 million in certain employee compensation and benefit expenses. See Note 2 to the financial statements under "Mississippi Power – System Restoration Rider" and " – Reliability Reserve Accounting Order" for additional information. Depreciation and Amortization Depreciation and amortization increased $9 million, or 5.0%, in 2023 compared to 2022 primarily due to an increase in depreciation associated with additional plant in service. Interest Expense, Net of Amounts Capitalized Interest expense, net of amounts capitalized increased $15 million, or 26.8%, in 2023 compared to 2022. The increase was primarily due to increases of approximately $10 million related to higher interest rates and $5 million related to 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. Income Taxes Income taxes decreased $1 million, or 2.7%, in 2023 compared to 2022 primarily due to a decrease of $7 million associated with the flowback of certain excess deferred income taxes associated with new PEP rates that became effective in April 2023, largely offset by an increase of $6 million associated with higher pre-tax earnings. See Note 2 to the financial statements under "Mississippi Power – Performance Evaluation Plan" and Note 10 to the financial statements for additional information. II-31     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Southern Power Net income attributable to Southern Power for 2023 was $357 million, a $3 million increase from 2022. The increase was primarily due to higher HLBV income associated with tax equity partnerships, an arbitration award received for losses previously incurred, a gain on the sale of spare parts, and receipts of liquidated damages and insurance proceeds related to generation facility production and equipment, as well as changes in state apportionment methodology related to tax legislation enacted by the State of Tennessee. These increases were largely offset by lower revenues driven by lower market prices of energy. A condensed statement of income follows: [[GREPCENT_TABLE]] [["","2023","","Increase(Decrease)from 2022"],["","(in millions)"],["Operating revenues","$","2,189","","","$","(1,180)"],["Fuel","706","","","(908)"],["Purchased power","116","","","(195)"],["Other operations and maintenance","473","","","(9)"],["Depreciation and amortization","504","","","(12)"],["Taxes other than income taxes","51","","","2"],["Loss on sales-type leases","\u2014","","","(1)"],["Gain on dispositions, net","(20)","","","(18)"],["Total operating expenses","1,830","","","(1,141)"],["Operating income","359","","","(39)"],["Interest expense, net of amounts capitalized","129","","","(9)"],["Other income (expense), net","12","","","5"],["Income taxes (benefit)","12","","","(8)"],["Net income","230","","","(17)"],["Net loss attributable to noncontrolling interests","(127)","","","(20)"],["Net income attributable to Southern Power","$","357","","","$","3"]] [[/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 generally 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-32     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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]] [["","2023","","2022"],["","(in millions)"],["PPA capacity revenues","$","471","","","$","451"],["PPA energy revenues","1,227","","","2,121"],["Total PPA revenues","1,698","","","2,572"],["Non-PPA revenues","436","","","761"],["Other revenues","55","","","36"],["Total operating revenues","$","2,189","","","$","3,369"]] [[/GREPCENT_TABLE]] Operating revenues for 2023 were $2.2 billion, a $1.2 billion, or 35.0% decrease from 2022. The change in operating revenues was primarily due to the following: •PPA capacity revenues increased $20 million, or 4.4%, primarily due to an increase associated with a change in rates from new and existing natural gas PPAs. •PPA energy revenues decreased $894 million, or 42.1%, primarily due to a $904 million decrease in sales under natural gas PPAs resulting from a $726 million decrease in the price of fuel and purchased power and a $178 million decrease in the volume of KWHs sold. •Non-PPA revenues decreased $325 million, or 42.7%, primarily due to a $650 million decrease in the market price of energy, partially offset by a $321 million increase in the volume of KWHs sold through short-term sales. •Other revenues increased $19 million, or 52.8%, primarily due to receipts of liquidated damages associated with generation facility production guarantees, an arbitration award received for losses previously incurred, and business interruption insurance proceeds for damaged generation equipment. See Note 3 to the financial statements under "General Litigation Matters – Southern Power" for additional information. 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"],["","2023","","2022"],["","(in billions of KWHs)"],["Generation","49","","48"],["Purchased power","3","","3"],["Total generation and purchased power","52","2.0%","51"],["Total generation and purchased power (excluding solar, wind, fuel cells, and tolling agreements)","33","6.5%","31"]] [[/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-33     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Details of Southern Power's fuel and purchased power expenses were as follows: [[GREPCENT_TABLE]] [["","2023","","2022"],["","(in millions)"],["Fuel","$","706","","","$","1,614"],["Purchased power","116","","","311"],["Total fuel and purchased power expenses","$","822","","","$","1,925"]] [[/GREPCENT_TABLE]] In 2023, total fuel and purchased power expenses decreased $1.1 billion, or 57.3%, compared to 2022. Fuel expense decreased $908 million, or 56.3%, primarily due to a $1.0 billion decrease associated with the average cost of fuel. Purchased power expense decreased $195 million, or 62.7%, primarily due to a $206 million decrease associated with the average cost of purchased power. Gain on Dispositions, Net In 2023, gain on dispositions, net increased $18 million compared to 2022 primarily due to a $16 million gain on the sale of spare parts in 2023. Interest Expense, Net of Amounts Capitalized In 2023, interest expense, net of amounts capitalized decreased $9 million, or 6.5%, compared to 2022. The decrease was primarily due to lower average outstanding borrowings. Income Taxes (Benefit) In 2023, income taxes decreased $8 million, or 40.0%, compared to 2022. The decrease was primarily due to a change in state apportionment methodology resulting from tax legislation enacted by the State of Tennessee in the second quarter 2023. See Notes 1 and 10 to the financial statements under "Income Taxes" and "Effective Tax Rate," respectively, for additional information. Net Loss Attributable to Noncontrolling Interests In 2023, net loss attributable to noncontrolling interests increased $20 million, or 18.7%, compared to 2022. The increased loss was primarily due to $25 million in higher HLBV loss allocations to wind tax equity partners and $5 million in lower income allocations to equity partners, partially offset by $10 million in lower HLBV loss allocations to battery energy storage partners. Southern Company Gas 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 in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. Therefore, weather typically does not have a significant net income impact. During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Southern Company Gas' base operating expenses, excluding cost of natural gas and bad debt expense, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Thus, Southern Company Gas' operating results 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"],["2023","","67","%","","","","73","%"],["2022","","67","%","","","","66","%"]] [[/GREPCENT_TABLE]] II-34     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Net Income Net income attributable to Southern Company Gas in 2023 was $615 million, an increase of $43 million, or 7.5%, compared to 2022. Net income increased primarily as a result of an impairment charge in 2022 related to the sale of natural gas storage facilities. The increase in net income was partially offset by a decrease of $29 million in net income at gas distribution operations primarily as a result of reduced revenue due to lower volumes sold, regulatory disallowances at Nicor Gas, and higher depreciation related to continued investment in infrastructure replacement programs, partially offset by lower cost of gas, and a $9 million decrease in net income at gas pipeline investments primarily as a result of higher expenses at SNG. A condensed income statement for Southern Company Gas follows: [[GREPCENT_TABLE]] [["","2023","","Increase (Decrease) from 2022"],["","(in millions)"],["Operating revenues","$","4,702","","","$","(1,260)"],["Cost of natural gas","1,644","","","(1,360)"],["Other operations and maintenance","1,194","","","18"],["Depreciation and amortization","582","","","23"],["Taxes other than income taxes","262","","","(20)"],["Impairment charges","\u2014","","","(131)"],["Estimated loss on regulatory disallowance","88","","","88"],["Gain on dispositions, net","(7)","","","(3)"],["Total operating expenses","3,763","","","(1,385)"],["Operating income","939","","","125"],["Earnings from equity method investments","140","","","(8)"],["Interest expense, net of amounts capitalized","310","","","47"],["Other income (expense), net","57","","","4"],["Earnings before income taxes","826","","","74"],["Income taxes","211","","","31"],["Net Income","$","615","","","$","43"]] [[/GREPCENT_TABLE]] Operating Revenues Operating revenues in 2023 were $4.7 billion, reflecting a $1.3 billion, or 21.1%, decrease compared to 2022. Details of operating revenues were as follows: [[GREPCENT_TABLE]] [["","2023"],["","(in millions)"],["Operating revenues \u2013 prior year","$","5,962"],["Estimated change resulting from \u2013"],["Infrastructure replacement programs and base rate changes","194"],["Gas costs and other cost recovery","(1,323)"],["Gas marketing services","(93)"],["Other","(38)"],["Operating revenues \u2013 current year","$","4,702"]] [[/GREPCENT_TABLE]] Revenues from infrastructure replacement programs and base rate changes increased in 2023 primarily due to rate increases at the natural gas distribution utilities and continued investment in infrastructure replacement, partially offset by lower volumes sold and regulatory disallowances at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Revenues associated with gas costs and other cost recovery decreased in 2023 primarily due to lower natural gas cost recovery associated with lower natural gas prices, the timing of natural gas purchases, and the recovery of those costs from customers. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from II-35     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 gas marketing services decreased in 2023 primarily due to lower natural gas prices and the timing of unrealized hedge losses. Customer Count 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. The following table provides the number of customers served by Southern Company Gas at December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","2023","","2022"],["","","(in thousands, except market share %)"],["Gas distribution operations","","4,374","","","4,358"],["Gas marketing services"],["Energy customers","","665","","","622"],["Market share of energy customers in Georgia","","30.0","%","","29.3","%"]] [[/GREPCENT_TABLE]] 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, 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 Note 2 to the financial statements under "Southern Company Gas – Natural Gas Cost Recovery" for additional information. Cost of natural gas at gas distribution operations represented 83.5% of the total cost of natural gas for 2023. 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, and gains and losses associated with certain derivatives. In 2023, cost of natural gas was $1.6 billion, a decrease of $1.4 billion, or 45.3%, compared to 2022, which reflects lower gas cost recovery in 2023 as a result of a 58.8% decrease in natural gas prices compared to 2022. II-36     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Volumes of Natural Gas Sold 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. The following table details the volumes of natural gas sold during all periods presented: [[GREPCENT_TABLE]] [["","","","2023 vs. 2022"],["","2023","","2022","","% Change"],["Gas distribution operations (mmBtu in millions)"],["Firm","625","","","707","","","(11.6)","%"],["Interruptible","93","","","93","","","\u2014"],["Total","718","","","800","","","(10.3)","%"],["Gas marketing services (mmBtu in millions)"],["Firm:"],["Georgia","33","","","35","","","(5.7)","%"],["Other","19","","","18","","","5.6"],["Interruptible large commercial and industrial","14","","","14","","","\u2014"],["Total","66","","","67","","","(1.5)","%"]] [[/GREPCENT_TABLE]] Other Operations and Maintenance Expenses In 2023, other operations and maintenance expenses increased $18 million, or 1.5%, compared to 2022. The increase was primarily due to increases of $70 million in compensation and benefits and $20 million related to energy service contracts, partially offset by a decrease of $60 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Depreciation and Amortization In 2023, depreciation and amortization increased $23 million, or 4.1%, compared to 2022. 