II-46

(in billions)
Base project capital cost forecast^(a)(b)
$ 8.0
Construction contingency estimate 0.4
Total project capital cost forecast^(a)(b)
8.4
Net investment as of December 31, 2018^(b)
(4.6 )
Remaining estimate to complete^(a)
$ 3.8


~~(a)~~	~~Excludes financing costs expected to be capitalized through AFUDC of approximately $315 million.~~


~~(b)~~	~~Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds.~~

Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.9 billion had been incurred through December 31, 2018.

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

~~required engineering changes, of plant systems, structures, and components (some of which are based on new technology that only recently began initial operation in~~Sequent. The purchase agreements require Sequent to provide firm gas to the ~~global nuclear industry at this scale); or other issues could arise and change~~natural gas distribution utilities, but the ~~projected schedule and estimated cost. Monthly construction production targets required to~~natural gas distribution utilities maintain the ~~current project schedule will continue~~right and ability to ~~increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.~~

~~Georgia Power and Southern Nuclear~~make their own long-term supply arrangements if they believe it is ~~a leading practice~~ in ~~connection with a construction project~~the best interest of ~~this size and complexity~~their customers.

Each agreement provides for Sequent to ~~periodically validate recent construction progress in comparison~~make payments to the projected schedule and to verify and update quantities of commodities remaining to install, labor productivity, and forecasted staffing needs. This verification process, led by Southern Nuclear, was underway as of December 31, 2018 and is expected to be completed during the second quarter 2019. Georgia Power currently does not anticipate any material changes to the total estimated project capital cost forecast for Plant Vogtle Units 3 and 4natural gas distribution utility through an annual minimum guarantee within a profit sharing structure, a profit sharing structure without an annual minimum guarantee, or the expected in-service dates of November 2021 and November 2022, respectively, resulting from this verification process. However, the ultimate impact on cost and schedule, if any, will not be known until the verification process is completed. Georgia Power is required to report the results and any project impacts to the Georgia PSC by May 15, 2019.a fixed fee.

There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.

The ultimate outcome of these matters cannot be determined at this time. However, any extension of the project schedule is currently estimated to result in additional base capital costs of approximately $50 million per month, based on Georgia Power's ownership interests, and AFUDC of approximately $12 million per month. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.

~~Joint Owner Contracts~~

In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other conditions, additional Vogtle Owner approval requirements. Effective August 31, 2018, the Vogtle Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue construction (as amended, and together with the November 2017 amendment, the Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.

As a result of the increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs as described below, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. On September 26, 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.

~~Amendments to the Vogtle Joint Ownership Agreements~~

In connection with the vote to continue construction, Georgia Power entered into (i) the Vogtle Owner Term Sheet with the other Vogtle Owners and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners, and (ii) the MEAG Term Sheet with MEAG and MEAG SPVJ to provide funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 (Project J) under certain circumstances. On January 14, 2019, Georgia Power, MEAG, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet (MEAG Funding Agreement). On February 18, 2019, Georgia Power, the other Vogtle Owners, and MEAG's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet (Global Amendments).

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

Pursuant to the Global Amendments, and consistent with the Vogtle Owner Term Sheet, the Vogtle Joint Ownership Agreements were modified as follows: (i) each Vogtle Owner must pay its proportionate share of qualifying construction costs for Plant Vogtle Units 3 and 4 based on its ownership percentage up to the estimated cost at completion (EAC) for Plant Vogtle Units 3 and 4 which formed the basis of Georgia Power's forecast of $8.4 billion in the nineteenth VCM plus $800 million; (ii) Georgia Power will be responsible for 55.7% of actual qualifying construction costs between $800 million and $1.6 billion over the EAC in the nineteenth VCM (resulting in $80 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 44.3% of such costs pro rata in accordance with their respective ownership interests; and (iii) Georgia Power will be responsible for 65.7% of qualifying construction costs between $1.6 billion and $2.1 billion over the EAC in the nineteenth VCM (resulting in a further $100 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 34.3% of such costs pro rata in accordance with their respective ownership interests.

If the EAC is revised and exceeds the EAC in the nineteenth VCM by more than $2.1 billion, each of the other Vogtle Owners will have a one-time option at the time the project budget forecast is so revised to tender a portion of its ownership interest to Georgia Power in exchange for Georgia Power's agreement to pay 100% of such Vogtle Owner's remaining share of total construction costs in excess of the EAC in the nineteenth VCM plus $2.1 billion. In this event, Georgia Power will have the option of cancelling the project in lieu of purchasing a portion of the ownership interest of any other Vogtle Owner. If Georgia Power accepts the offer to purchase a portion of another Vogtle Owner's ownership interest in Plant Vogtle Units 3 and 4, the ownership interest(s) to be conveyed from the tendering Vogtle Owner(s) to Georgia Power will be calculated based on the proportion of the cumulative amount of construction costs paid by each such tendering Vogtle Owner(s) and by Georgia Power as of the COD of Plant Vogtle Unit 4. For purposes of this calculation, payments made by Georgia Power on behalf of another Vogtle Owner in accordance with the second and third items described in the paragraph above will be treated as payments made by the applicable Vogtle Owner.