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 2023, taxes other than income taxes decreased $20 million, or 7.1%, compared to 2022. The decrease was primarily due to a $29 million decrease in revenue taxes, partially offset by increases in payroll and property taxes. Impairment Charges In 2022, Southern Company Gas recorded pre-tax impairment charges totaling approximately $131 million ($99 million after tax) as a result of an agreement to sell two natural gas storage facilities. See Note 15 to the financial statements under "Southern Company Gas" for additional information. Estimated Loss on Regulatory Disallowance In 2023, Southern Company Gas recorded pre-tax charges related to the disallowance of certain capital investments at Nicor Gas, $88 million of which was recorded in estimated loss on regulatory disallowance. See Note 2 under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for additional information. Interest Expense, Net of Amounts Capitalized In 2023, interest expense, net of amounts capitalized increased $47 million, or 17.9%, compared to 2022. The increase reflects $43 million related to higher interest rates and $8 million related to higher average outstanding borrowings. See Note 8 to the financial statements for additional information. Income Taxes In 2023, income taxes increased $31 million, or 17.2%, compared to 2022. The increase was primarily due to $33 million of tax benefit in 2022 related to the impairment charges associated with the sale of two natural gas storage facilities and higher taxes II-37     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS related to increased earnings, partially offset by approximately $24 million related to the regulatory disallowances at Nicor Gas. See Notes 2 and 15 to the financial statements under "Southern Company Gas" and Note 10 to the financial statements for additional information. Segment Information [[GREPCENT_TABLE]] [["","","2023","","2022"],["","","Operating Revenues","","Operating Expenses","","Net Income (Loss)","","Operating Revenues","","Operating Expenses","","Net Income (Loss)"],["","","(in millions)","","(in millions)"],["Gas distribution operations","","$","4,105","","","$","3,301","","","$","441","","","$","5,267","","","$","4,464","","","$","470"],["Gas pipeline investments","","32","","","10","","","98","","","32","","","11","","","107"],["Gas marketing services","","548","","","418","","","91","","","638","","","505","","","94"],["All other","","36","","","40","","","(15)","","","55","","","190","","","(99)"],["Intercompany eliminations","","(19)","","","(6)","","","\u2014","","","(30)","","","(22)","","","\u2014"],["Consolidated","","$","4,702","","","$","3,763","","","$","615","","","$","5,962","","","$","5,148","","","$","572"]] [[/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. See Note 2 to the financial statements under "Southern Company Gas" for additional information. In 2023, net income decreased $29 million, or 6.2%, compared to 2022. Operating revenues decreased $1.2 billion primarily due to lower gas cost recovery and lower volumes sold, partially offset by rate increases and continued investment in infrastructure replacement. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas. Operating expenses decreased $1.2 billion primarily due to a $1.3 billion decrease in the cost of natural gas as a result of lower gas prices compared to 2022 and lower taxes other than income taxes, partially offset by $88 million related to the regulatory disallowances at Nicor Gas, higher depreciation resulting from additional assets placed in service, higher compensation and benefits expenses, and a $20 million increase related to energy service contracts. The decrease in operating expenses also includes costs passed through directly to customers, primarily related to bad debt expenses, energy efficiency programs, and revenue taxes. The decrease in net income also includes an increase of $46 million in interest expense, net of amounts capitalized primarily due to higher interest rates and higher average outstanding debt, partially offset by a $19 million decrease in income taxes primarily as a result of the tax benefit resulting from the regulatory disallowances at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas" for additional information. Gas Pipeline Investments Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG and Dalton Pipeline. In 2023, net income decreased $9 million compared to 2022. The decrease was primarily due to lower earnings at SNG resulting from higher expenses. See Note 7 to the financial statements under "Southern Company Gas" for additional information. Gas Marketing Services Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing II-38     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 2023, net income decreased $3 million, or 3.2%, compared to 2022. The decrease was due to a $90 million decrease in operating revenues primarily due to lower gas prices and the timing of unrealized hedge losses, largely offset by an $87 million decrease in operating expenses primarily related to a $106 million decrease in cost of gas, partially offset by higher compensation and benefits. All Other All other includes natural gas storage businesses, a renewable natural gas business, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense) associated with affiliate financing arrangements. All other included a natural gas storage facility in Texas through its sale in November 2022 and a natural gas storage facility in California through its sale in September 2023. See Note 15 to the financial statements under "Southern Company Gas" for additional information. In 2023, net income increased $84 million compared to 2022. The increase was primarily due to a decrease in operating expenses primarily related to pre-tax impairment charges in 2022 totaling approximately $131 million ($99 million after tax) as a result of an agreement to sell two natural gas storage facilities, lower depreciation, lower cost of gas, and lower taxes other than income taxes, partially offset by a decrease in operating revenues of $19 million and an increase in income taxes. 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 distribution service provided 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. Each Registrant's results of operations are not necessarily indicative of its future earnings potential. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein. For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, including those related to projected long-term demand growth, stringent environmental standards, including CCR rules, safety, system reliability and resiliency, fuel, restoration following major storms, and capital expenditures, including constructing new electric generating plants and expanding and improving the transmission and distribution systems; continued customer growth; and the trends of higher inflation and reduced electricity usage per customer, especially in residential and commercial markets. For Georgia Power, other major factors are completing construction and start-up of Plant Vogtle Unit 4 and meeting the related cost and schedule projections. Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce transactions, which could contribute to a net reduction in customer usage. Global and U.S. economic conditions continue to be affected by higher-than-expected inflation that arose from the COVID-19 pandemic and associated policy responses of governments and central banks. In response to elevated inflation levels, the U.S. Federal Reserve raised interest rates faster than any rate increase cycle in the last 40 years. The actions by the U.S. Federal Reserve have helped to slow the rate of inflation and curtail economic activity. Although target levels of inflation have yet to be achieved, the U.S. Federal Reserve has indicated its current intention to pause future rate increases and evaluate rate cuts in the near term. The shifting economic policy variables and weakening of historic relationships among economic activity, prices, and employment have increased the uncertainty of future levels of economic activity, which will directly impact future energy demand and operating costs. Weakening economic activity increases the risk of slowing or declining energy sales. See RESULTS OF OPERATIONS herein for information on energy sales in the Southern Company system's service territory during 2023. II-39     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including the parameters of the wholesale market and the efficient operation of its wholesale generating assets; Southern Power's ability to execute its growth strategy through the development, construction, or acquisition of renewable facilities and other energy projects while containing costs; regulatory matters; customer creditworthiness; total electric generating capacity available in Southern Power's market areas; Southern Power's ability to successfully remarket capacity as current contracts expire; renewable portfolio standards; continued availability of federal and state ITCs and PTCs, which could be impacted by future tax legislation; transmission constraints; cost of generation from units within the Southern Company power pool; and operational limitations. See "Income Tax Matters" herein for information regarding the IRA's expansion of the availability of federal ITCs and PTCs. Also see Notes 10 and 15 to the financial statements 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 resiliency, natural gas, and capital expenditures, including expanding and improving the natural gas distribution systems; the completion and subsequent operation of ongoing infrastructure and other construction projects; customer creditworthiness; and certain policies to limit the use of natural gas, such as the potential in Illinois and across certain other parts of the U.S. for state or municipal bans on the use of natural gas or policies designed to promote electrification. The volatility of natural gas prices has an impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services business to capture value from locational and seasonal spreads. Additionally, changes in commodity prices, primarily driven by tight gas supplies, geopolitical events, and diminished gas production, subject a portion of Southern Company Gas' operations to earnings variability and may result in higher natural gas prices. Additional economic factors may contribute to this environment. The demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis. Alternatively, a significant drop in oil and natural gas prices could lead to a consolidation of natural gas producers or reduced levels of natural gas production. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather; competition; developing new and maintaining existing energy contracts and associated load requirements with wholesale customers; customer energy conservation practices; the use of alternative energy sources by customers; government incentives to reduce overall energy usage; fuel, labor, and material prices in an environment of heightened inflation and material and labor supply chain disruptions; and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings. Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 14.0% of Mississippi Power's total operating revenues in 2023. 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 generally 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 II-40     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 regulatory matters, and the ability to continue recovering the related costs, through rates for the traditional electric operating companies and the natural gas distribution utilities and/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 for 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/or operating any type of existing or 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. 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 2028 based on the current environmental compliance strategy for the Southern Company system and the traditional electric operating companies are as follows: [[GREPCENT_TABLE]] [["","2024","2025","2026","2027","2028","Total"],["","(in millions)"],["Southern Company","$","150","","$","141","","$","112","","$","92","","$","30","","$","525"],["Alabama Power","45","","47","","40","","35","","19","","186"],["Georgia Power","92","","80","","60","","32","","10","","274"],["Mississippi Power","13","","13","","12","","26","","1","","65"]] [[/GREPCENT_TABLE]] These estimates do not include compliance costs associated with potential regulation of GHG emissions or the proposed ELG Supplemental Rule. See "Environmental Laws and Regulations – Greenhouse Gases" and " – Water Quality" 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 Since 1990, the Southern Company system reduced SO2 and NOX air emissions by 99% and 92%, respectively, through 2022. Since 2005, the Southern Company system reduced mercury air emissions by 97% through 2022. On February 13, 2023, the EPA published a final rule disapproving 19 state implementation plans (SIPs), including the States of Alabama and Mississippi, under the interstate transport (good neighbor) provisions of the Clean Air Act for the 2015 Ozone National Ambient Air Quality Standards (NAAQS). On March 14, 2023 and March 15, 2023, the State of Mississippi and Mississippi Power, respectively, challenged the EPA's disapproval of the Mississippi SIP in the U.S. Court of Appeals for the II-41     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Fifth Circuit. On June 8, 2023, the U.S. Court of Appeals for the Fifth Circuit stayed the EPA's disapproval of the Mississippi SIP, pending appeal. On April 13, 2023 and April 14, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative challenged the EPA's disapproval of the Alabama SIP in the U.S. Court of Appeals for the Eleventh Circuit. On August 17, 2023, the U.S. Court of Appeals for the Eleventh Circuit stayed the EPA's disapproval of the Alabama SIP, pending appeal. On June 5, 2023, the EPA published the 2015 Ozone NAAQS Good Neighbor federal implementation plan (FIP), which requires reductions in NOX emissions from sources in 23 states, including Alabama and Mississippi, to assure those states satisfy their Clean Air Act good neighbor obligations for the 2015 Ozone NAAQS. Georgia and North Carolina have approved interstate transport SIPs addressing the 2015 Ozone NAAQS and are not subject to this rule. On June 16, 2023 and June 27, 2023, the State of Mississippi and Mississippi Power, respectively, challenged the FIP for Mississippi in the U.S. Court of Appeals for the Fifth Circuit. On August 4, 2023, the State of Alabama, Alabama Power, and PowerSouth Energy Cooperative challenged the FIP for Alabama in the U.S. Court of Appeals for the Eleventh Circuit. Both cases are being held in abeyance pending resolution of the Mississippi SIP disapproval and Alabama SIP disapproval cases, respectively. In July and September 2023, the EPA published an Interim Final Rule and an updated Interim Final Rule that stays the implementation of the FIPs for states with judicially stayed SIP disapprovals, including Mississippi and Alabama, respectively. The Interim Final Rule revises the existing regulations to maintain currently applicable trading programs for those states. The ultimate impact of the rule and associated legal matters cannot be determined at this time; however, implementation of the FIPs will likely result in increased compliance costs for the traditional electric operating companies. Water Quality In 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 extended the latest applicability date for both discharges to December 31, 2025. The ELG Reconsideration Rule also updated the voluntary incentive program and provided new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. On March 29, 2023, the EPA published a proposed ELG Supplemental Rule revising certain effluent limits of the 2020 and 2015 ELG rules. The proposal imposes more stringent requirements for flue gas desulfurization wastewater, bottom ash transport water, and combustion residual leachate to be met no later than December 31, 2029. The EPA is also proposing that a limited number of facilities already achieving compliance with the 2020 ELG Reconsideration Rule be allowed to elect retirement or repowering by December 31, 2032 as opposed to meeting the new more stringent requirements. The proposal maintains the 2020 ELG Reconsideration Rule's permanent cessation of coal combustion subcategory allowing units to continue to operate until the end of 2028 without having to install additional technologies. The proposal also maintains the Voluntary Incentive Program (VIP) subcategory, which allows units to comply with VIP limits by December 31, 2028. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs. As required by the ELG Reconsideration Rule, in 2021, Alabama Power and Georgia Power each submitted initial notices of planned participation (NOPP) for applicable units seeking to qualify for these cessation of coal combustion or VIP subcategories that require compliance by December 31, 2028. 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 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). However, Alabama Power, in conjunction with Georgia Power, is evaluating extending the operation of Plant Gaston Units 1 through 4 beyond the indicated retirement date. The NOPP submittals are subject to the review of the ADEM. Plant Barry Unit 4 ceased using coal and began to operate solely on natural gas in December 2022. See Notes 2 and 7 to the financial statements under "Georgia Power – Integrated Resource Plans" and "SEGCO," respectively, for additional information. The remaining 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 $1.2 billion (excluding capitalized asset retirement costs which are recovered through Rate CNP Compliance) at December 31, 2023. 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. II-42     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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), which occurred in August 2022, 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 also submitted a NOPP indicating plans 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 and decisions related to retirement or continued operation of units are subject to Georgia PSC approval. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plans" for additional information. 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, which has broader applicability than the federal rule. The State of Mississippi has not developed a state CCR permit program. On August 14, 2023, the EPA published a proposal to deny the ADEM's CCR permit program application. Alabama Power's permits to close its CCR facilities remain valid under state law. In the absence of an EPA-approved state permit program, CCR facilities in Alabama will remain subject to both the federal and state CCR rules. The Holistic Approach to Closure: Part A rule, finalized in 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. Beginning in January 2022, the EPA issued numerous Part A determinations that state its current positions on a variety of CCR Rule compliance requirements, such as criteria for groundwater corrective action and CCR unit closure. The traditional electric operating companies are working with state regulatory agencies to determine whether the EPA's current positions may impact closure and groundwater monitoring plans. In April 2022, the Utilities Solid Waste Activities Group and a group of generating facility operators filed petitions for review in the U.S. Court of Appeals for the D.C. Circuit challenging whether the EPA's January 2022 actions establish new legislative rules that should have gone through notice-and-comment rulemaking. A decision by the court is expected in 2024. The ultimate impacts of the EPA's current positions are subject to the outcome of the pending litigation and any potential future rulemaking and cannot be determined at this time. On May 18, 2023, the EPA published a proposed rule to establish two new categories of federally regulated CCR, legacy surface impoundments and CCR management units (CCRMUs). The proposal establishes accelerated compliance deadlines for legacy surface impoundments to meet regulatory requirements, including a requirement to initiate closure within 12 months after the effective date of the final rule. The EPA is also proposing a definition for CCRMUs. The EPA's proposal would also require facility evaluations to be completed at both active facilities and inactive facilities with one or more legacy surface impoundment to determine the presence or absence of CCRMUs. CCRMUs must comply with the CCR Rule's provisions for groundwater monitoring, corrective action, closure, and post-closure activities. On November 14, 2023, the EPA published a Notice of Data Availability supplementing the proposed rule, which sought comment on new data and a supplemental risk assessment that could be used to support final rulemaking. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs. 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," Notes 2 and 3 to the financial statements under "Georgia Power – Rate Plans" and "General Litigation Matters – Alabama Power," respectively, and Note 6 to the financial statements for additional information. II-43     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Greenhouse Gases On May 23, 2023, the EPA published proposed GHG standards and state plan guidelines for fossil fuel-fired power plants, which would require GHG limits for subcategories of both new and existing units based on technologies such as carbon capture and sequestration, low-GHG hydrogen co-firing, and natural gas co-firing. The proposed standards for new combustion turbines include subcategories for different operational uses including peaking, intermediate, and base load. Compliance with new source standards, once finalized, begins when the unit comes online. The proposed state plan guidelines for existing units include subcategories based on unit type, retirement date, size, and capacity factor. The EPA is proposing a 24-month state plan submission deadline for the existing unit implementation and may allow states to implement some limited form of trading and averaging for the state plans. Existing source compliance is proposed to begin as early as January 1, 2030, depending on the unit type and subcategory. The EPA also proposes to simultaneously repeal the Affordable Clean Energy rule. On November 17, 2023, the EPA published a final rule updating the regulations governing the processes and timelines for state and federal plans to implement existing source GHG performance standards. While this rule establishes the general requirements and timelines for states to follow in implementing the EPA's emissions guidelines, the pending final rule for GHG emissions from fossil fuel-fired power plants is expected to include schedules and other implementation requirements that will supersede these general provisions. On November 20, 2023, the EPA published a Supplemental Notice of Proposed Rulemaking for the pending rules for fossil fuel-fired power plants requesting additional input on how the EPA should address reliability concerns in the final rules. A final rule is anticipated in 2024. The ultimate impact of this proposal cannot be determined at this time; however, it may result in significant compliance costs. In 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. In 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 accelerate its 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 17% coal and 54% natural gas in 2023. This transition has been supported in part by the Southern Company system retiring over 6,700 MWs of coal-fired generating capacity since 2010 and converting 3,700 MWs of generating capacity from coal to natural gas since 2015. In addition, the Southern Company system's capacity mix consists of over 11,600 MWs of renewable and storage facilities through ownership and long-term PPAs. 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. The following table provides the Registrants' 2022 and preliminary 2023 Scope 1 GHG emissions based on equity share of facilities: [[GREPCENT_TABLE]] [["","2022","Preliminary 2023"],["","(in million metric tons of CO2 equivalent)"],["Southern Company(*)","85","80"],["Alabama Power(*)","35","28"],["Georgia Power","23","24"],["Mississippi Power","9","9"],["Southern Power","13","13"],["Southern Company Gas(*)","2","2"]] [[/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 2023 emissions, the Southern Company system has achieved an estimated GHG emission reduction of 49% since 2007. GHG emissions decreased in 2023 when compared to 2022 as coal generation was displaced by lower carbon generation, including from Plant Vogtle Unit 3, as discussed further under RESULTS OF OPERATIONS – "Southern Company – Electricity Business" herein. Southern Company system management expects to achieve GHG reductions of greater than 50% as early as 2025, five years earlier than the established interim goal, and remain close to 50% through the late 2020s, followed thereafter by continued reductions. While none II-44     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS of Southern Company's subsidiaries are currently subject to renewable portfolio standards or similar requirements, management of the traditional electric operating companies is working with applicable regulators through their IRP processes to continue the generating fleet transition 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; implement initiatives to reduce natural gas distribution operational emissions; 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. 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. 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. Alabama Power On July 14, 2023, Alabama Power issued a request for proposals of between 100 MWs and 1,200 MWs of capacity beginning no later than December 1, 2028, with consideration for commencement as early as 2025. Any purchases will depend upon the cost competitiveness of the respective offers, as well as other options available to Alabama Power, and would ultimately require approval by the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time. Construction Programs The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system strategy continues to include developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Unit 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Also see Note 2 to the financial statements under "Georgia Power – Integrated Resource Plans" for information regarding Georgia Power's request with the Georgia PSC to develop, own, and operate three simple cycle combustion turbines at Plant Yates. See Note 15 to the financial statements under "Southern Power" for information relating to Southern Power's construction of renewable energy facilities. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and resiliency, reduce emissions, and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Note 2 to the financial statements 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 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. See FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" herein for additional information. Southern Power works to maintain and expand its share of the wholesale market. During 2023, Southern Power continued to be successful in remarketing up to 438 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 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 associated 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 Tax Credits Southern Company has received ITCs and PTCs in connection with investments in solar, wind, fuel cell, advanced nuclear, 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, 2023, Southern Company and Southern Power had approximately $0.8 billion and $0.5 billion, respectively, of unutilized federal ITCs and PTCs, which are currently expected to be fully utilized by 2029, 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 equity 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. In the third quarter 2023, Georgia Power started generating advanced nuclear PTCs for Plant Vogtle Unit 3 beginning on the in-service date of July 31, 2023. PTCs are recognized as an income tax benefit based on KWH production. In addition, pursuant to the Global Amendments to the Vogtle Joint Ownership Agreements (as defined in Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Joint Owner Contracts"), Georgia Power is purchasing advanced nuclear PTCs for Plant Vogtle Unit 3 from the other Vogtle Owners. The gain recognized on the purchase of the joint owner PTCs is recognized as an income tax benefit. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4. 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. Inflation Reduction Act In August 2022, the IRA was signed into law. The IRA extends, expands, and increases ITCs and PTCs for clean energy projects, allows PTCs for solar projects, adds ITCs for stand-alone energy storage projects with an option to elect out of the tax normalization requirement, and allows for the transferability of the tax credits. The IRA extends and increases the tax credits for carbon capture and sequestration projects and adds tax credits for clean hydrogen and nuclear projects. Additional ITC and PTC amounts are available if the projects meet domestic content requirements or are located in low-income or energy communities. The IRA also enacted a 15% corporate minimum tax on book income, with material adjustments for pension costs and tax depreciation. The 15% corporate minimum tax on book income can be reduced by energy tax credits. For solar projects placed in service in 2022 through 2032, the IRA provides for a 30% ITC and an option to claim a PTC instead of an ITC. Starting in 2023 and through 2032, the IRA provides for a 30% ITC for stand-alone energy storage projects. For wind projects placed in service in 2022 through 2032, the IRA provides for a 100% PTC, adjusted for inflation annually. For projects placed in service before 2022, the 2023 PTC rate is 2.8 cents per KWH. For projects placed in service in 2022 and later, the 2023 PTC rate is 2.75 cents per KWH. The same PTC rate applies for solar projects for which the PTC option has been elected. To realize the full value of ITCs and PTCs, the IRA requires satisfaction of prevailing wage and apprenticeship requirements. In June 2023, the IRS issued temporary regulations related to the transferability of tax credits. During the fourth quarter 2023, Southern Power executed an agreement to transfer certain PTCs generated in 2023. The discount recognized was booked through income tax expense and was immaterial. Southern Company and certain subsidiaries are considering the sale of additional tax credits that are eligible to be transferred. Implementation of the IRA provisions is subject to the issuance of additional guidance by the U.S. Treasury Department and the IRS. The Registrants are still evaluating the impacts and the ultimate outcome of this matter cannot be determined at this time. II-47     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Natural Gas Safe Harbor Method In April 2023, the IRS issued Revenue Procedure 2023-15, which provides a safe harbor tax method of accounting that taxpayers may use to determine whether certain expenditures to maintain, repair, replace, or improve natural gas transmission and distribution property must be capitalized or allowed as repair deductions. The revenue procedure allows multiple alternatives for implementation which will result in a tax accounting method change for Southern Company Gas' eligible expenditures. Due to the complexity of analysis needed and the various implementation options allowed under the revenue procedure, Southern Company and Southern Company Gas are still evaluating the impacts and the ultimate outcome of this matter cannot be determined at this time. See Note 10 to the financial statements under "Deferred Tax Assets and Liabilities – Tax Credit Carryforwards" for additional information. 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, which requires the use of estimates, judgments, and assumptions. Significant accounting policies are described in the notes to the financial statements. Detailed further herein are certain estimates made in the application of these policies that may have a material impact on the results of operations, financial condition, 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 financial statements. Senior management has reviewed and discussed these 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. Additionally, a regulatory agency may disallow recovery of all or a portion of certain assets. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for information regarding the disallowance of certain capital investments at Nicor Gas and "Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4" herein for information regarding the Prudency Stipulation related to Georgia Power's construction of Plant Vogtle Units 3 and 4. Revenues related to regulated utility operations as a percentage of total operating revenues in 2023 for the applicable Registrants were as follows: 89% for Southern Company, 98% for Alabama Power, 96% for Georgia Power, 99% for Mississippi Power, and 87% 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 II-48     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with Georgia Power's fifteenth VCM report. In January 2018, the Georgia PSC issued an order approving Georgia Power's seventeenth VCM report, which included a modification of the Vogtle Cost Settlement Agreement. The January 2018 order and the modified Vogtle Cost Settlement Agreement resolved certain regulatory matters related to Plant Vogtle Units 3 and 4 including, but not limited to: (i) 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 (ii) a prudence proceeding on cost recovery would occur subsequent to achieving fuel load for Unit 4. On December 19, 2023, the Georgia PSC voted to approve Georgia Power's Application as modified by the Prudency Stipulation. Under the terms of the approved Prudency Stipulation, Georgia Power will recover $7.562 billion in total construction and capital costs and associated retail rate base items of $1.02 billion, which includes AFUDC financing costs above $4.418 billion (the Georgia PSC-certified amount) up to $7.562 billion. The approval of the Application and the Prudency Stipulation resolves all issues for determination by the Georgia PSC regarding the reasonableness, prudence, and cost recovery for the remaining Plant Vogtle Units 3 and 4 construction and capital costs not already in retail base rates. As of December 31, 2023, Georgia Power revised its total project capital cost forecast to $10.8 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds). This forecast includes construction contingency of $36 million and is based on the actual in-service date of July 2023 for Unit 3 and a projected in-service date during the second quarter 2024 for Unit 4. Since 2018, established construction contingency and additional costs totaling $2.7 billion have been assigned to the base capital cost forecast. Georgia Power did 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, until the prudency proceeding described above, did not seek rate recovery for subsequent construction and additional contingency costs assigned to the base capital cost forecast. After considering the significant level of uncertainty that existed regarding the future recoverability of these costs since the ultimate outcome of these matters was subject to the outcome of assessments by management, as well as Georgia PSC decisions in the related regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $1.1 billion ($0.8 billion after tax) in 2018; $149 million ($111 million after tax) and $176 million ($131 million after tax) in the second quarter and the fourth quarter 2020, respectively; $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; and $36 million ($27 million after tax), $32 million ($24 million after tax), and $148 million ($110 million after tax) in the second quarter 2022, the third quarter 2022, and the fourth quarter 2022, respectively. As a result of the Georgia PSC's approval of the Prudency Stipulation, Georgia Power recorded a pre-tax credit to income of approximately $228 million ($170 million after tax) in the fourth quarter 2023 to recognize CWIP costs previously charged to income, which are now recoverable through retail rates. Associated AFUDC on these costs was also recognized. In September 2022, Georgia Power and MEAG Power reached an agreement to resolve a dispute regarding 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"). Under the terms of the agreement, among other items, (i) MEAG Power will not exercise its tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4; (ii) Georgia Power will reimburse a portion of MEAG Power's costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will total approximately $92 million based on the current project capital cost forecast; and (iii) Georgia Power will reimburse 20% of MEAG Power's costs of construction with respect to any amounts over the current project capital cost forecast, with no further adjustment for force majeure costs. On October 5, 2023 and October 17, 2023, Georgia Power reached agreements with OPC and Dalton, respectively, to resolve its respective dispute with each of OPC and Dalton regarding the cost-sharing and tender provisions of the Global Amendments. Under the terms of the agreements with OPC and Dalton, among other items, (i) each of OPC and Dalton retracted its exercise of the tender option and will retain its full ownership interest in Plant Vogtle Units 3 and 4, (ii) Georgia Power made payments immediately after execution of the agreements of $308 million and $17 million to OPC and Dalton, respectively, representing payment for a portion of each of OPC's and Dalton's costs of construction for Plant Vogtle Units 3 and 4 previously incurred, (iii) Georgia Power will pay a portion of each of OPC's and Dalton's further costs of construction for Plant Vogtle Units 3 and 4 as such costs are incurred and with no further adjustment for force majeure costs, which payments will be in an aggregate amount of approximately $105 million and $6 million for OPC and Dalton, respectively, based on the current project capital cost forecast, II-49     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS and (iv) Georgia Power will pay 66% of each of OPC's and Dalton's costs of construction with respect to any amounts above the current project capital cost forecast, with no further adjustment for force majeure costs. Georgia Power recorded pre-tax charges to income through the fourth quarter 2022 of $407 million ($304 million after tax) associated with the cost-sharing provisions of the Global Amendments, including the settlement with MEAG Power. Based on the current project capital cost forecast and the settlements with OPC and Dalton described above, Georgia Power recorded a pre-tax charge to income of approximately $160 million ($120 million after tax) in the third quarter 2023. These charges are included in the total project capital cost forecast and will not be recovered from retail customers. As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts for Unit 4 on a regular basis to incorporate current information available, particularly in the areas of start-up testing and related test results and engineering support. The projected schedule for Unit 4 significantly depends on the progression of start-up and pre-operational testing, which may be impacted by equipment or other operational failures. Any further delays could result in a later in-service date and cost increases. Various design and other licensing-based compliance matters may result in additional license amendment requests or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the Unit 4 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 June 2024 for Unit 4, including the current level of cost sharing described in Note 2, is estimated to result in additional base capital costs for Georgia Power of up to $25 million per month as well as any additional related construction, support resources, or testing costs. Pursuant to the Prudency Stipulation, any further changes to the capital cost forecast will not be recoverable through regulated rates and 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 Unit 4, 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, Georgia Power, 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. See Note 10 to the financial statements under "Deferred Tax Assets and Liabilities – Tax Credit Carryforwards" and " – Net Operating Loss Carryforwards" for additional information. 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. Any apportionments and/or filing methodologies ultimately finalized in a manner inconsistent with expectations could have a material effect on the financial statements of the applicable Registrants. Asset Retirement Obligations (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas) Estimating AROs requires significant judgment. 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 II-50     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 through 3). 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 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. The cost estimates for Alabama Power are based on closure-in-place for all ash ponds. The cost estimates for Georgia Power and Mississippi Power are based on a combination of closure-in-place for some ash ponds and closure by removal for others. Additionally, the closure designs and plans in the States of Alabama and Georgia are subject to approval by environmental regulatory agencies. See Note 6 to the financial statements and FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" herein for additional information, including updates to AROs related to ash ponds recorded during 2023 by certain Registrants. 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 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 2024","","Projected Obligation for Pension Plan at December 31, 2023","","Projected Obligation forOther PostretirementBenefit Plans at December 31, 2023"],["","(in millions)"],["Discount rate:"],["Southern Company","$35/$(32)","","$419/$(397)","","$34/$(32)"],["Alabama Power","$9/$(9)","","$101/$(96)","","$9/$(8)"],["Georgia Power","$9/$(9)","","$122/$(116)","","$11/$(11)"],["Mississippi Power","$2/$(1)","","$18/$(18)","","$1/$(1)"],["Southern Company Gas","$2/$(2)","","$27/$(25)","","$4/$(4)"],["Salaries:"],["Southern Company","$18/$(17)","","$87/$(84)","","$\u2013/$\u2013"],["Alabama Power","$5/(5)","","$24/$(23)","","$\u2013/$\u2013"],["Georgia Power","$5/(5)","","$23/$(23)","","$\u2013/$\u2013"],["Mississippi Power","$1/$(1)","","$4/$(4)","","$\u2013/$\u2013"],["Southern Company Gas","$1/$(1)","","$3/$(3)","","$\u2013/$\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. Impairment (Southern Company, Southern Power, and Southern Company Gas) Goodwill (Southern Company and Southern Company Gas) The acquisition method of accounting for business combinations 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 recorded at the reporting unit level, which 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. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter of the year and on an interim basis if events and circumstances occur that indicate goodwill may be impaired. Goodwill is evaluated for impairment either under the qualitative assessment option or the quantitative option to determine the fair value of the reporting unit. If goodwill is determined to be impaired, an impairment loss measured at the amount by which the reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill, is recorded. Goodwill for Southern Company and Southern Company Gas was $5.2 billion and $5.0 billion, respectively, at December 31, 2023. During 2022, Southern Company recorded a $119 million impairment loss as a result of its annual goodwill impairment test for PowerSecure. 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. II-52     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS See Note 1 to the financial statements under "Goodwill and Other Intangible Assets" 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 impairment indicator exists, the asset is tested for recoverability by comparing the asset carrying amount 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 amount of the asset, the fair value of the asset is determined and a loss is recorded equal to the difference between the carrying amount 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 amount 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. 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 assets. For Southern Power, examples of impairment indicators could include, but are not limited to, 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, changes in tax legislation, 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, Southern Company recorded impairment charges totaling $7 million ($6 million after tax) related to its leveraged lease investments. During 2022, Southern Company Gas recorded pre-tax impairment charges totaling $131 million ($99 million after tax) related to natural gas storage facilities. During 2021, Southern Company Gas recorded total pre-tax impairment charges of $84 million ($67 million after tax) related to its equity method investment in the PennEast Pipeline project. 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. Revenue Recognition (Southern Power) Southern Power's power sale transactions, which include PPAs, are classified in one of four general categories: leases, normal sale derivatives or contracts with customers, 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. Normal Sale Derivative Transactions and Contracts with Customers 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 II-53     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 revenue from contracts with customers. 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. Acquisitions that meet the definition of a business are accounted for under the acquisition method, whereby the identifiable assets acquired, liabilities assumed, and any noncontrolling interests (including any intangible assets, primarily related to acquired PPAs) are recognized and measured at fair value. 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. For potential or successful acquisitions that meet the definition of a business, any due diligence or transaction costs incurred are expensed as incurred. If the acquisition is an asset acquisition, direct and incremental transaction costs can be capitalized as a component of the cost of the assets acquired. 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 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 See Note 1 to the financial statements under "Recently Adopted Accounting Standards" for additional information. II-54     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Overview The financial condition of each Registrant remained stable at December 31, 2023. 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 2023, Southern Power utilized tax credits, which provided $332 million in operating cash flows. For the three-year period from 2024 through 2026, projected stock dividends, capital expenditures, and debt maturities are expected to exceed operating cash flows for each of Southern Company, the traditional electric operating companies, and Southern Company Gas. 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 may 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. 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, 2023 as compared to December 31, 2022. No contributions to the qualified pension plan were made during 2023 and no mandatory contributions to the qualified pension plans are anticipated during 2024. See Notes 6 and 11 to the financial statements under "Nuclear Decommissioning" and "Pension Plans," respectively, for additional information. At the end of 2023, the market price of Southern Company's common stock was $70.12 per share (based on the closing price as reported on the NYSE) and the book value was $28.83 per share, representing a market-to-book value ratio of 243%, compared to $71.41, $27.93, and 256%, respectively, at the end of 2022. II-55     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Cash Requirements Capital Expenditures Total estimated capital expenditures, including LTSA and nuclear fuel commitments, for the Registrants through 2028 based on their current construction programs are as follows: [[GREPCENT_TABLE]] [["","2024","2025","2026","2027","2028"],["","(in billions)"],["Southern Company(a)(b)","$","10.0","","$","9.4","","$","8.5","","$","8.6","","$","8.7"],["Alabama Power","2.1","","2.0","","1.9","","2.0","","1.9"],["Georgia Power(a)","5.4","","5.0","","4.4","","4.5","","4.7"],["Mississippi Power","0.3","","0.3","","0.2","","0.3","","0.3"],["Southern Power(b)","0.3","","0.2","","0.1","","0.1","","0.1"],["Southern Company Gas","1.8","","1.8","","1.7","","1.7","","1.7"]] [[/GREPCENT_TABLE]] (a)Includes expenditures of approximately $0.2 billion in 2024 for the construction of Plant Vogtle Unit 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Also includes certain expenditures related to the construction of Plant Yates Units 8 through 10 as requested in Georgia Power's 2023 IRP Update filing, which is subject to the approval of the Georgia PSC. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plans" for additional information. (b)Includes $0.1 billion in both 2024 and 2025 related to the South Cheyenne and Millers Branch solar projects. Excludes approximately $0.8 billion annually 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. Also excludes estimated capital expenditures associated with the phase two expansion of the Millers Branch solar project, which was committed to subsequent to December 31, 2023. See Note 15 to the financial statements under "Southern Power" for additional information regarding the South Cheyenne and Millers Branch solar projects. These capital expenditures include estimates to comply with environmental laws and regulations, but do not include compliance costs associated with potential regulation of GHG emissions or the proposed ELG Supplemental Rule. See FUTURE EARNINGS POTENTIAL – "Environmental Matters" herein for additional information. At December 31, 2023, significant purchase commitments were outstanding in connection with the Registrants' construction programs. The traditional electric operating companies also anticipate continued 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 are based on closure-in-place for all ash ponds. The cost estimates for Georgia Power and Mississippi Power are based on a combination of closure-in-place for some ash ponds and closure by removal for others. These estimated 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 2028 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]] [["","2024","2025","2026","2027","2028"],["","(in millions)"],["Southern Company","$","728","","$","767","","$","762","","$","725","","$","669"],["Alabama Power","346","","364","","299","","237","","216"],["Georgia Power","338","","347","","429","","450","","450"],["Mississippi Power","24","","30","","17","","2","","2"]] [[/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. 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 II-56     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 Unit 4, which includes components based on new technology that only within the last several 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 Unit 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, 2023, 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. 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, 2023 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, 2023. As discussed under "Capital Expenditures" herein, estimated expenditures for nuclear fuel are included in the applicable Registrants' construction programs for the years 2024 through 2028. Nuclear fuel commitments at December 31, 2023 that extend beyond 2028 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]] [["","2024","2025","2026","2027","2028","Thereafter"],["","(in millions)"],["Southern Company(*)","$","3,347","","$","3,151","","$","2,201","","$","1,738","","$","1,171","","$","4,820"],["Alabama Power","1,210","","1,181","","819","","619","","328","","1,136"],["Georgia Power(*)","1,262","","1,111","","696","","579","","471","","2,008"],["Mississippi Power","377","","420","","338","","263","","213","","1,002"],["Southern Power","558","","502","","414","","346","","232","","674"]] [[/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." In connection with Georgia Power's 2022 IRP, the Georgia PSC approved five affiliate PPAs with Southern Power, which are expected to be accounted for as leases, and are contingent upon approval by the FERC. The expected capacity payments associated with the PPAs total $5 million in 2024, $68 million in 2025, $75 million in 2026, $76 million in 2027, $86 million in 2028, and $584 million thereafter. In connection with Georgia Power's 2023 IRP Update, Georgia Power has requested certification of a non-affiliate PPA, which is expected to be accounted for as a lease and is contingent upon approval by the Georgia PSC. The expected capacity payments associated with the PPA are $10 million in 2024, $17 million in 2025, $18 million in 2026, $19 million in 2027, and $19 million in 2028. See Note 2 to the financial statements under "Georgia Power – Integrated Resource Plans" for additional information. II-57     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS The traditional electric operating companies and Southern Power have entered into LTSAs for the purpose of securing maintenance support for certain of their generating facilities. See Note 1 to the financial statements under "Long-term Service Agreements" for additional information. As discussed under "Capital Expenditures" herein, estimated expenditures related to LTSAs are included in the applicable Registrants' construction programs for the years 2024 through 2028. Total estimated payments for LTSA commitments at December 31, 2023 that extend beyond 2028 are provided in the following table and include price escalation based on inflation indices: [[GREPCENT_TABLE]] [["","Southern Company","Alabama Power","Georgia Power","Mississippi Power","Southern Power"],["","(in millions)"],["LTSA commitments (after 2028)","$","1,594","","$","262","","$","252","","$","152","","$","928"]] [[/GREPCENT_TABLE]] In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2023 are provided in the table below. [[GREPCENT_TABLE]] [["","2024","2025","2026","2027","2028","Thereafter"],["","(in millions)"],["Southern Power's operations and maintenance agreements","$","74","","$","45","","$","33","","$","30","","$","30","","$","226"]] [[/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. Sources of Capital Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt, hybrid, and/or equity issuances. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The Subsidiary Registrants plan to obtain the funds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. Operating cash flows provide a substantial portion of the Registrants' cash needs. Georgia Power intends to utilize a mix of senior note issuances, short-term floating rate bank loans, and commercial paper issuances to continue funding operating cash flows related to fuel cost under recovery. The amount, type, and timing of any financings in 2024, 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 2023, Southern Power obtained tax equity funding for existing tax equity partnerships totaling $21 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 II-58     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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, up to 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, 2023, the amount of subsidiary retained earnings restricted to dividend totaled $1.7 billion. This restriction did not impact Southern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations. Certain Registrants' current liabilities frequently exceed their current assets because of long-term debt maturities and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs. The Registrants generally plan to refinance long-term debt as it matures. See Note 8 to the financial statements for additional information. Also see "Financing Activities" herein for information on financing activities that occurred subsequent to December 31, 2023. The following table shows the amount by which current liabilities exceeded current assets at December 31, 2023 for the applicable Registrants: [[GREPCENT_TABLE]] [["At December 31, 2023","Southern Company","","Georgia Power","Mississippi Power","","Southern Company Gas"],["","(in millions)"],["Current liabilities in excess of current assets","$","3,035","","","$","1,674","","$","314","","","$","222"]] [[/GREPCENT_TABLE]] The Registrants believe the need for working capital can be adequately met by utilizing operating cash flows, as well as commercial paper, lines of credit, and short-term bank notes, as market conditions permit. In addition, under certain circumstances, the Subsidiary Registrants may utilize equity contributions and/or loans from Southern Company. Bank Credit Arrangements At December 31, 2023, the Registrants' unused committed credit arrangements with banks were as follows: [[GREPCENT_TABLE]] [["At December 31, 2023","Southern Company parent","Alabama Power","Georgia Power","Mississippi Power","Southern Power(a)","Southern Company Gas(b)","SEGCO","Southern Company"],["","(in millions)"],["Unused committed credit","$","1,998","","$","1,350","","$","1,726","","$","275","","$","589","","$","1,598","","$","30","","$","7,566"]] [[/GREPCENT_TABLE]] (a)At December 31, 2023, Southern Power also had two continuing letters of credit facilities for standby letters of credit, of which $15 million was unused. Southern Power's subsidiaries are not parties to its bank credit arrangements or letter of credit facilities. (b)Includes $798 million and $800 million at Southern Company Gas Capital and Nicor Gas, respectively. Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of the unused credit with banks is allocated to provide liquidity support to certain revenue bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. At December 31, 2023, outstanding variable rate demand revenue bonds of the traditional electric operating companies with allocated liquidity support totaled approximately $1.7 billion (comprised of approximately $818 million at Alabama Power, $819 million at Georgia Power, and $69 million at Mississippi Power). In addition, at December 31, 2023, Georgia Power had approximately $325 million of fixed rate revenue bonds outstanding that are required to be remarketed within the next 12 months. The variable rate demand revenue bonds and fixed rate revenue bonds required to be remarketed within the next 12 months are classified as long-term debt on the balance sheets as a result of available long-term committed credit. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information. II-59     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Short-term Borrowings The Registrants, Nicor Gas, and SEGCO make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Southern Power's subsidiaries are not issuers or obligors under its commercial paper program. Commercial paper and short-term bank term loans are included in notes payable in the balance sheets. Details of the Registrants' short-term borrowings were as follows: [[GREPCENT_TABLE]] [["","Short-term Debt at the End of the Period"],["","Amount Outstanding","","Weighted Average Interest Rate"],["","December 31,","","December 31,"],["","2023","2022","2021","","2023","2022","2021"],["","(in millions)"],["Southern Company","$","2,314","","$","2,609","","$","1,440","","","5.7","%","4.9","%","0.4","%"],["Alabama Power","40","","\u2014","","\u2014","","","5.5","","\u2014","","\u2014"],["Georgia Power","1,329","","1,600","","\u2014","","","5.9","","5.0","","\u2014"],["Southern Power","138","","225","","211","","","5.5","","4.7","","0.3"],["Southern Company Gas:"],["Southern Company Gas Capital","$","23","","$","285","","$","379","","","5.5","%","4.8","%","0.3","%"],["Nicor Gas","392","","483","","830","","","5.5","","4.7","","0.4"],["Southern Company Gas Total","$","415","","$","768","","$","1,209","","","5.5","%","4.7","%","0.4","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Short-term Debt During the Period(*)"],["","Average Amount Outstanding","","Weighted Average Interest Rate","","Maximum Amount Outstanding"],["","2023","2022","2021","","2023","2022","2021","","2023","2022","2021"],["","(in millions)","","","","","","(in millions)"],["Southern Company","$","2,191","","$","1,995","","$","1,141","","","5.6","%","2.2","%","0.3","%","","$","3,270","","$","2,894","","$","1,809"],["Alabama Power","44","","6","","27","","","5.0","","2.1","","0.1","","","230","","200","","200"],["Georgia Power","1,440","","673","","95","","","5.8","","3.1","","0.2","","","2,260","","1,710","","407"],["Mississippi Power","56","","8","","15","","","5.5","","1.6","","0.2","","","169","","71","","81"],["Southern Power","158","","166","","133","","","5.6","","2.3","","0.2","","","359","","350","","520"],["Southern Company Gas:"],["Southern Company Gas Capital","$","163","","$","279","","$","206","","","5.3","%","1.8","%","0.2","%","","$","440","","$","547","","$","485"],["Nicor Gas","88","","349","","420","","","5.1","","2.1","","0.4","","","483","","830","","897"],["Southern Company Gas Total","$","251","","$","628","","$","626","","","5.2","%","2.0","%","0.4","%"]] [[/GREPCENT_TABLE]] (*)    Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2023, 2022, and 2021. II-60     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Analysis of Cash Flows Net cash flows provided from (used for) operating, investing, and financing activities in 2023 and 2022 are presented in the following table: [[GREPCENT_TABLE]] [["Net cash provided from (used for):","Southern Company","Alabama Power","Georgia Power","Mississippi Power","Southern Power","Southern Company Gas"],["","(in millions)"],["2023"],["Operating activities","$","7,553","","$","2,079","","$","2,752","","$","369","","$","1,096","","$","1,762"],["Investing activities","(9,668)","","(2,196)","","(5,079)","","(370)","","(265)","","(1,656)"],["Financing activities","999","","(161)","","1,922","","(20)","","(820)","","(154)"],["2022"],["Operating activities","$","6,302","","$","1,639","","$","2,038","","$","383","","$","815","","$","1,519"],["Investing activities","(8,430)","","(2,263)","","(3,954)","","(317)","","(194)","","(1,580)"],["Financing activities","2,336","","251","","2,363","","(68)","","(623)","","96"]] [[/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 increased $1.3 billion in 2023 as compared to 2022 primarily due to increased fuel cost recovery and the timing of customer receivable collections, partially offset by the timing of vendor payments. The net cash used for investing activities in 2023 and 2022 was primarily related to the Subsidiary Registrants' construction programs. The net cash provided from financing activities in 2023 was primarily related to net issuances of long-term debt and an increase in commercial paper borrowings, partially offset by common stock dividend payments and net repayments of short-term bank loans. The net cash provided from financing activities in 2022 was primarily related to net issuances of long-term debt, the issuance of common stock to settle the purchase contracts entered into as part of the Equity Units (as discussed in Note 8 to the financial statements under "Equity Units"), and an increase in short-term borrowings, partially offset by common stock dividend payments. Alabama Power Net cash provided from operating activities increased $440 million in 2023 as compared to 2022 primarily due to an increase in fuel cost recovery and the timing of customer receivable collections, partially offset by the timing of vendor payments and fuel stock purchases. The net cash used for investing activities in 2023 and 2022 was primarily related to gross property additions, including approximately $79 million and $211 million, respectively, related to the construction of Plant Barry Unit 8 and, for 2022, $171 million related to the acquisition of the Calhoun Generating Station. See Notes 2 and 15 to the financial statements under "Alabama Power" for additional information. The net cash used for financing activities in 2023 was primarily related to common stock dividend payments, largely offset by net issuances of long-term debt and capital contributions from Southern Company. The net cash provided from financing activities in 2022 was primarily related to net long-term debt issuances and capital contributions from Southern Company, partially offset by common stock dividend payments and preferred stock redemptions. Georgia Power Net cash provided from operating activities increased $714 million in 2023 as compared to 2022 primarily due to increased fuel cost recovery, partially offset by the timing of vendor payments. The net cash used for investing activities in 2023 and 2022 was primarily related to gross property additions, including approximately $1.1 billion and $1.0 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-61     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS The net cash provided from financing activities in 2023 was primarily related to capital contributions from Southern Company, net issuances of senior notes, an increase in commercial paper borrowings, and reofferings of pollution control revenue bonds which were previously held by Georgia Power, partially offset by common stock dividend payments and a net decrease in short-term borrowings. The net cash provided from financing activities in 2022 was primarily related to a net increase in short-term bank debt, capital contributions from Southern Company, and net issuances of senior notes, partially offset by common stock dividend payments. Mississippi Power Net cash provided from operating activities decreased $14 million in 2023 as compared to 2022 primarily due to the timing of vendor payments, partially offset by a decrease in power pool sales and the timing of customer receivable collections. The net cash used for investing activities in 2023 and 2022 was primarily related to gross property additions. The net cash used for financing activities in 2023 was primarily related to common stock dividend payments, partially offset by the issuance of senior notes. The net cash used for financing activities in 2022 was primarily related to common stock dividend payments, partially offset by capital contributions from Southern Company and the issuance of revenue bonds. Southern Power Net cash provided from operating activities increased $281 million in 2023 as compared to 2022 primarily due to an increase in the utilization of tax credits and the timing of customer receivable collections, partially offset by the timing of vendor payments. The net cash used for investing activities in 2023 was primarily related to the acquisitions of the South Cheyenne and Millers Branch solar facilities and ongoing construction activities. The net cash used for investing activities in 2022 was primarily related to ongoing construction activities. See Note 15 to the financial statements under "Southern Power" for additional information. The net cash used for financing activities in 2023 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, net distributions to noncontrolling interests, and net repayments of short-term debt. The net cash used for financing activities in 2022 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, and net capital distributions to noncontrolling interests, partially offset by capital contributions from Southern Company. Southern Company Gas Net cash provided from operating activities increased $243 million in 2023 as compared to 2022 primarily due to the timing of customer receivable collections, partially offset by the timing of vendor payments. The net cash used for investing activities in 2023 and 2022 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 used for financing activities in 2023 was primarily related to repayment of short-term borrowings and common stock dividend payments, partially offset by net issuances of long-term debt and capital contributions from Southern Company. The net cash provided from financing activities in 2022 was primarily related to net issuances of long-term debt and capital contributions from Southern Company, partially offset by common stock dividend payments and a decrease in short-term borrowings. Significant Balance Sheet Changes Southern Company Significant balance sheet changes in 2023 for Southern Company included: •an increase of $5.3 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs; •an increase of $4.7 billion in long-term debt (including securities due within one year) related to new issuances; •a decrease of $1.2 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Company" herein; •an increase of $1.0 billion in total common stockholders' equity primarily related to net income, partially offset by common stock dividend payments; •an increase of $1.0 billion in accumulated deferred income taxes primarily related to an increase in property-related timing differences and the expected utilization of ITCs; •a decrease of $0.6 billion in accounts payable primarily related to the timing of vendor payments; II-62     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS •a decrease of $0.6 billion in deferred credits related to income taxes primarily due to the flowback of excess deferred income taxes; and •a decrease of $0.5 billion in AROs primarily due to cost estimate updates at Georgia Power for ash pond closures. See "Financing Activities" herein and Notes 2, 5, 6, 8, and 10 to the financial statements for additional information. Alabama Power Significant balance sheet changes in 2023 for Alabama Power included: •an increase of $0.8 billion in total property, plant, and equipment primarily related to the construction of Plant Barry Unit 8 and construction of distribution and transmission facilities; •an increase of $0.6 billion in total common stockholder's equity primarily due to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company; •an increase of $0.6 billion in long-term debt (including securities due within one year) primarily due to the issuance of senior notes and revenue bonds; •a decrease of $0.4 billion in deferred credits related to income taxes primarily due to the flowback of excess deferred income taxes; •a decrease of $0.4 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Alabama Power" herein; and •a decrease of $0.2 billion in other regulatory assets, deferred primarily due to a decrease in deferred under recovered fuel costs. See "Financing Activities – Alabama Power" herein and Notes 2, 5, and 8 to the financial statements for additional information. Georgia Power Significant balance sheet changes in 2023 for Georgia Power included: •an increase of $3.5 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities, including $1.2 billion for Plant Vogtle Units 3 and 4; •an increase of $2.5 billion in common stockholder's equity primarily due to capital contributions from Southern Company and net income, partially offset by dividends paid to Southern Company; •an increase of $1.8 billion in long-term debt (including securities due within one year) primarily due to net issuances of senior notes; •decreases of $0.4 billion in AROs and $0.3 billion in regulatory assets associated with AROs primarily due to cost estimate updates for ash pond closures; •a decrease of $0.4 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Georgia Power" herein; •an increase of $0.3 billion in accumulated deferred income taxes primarily due to an increase in property-related timing differences; and •a decrease of $0.3 billion in notes payable primarily due to net repayments of short-term bank debt, largely offset by an increase in commercial paper borrowings. See "Financing Activities – Georgia Power" herein and Notes 2, 5, 6, 8, and 10 to the financial statements for additional information. Mississippi Power Significant balance sheet changes in 2023 for Mississippi Power included: •an increase of $161 million in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities; •an increase of $99 million in long-term debt (including securities due within one year) primarily due to issuances of senior notes; •an increase of $72 million in common stockholder's equity related to net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company; and •a decrease of $53 million in affiliated receivables primarily due to a decrease in power pool sales. See "Financing Activities – Mississippi Power" herein and Notes 5 and 8 to the financial statements for additional information. II-63     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Southern Power Significant balance sheet changes in 2023 for Southern Power included: •an increase of $335 million in accumulated deferred income taxes primarily related to the expected utilization of ITCs; •a decrease of $268 million in long-term debt (including securities due within one year) primarily due to the repayment of senior notes at maturity; •a decrease of $218 million in total stockholder's equity primarily due to dividends paid to Southern Company and net distributions to noncontrolling interests, partially offset by net income and capital contributions from Southern Company; and •a decrease of $189 million in total property, plant, and equipment in service primarily due to continued depreciation of assets, partially offset by an increase in construction work in progress primarily related to the acquisition of the South Cheyenne and Millers Branch solar facilities. See "Financing Activities – Southern Power" herein and Notes 5, 8, and 15 to the financial statements for additional information. Southern Company Gas Significant balance sheet changes in 2023 for Southern Company Gas included: •an increase of $1.1 billion in total property, plant, and equipment primarily related to the construction of transportation and distribution assets and additional infrastructure investment; •a decrease of $0.4 billion in total accounts receivable primarily relating to decreases of $0.2 billion in customer accounts receivable and $0.2 billion in unbilled revenues as a result of seasonality; •an increase of $0.4 billion 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 $0.4 billion in long-term debt (including securities due within one year) due to issuances of senior notes and first mortgage bonds; •a decrease of $0.4 billion in notes payable due to repayments of short-term debt and commercial paper borrowings; •a decrease of $0.3 billion in other accounts payable due to the timing of vendor payments; and •an increase of $0.2 billion in natural gas cost over recovery primarily due to lower natural gas prices and the timing of natural gas purchases. See "Financing Activities – Southern Company Gas" herein and Notes 2, 5, and 8 to the financial statements for additional information. Financing Activities The following table outlines the Registrants' long-term debt financing activities for the year ended December 31, 2023: [[GREPCENT_TABLE]] [["","Issuances and Reofferings","","Maturities and Redemptions"],["Company","Senior Notes","Revenue Bonds","Other Long-Term Debt","","Senior Notes","Revenue Bonds","Other Long-Term Debt(a)"],["","(in millions)"],["Southern Company parent","$","4,525","","$","\u2014","","$","\u2014","","","$","1,850","","$","\u2014","","$","550"],["Alabama Power","500","","326","","29","","","300","","\u2014","","2"],["Georgia Power","2,450","","229","","\u2014","","","800","","\u2014","","102"],["Mississippi Power","100","","\u2014","","\u2014","","","\u2014","","\u2014","","1"],["Southern Power","\u2014","","\u2014","","\u2014","","","290","","\u2014","","\u2014"],["Southern Company Gas","500","","\u2014","","312","","","350","","\u2014","","50"],["Other","\u2014","","\u2014","","\u2014","","","\u2014","","\u2014","","8"],["Elimination(b)","\u2014","","\u2014","","\u2014","","","\u2014","","\u2014","","(9)"],["Southern Company","$","8,075","","$","555","","$","341","","","$","3,590","","$","\u2014","","$","704"]] [[/GREPCENT_TABLE]] (a)Includes reductions in finance lease obligations resulting from cash payments under finance leases and, for Georgia Power, principal amortization payments totaling $86 million for FFB borrowings. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" for additional information. (b)Represents reductions in affiliate finance lease obligations at Georgia Power, which are eliminated in Southern Company's consolidated financial statements. II-64     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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 2023, Southern Company issued approximately 2.1 million shares of common stock primarily through equity compensation plans and received proceeds of approximately $36 million. In January 2023, Southern Company redeemed all $550 million aggregate principal amount of its Series 2016B Junior Subordinated Notes due March 15, 2057. In February 2023, Southern Company issued $1.5 billion aggregate principal amount of its Series 2023A 3.875% Convertible Senior Notes due December 15, 2025 (Series 2023A Convertible Senior Notes) in a private offering. In March 2023, Southern Company issued an additional $225 million aggregate principal amount of the Series 2023A Convertible Senior Notes upon the exercise by the initial purchasers of their over-allotment option. See Note 8 to the financial statements under "Convertible Senior Notes" for additional information. In May 2023, Southern Company repaid at maturity $600 million aggregate principal amount of its 2021C Floating Rate Senior Notes. Also in May 2023, Southern Company issued $750 million aggregate principal amount of Series 2023B 4.85% Senior Notes due June 15, 2028 and $750 million aggregate principal amount of Series 2023C 5.20% Senior Notes due June 15, 2033. In July 2023, Southern Company repaid at maturity $1.25 billion aggregate principal amount of its 2.95% Senior Notes. In September 2023, Southern Company issued $600 million aggregate principal amount of Series 2023D 5.50% Senior Notes due March 15, 2029 and $700 million aggregate principal amount of Series 2023E 5.70% Senior Notes due March 15, 2034. Alabama Power During 2023, a subsidiary of Alabama Power borrowed $20 million under a $39 million long-term floating rate bank loan entered into in December 2022 with a maturity date of December 12, 2029. In May 2023, Alabama Power issued $200 million aggregate principal amount of Series 2023A Floating Rate Senior Notes due May 15, 2073. In August 2023, the Walker County Economic and Industrial Development Authority issued for the benefit of Alabama Power $228 million aggregate principal amount of Solid Waste Disposal Revenue Bonds (Alabama Power Company Plant Gorgas Project), First Series 2023 ($140 million aggregate principal amount) and Second Series 2023 ($88 million aggregate principal amount) due August 1, 2063. The proceeds from the revenue bonds are being used to finance certain solid waste disposal facilities at Plant Gorgas. Also in August 2023, the Industrial Development Board of the Town of West Jefferson issued for the benefit of Alabama Power $98 million aggregate principal amount of Solid Waste Disposal Revenue Bonds (Alabama Power Company Plant Miller Project), Series 2023 due August 1, 2063. The proceeds from the revenue bonds are being used to finance certain solid waste disposal facilities at Plant Miller. In September 2023, a subsidiary of Alabama Power assumed two fixed rate bank loans totaling $9 million, which it repaid in December 2023 using approximately $9 million of borrowings under a new $20 million fixed rate bank loan maturing December 2030. In November 2023, Alabama Power issued $300 million aggregate principal amount of Series 2023B 5.85% Senior Notes due November 15, 2033. In December 2023, Alabama Power repaid at maturity $300 million aggregate principal amount of its Series 2013A 3.55% Senior Notes. Subsequent to December 31, 2023, Alabama Power received a capital contribution of $425 million from Southern Company and also repaid at maturity approximately $21 million aggregate principal amount of Industrial Development Board of the Town of Wilsonville (Alabama) Pollution Control Revenue Bonds (Alabama Power Company Gaston Plant Project), Series D. II-65     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Georgia Power In March 2023, Georgia Power reoffered to the public the following pollution control revenue bonds that previously had been purchased and were held by Georgia Power at December 31, 2022: •approximately $28 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2006; •approximately $89 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2009; •approximately $49 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), First Series 2012; •approximately $18 million aggregate principal amount of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), First Series 2013; and •$46 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1996. Also in March 2023, Georgia Power borrowed $100 million pursuant to a short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand. In April 2023, Georgia Power borrowed an additional $150 million under the arrangement. In May 2023, Georgia Power repaid the aggregate $250 million outstanding. Also in March 2023, Georgia Power repaid at maturity a $200 million short-term floating rate bank loan entered into in March 2022. In April 2023, Georgia Power repaid at maturity $100 million aggregate principal amount of its Series N 5.750% Senior Notes. Also in April 2023, Georgia Power repaid at maturity a $200 million short-term floating rate bank loan entered into in April 2022. In May 2023, Georgia Power issued $750 million aggregate principal amount of Series 2023A 4.65% Senior Notes due May 16, 2028 and $1.0 billion aggregate principal amount of Series 2023B 4.95% Senior Notes due May 17, 2033. In July 2023, Georgia Power repaid at maturity $700 million aggregate principal amount of its Series 2020A 2.10% Senior Notes. In November 2023, Georgia Power issued $700 million aggregate principal amount of Series 2023C Floating Rate Senior Notes due May 8, 2025. Also in November 2023, Georgia Power repaid $780 million of a $1.2 billion short-term floating rate bank loan entered into in November 2022 and extended the maturity of the remaining outstanding amount of $420 million to November 2024. In December 2023 and subsequent to December 31, 2023, Georgia Power borrowed $100 million and $150 million, respectively, pursuant to a short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand. Mississippi Power In March 2023, Mississippi Power borrowed $50 million of short-term debt pursuant to its $125 million revolving credit arrangement, which it repaid in June 2023. In June 2023, Mississippi Power issued in a private placement $65 million aggregate principal amount of Series 2023A 5.64% Senior Notes due July 15, 2026 and $35 million aggregate principal amount of Series 2023B 5.63% Senior Notes due July 15, 2033. Southern Power In January 2023, Southern Power borrowed $100 million pursuant to a short-term uncommitted bank credit arrangement bearing interest at a mutually agreed upon rate and payable on demand. During the second quarter 2023, Southern Power made net repayments of $50 million of the $100 million borrowed. In October 2023, Southern Power borrowed the remaining $50 million under the arrangement. In December 2023, Southern Power repaid the $100 million outstanding amount. In September 2023, Southern Power repaid at maturity $290 million aggregate principal amount of its Series 2016C 2.75% Senior Notes. II-66     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Southern Company Gas In February 2023, Nicor Gas repaid its $150 million and $50 million short-term floating rate bank loans entered into in February 2022 and March 2022, respectively. In July 2023, Nicor Gas issued in a private placement $50 million aggregate principal amount of 5.28% Series First Mortgage Bonds due July 31, 2030 and $75 million aggregate principal amount of 5.43% Series First Mortgage Bonds due July 31, 2035. In October 2023, pursuant to the same agreement, Nicor Gas issued in a private placement $75 million aggregate principal amount of 5.67% Series First Mortgage Bonds due October 31, 2053 and $75 million aggregate principal amount of 5.77% Series First Mortgage Bonds due October 31, 2063. In September 2023, Southern Company Gas Capital issued $500 million aggregate principal amount of Series 2023A 5.75% Senior Notes due September 15, 2033, guaranteed by Southern Company Gas. In October 2023, Southern Company Gas Capital repaid at maturity $350 million aggregate principal amount of its 2.450% Senior Notes. In December 2023, Nicor Gas repaid at maturity $50 million aggregate principal amount of its 5.80% Series First Mortgage Bonds. During 2023, Southern Company Gas received cash advances totaling $37 million under a long-term financing agreement related to a construction contract. Credit Rating Risk At December 31, 2023, the Registrants did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain Registrants to BBB and/or Baa2 or below. These contracts are primarily for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and, for Georgia Power, services at Plant Vogtle Units 3 and 4. The maximum potential collateral requirements under these contracts at December 31, 2023 were as follows: [[GREPCENT_TABLE]] [["Credit Ratings","Southern Company(*)","Alabama Power","Georgia Power","Mississippi Power","SouthernPower(*)","Southern Company Gas"],["","(in millions)"],["At BBB and/or Baa2","$","33","","$","1","","$","\u2014","","$","\u2014","","$","32","","$","\u2014"],["At BBB- and/or Baa3","407","","2","","60","","1","","345","","\u2014"],["At BB+ and/or Ba1 or below","2,074","","404","","943","","319","","1,289","","19"]] [[/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 $106 million of cash collateral posted related to PPA requirements at December 31, 2023. The amounts in the previous table for the traditional electric operating companies and Southern Power include certain agreements that could require collateral if either Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of the Registrants to access capital markets and would be likely to impact the cost at which they do so. Mississippi Power and its largest retail customer, Chevron Products Company (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 August 2, 2023, S&P revised its credit rating outlook for Southern Company and its subsidiaries to positive from stable. On September 1, 2023, Fitch upgraded the senior unsecured long-term debt rating of Georgia Power to A- from BBB+ and revised the rating outlook to positive from stable. II-67     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Also on September 1, 2023, Fitch revised the ratings outlook of Southern Company, Alabama Power, Southern Power, Nicor Gas, and SEGCO to stable from negative. On September 26, 2023, Moody's upgraded Mississippi Power's senior unsecured long-term debt rating to A3 from Baa1 and revised its rating outlook to stable from positive. Also on September 26, 2023, Moody's revised its ratings outlooks for Southern Company and Georgia Power to positive from stable. Market Price Risk The Registrants had no material change in market risk exposure for the year ended December 31, 2023 when compared to the year ended December 31, 2022. 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. 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 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 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, 2023 for the applicable Registrants: [[GREPCENT_TABLE]] [["At December 31, 2023","Southern Company(*)","Alabama Power","Georgia Power","Mississippi Power","","Southern Company Gas"],["","(in millions, except percentages)"],["Long-term variable interest rate exposure","$","5,290","","$","1,083","","$","1,939","","$","269","","","$","500"],["Weighted average interest rate on long-term variable interest rate exposure","5.87","%","4.75","%","5.48","%","5.39","%","","5.85","%"],["Impact on annualized interest expense of 100 basis point change in interest rates","$","53","","$","11","","$","19","","$","3","","","$","5"]] [[/GREPCENT_TABLE]] (*)Includes $1.4 billion of long-term variable interest rate exposure at the Southern Company parent entity. The Registrants may enter into interest rate derivatives designated as hedges, which are intended to mitigate interest rate volatility related to forecasted debt financings and existing fixed and floating rate obligations. See Note 14 to the financial statements under "Interest Rate Derivatives" for additional information. Southern Company and Southern Power had foreign currency denominated debt at December 31, 2023 and have each mitigated exposure to foreign currency exchange rate risk through the use of foreign currency swaps. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information. II-68     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS Changes in fair value of energy-related derivative contracts for Southern Company and Southern Company Gas for the years ended December 31, 2023 and 2022 are provided in the table below. At December 31, 2023 and 2022, substantially all of the traditional electric operating companies' and certain of the natural gas distribution utilities' energy-related derivative contracts were designated as regulatory hedges and were related to the applicable company's fuel-hedging program. [[GREPCENT_TABLE]] [["","Southern Company(a)","","","","","Southern Company Gas(a)"],["","(in millions)"],["Contracts outstanding at December 31, 2021, assets (liabilities), net","$","174","","","","","","$","8"],["Contracts realized or settled","(327)","","","","","","10"],["Current period changes(b)","142","","","","","","(55)"],["Contracts outstanding at December 31, 2022, assets (liabilities), net","$","(11)","","","","","","$","(37)"],["Contracts realized or settled","207","","","","","","33"],["Current period changes(b)","(500)","","","","","","(45)"],["Contracts outstanding at December 31, 2023, assets (liabilities), net","$","(304)","","","","","","$","(49)"]] [[/GREPCENT_TABLE]] (a)Excludes cash collateral held on deposit in broker margin accounts of $62 million, $41 million, and $3 million at December 31, 2023, 2022, and 2021, 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. The net hedge volumes of energy-related derivative contracts for natural gas purchased (sold) at December 31, 2023 and 2022 for Southern Company and Southern Company Gas were as follows: [[GREPCENT_TABLE]] [["","Southern Company","","","","","Southern Company Gas"],["","mmBtu Volume (in millions)"],["At December 31, 2023:"],["Commodity \u2013 Natural gas swaps","109","","","","","","\u2014"],["Commodity \u2013 Natural gas options","339","","","","","","102"],["Total hedge volume","448","","","","","","102"],["At December 31, 2022:"],["Commodity \u2013 Natural gas swaps","217","","","","","","\u2014"],["Commodity \u2013 Natural gas options","214","","","","","","93"],["Total hedge volume","431","","","","","","93"]] [[/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 112 million mmBtu and short natural gas positions of 10 million mmBtu at December 31, 2023 and the net of long natural gas positions of 98 million mmBtu and short natural gas positions of 5 million mmBtu at December 31, 2022. For the Southern Company system, the weighted average swap contract cost per mmBtu was approximately $0.76 per mmBtu below market prices at December 31, 2023 and was approximately $0.08 per mmBtu above market prices at December 31, 2022. The change in option fair value is primarily attributable to the volatility of the market and the underlying change in the natural gas price. Substantially all of the traditional electric operating companies' natural gas hedge gains and losses are recovered through their respective fuel cost recovery clauses. II-69     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS The Registrants use over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2 of the fair value hierarchy. In addition, Southern Company Gas uses exchange-traded market-observable contracts, which are categorized as Level 1. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts for Southern Company and Southern Company Gas at December 31, 2023 were as follows: [[GREPCENT_TABLE]] [["","Fair Value Measurements of Contracts at"],["","December 31, 2023"],["","Total Fair Value","","Maturity"],["","","2024","","2025 \u2013 2026","","2027 \u2013 2028","","Thereafter"],["","(in millions)"],["Southern Company"],["Level 1(a)","$","(40)","","","$","(36)","","","$","(4)","","","$","\u2014","","","$","\u2014"],["Level 2(b)","(264)","","","(180)","","","(87)","","","1","","","2"],["Southern Company total(c)","$","(304)","","","$","(216)","","","$","(91)","","","$","1","","","$","2"],["Southern Company Gas"],["Level 1(a)","$","(40)","","","$","(36)","","","$","(4)","","","$","\u2014","","","$","\u2014"],["Level 2(b)","(9)","","","(8)","","","(1)","","","\u2014","","","\u2014"],["Southern Company Gas total(c)","$","(49)","","","$","(44)","","","$","(5)","","","$","\u2014","","","$","\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 $62 million as well as immaterial premium and associated intrinsic value associated with weather derivatives. 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 13 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 2023, the four largest Marketers based on customer count, which includes SouthStar, accounted for 18% of Southern Company Gas' operating revenues and 20% 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. II-70     Table of Contents                                Index to Financial Statements         COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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-71     Table of Contents                                Index to Financial Statements