In the event the actual costs of construction at completion of a Unit are less than the EAC reflected in the nineteenth VCM report and such Unit is placed in service in accordance with the schedule projected in the nineteenth VCM report (i.e., Plant Vogtle Unit 3 is placed in service by November 2021 or Plant Vogtle Unit 4 is placed in service by November 2022), Georgia Power will be entitled to 60.7% of the cost savings with respect to the relevant Unit and the remaining Vogtle Owners will be entitled to 39.3% of such savings on a pro rata basis in accordance with their respective ownership interests.

For purposes of the foregoing provisions, qualifying construction costs will not include costs (i) resulting from force majeure events, including governmental actions or inactions (or significant delays associated with issuance of such actions) that affect the licensing, completion, start-up, operations, or financing of Plant Vogtle Units 3 and 4, administrative proceedings or litigation regarding ITAAC or other regulatory challenges to commencement of operation of Plant Vogtle Units 3 and 4, and changes in laws or regulations governing Plant Vogtle Units 3 and 4, (ii) legal fees and legal expenses incurred due to litigation with contractors or subcontractors that are not subsidiaries or affiliates of Southern Company, and (iii) additional costs caused by requests from the Vogtle Owners other than Georgia Power, except for the exercise of a right to vote granted under the Vogtle Joint Ownership Agreements, that increase costs by $100,000 or more.

Pursuant to the Global Amendments, and consistent with the Vogtle Owner Term Sheet, the provisions of the Vogtle Joint Ownership Agreements requiring that Vogtle Owners holding 90% of the ownership interests in Plant Vogtle Units 3 and 4 vote to continue construction following certain adverse events (Project Adverse Events) were modified. Pursuant to the Global Amendments, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain Project Adverse Events occur, including: (i) the bankruptcy of Toshiba; (ii) the termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement, the Bechtel Agreement, or the agency agreement with Southern Nuclear; (iii) Georgia Power publicly announces its intention not to submit for rate recovery any portion of its investment in Plant Vogtle Units 3 and 4 or the Georgia PSC determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates, excluding any additional amounts paid by Georgia Power on behalf of the other Vogtle Owners pursuant to the Global Amendments described above and the first 6% of costs during any six-month VCM reporting period that are disallowed by the Georgia PSC for recovery, or for which Georgia Power elects not to seek cost recovery, through retail rates; and (iv) an incremental extension of one year or more over the most recently approved schedule. Under the Global Amendments, Georgia Power may cancel the project at any time in its sole discretion.

In addition, pursuant to the Vogtle Joint Ownership Agreements, the required approval of holders of ownership interests in Plant Vogtle Units 3 and 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Vogtle Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

the holders of more than 50% of the ownership interests vote in favor of continuing construction (Majority Voting Owners). In such a case, the Vogtle Owners (i) have agreed to negotiate in good faith towards the resumption of the project, (ii) if no agreement is reached during such 30-day period, the project will be cancelled, and (iii) in the event of such a cancellation, the Majority Voting Owners will be obligated to reimburse any other Vogtle Owner for the incremental costs it incurred during such 30-day negotiation period.

~~Purchase of PTCs During Commercial Operation~~

~~Potential Funding to MEAG Project J~~

Pursuant to the MEAG Funding Agreement, and consistent with the MEAG Term Sheet, if MEAG SPVJ is unable to make its payments due under the Vogtle Joint Ownership Agreements solely as a result of the occurrence of one of the following situations that materially impedes access to capital markets for MEAG for Project J: (i) the conduct of JEA or the City of Jacksonville, such as JEA's legal challenges of its obligations under a PPA with MEAG (PPA-J), or (ii) PPA-J is declared void by a court of competent jurisdiction or rejected by JEA under the applicable provisions of the U.S. Bankruptcy Code (each of (i) and (ii), a JEA Default), at MEAG's request, Georgia Power will purchase from MEAG SPVJ the rights to PTCs attributable to MEAG SPVJ's share of Plant Vogtle Units 3 and 4 (approximately 206 MWs) within 30 days of such request at varying prices dependent upon the stage of construction of Plant Vogtle Units 3 and 4. The aggregate purchase price of the PTCs, together with any advances made as described in the next paragraph, shall not exceed $300 million.

At the option of MEAG, as an alternative or supplement to Georgia Power's purchase of PTCs as described above, Georgia Power has agreed to provide up to $250 million in funding to MEAG for Project J in the form of advances (either advances under the Vogtle Joint Ownership Agreements or the purchase of MEAG Project J bonds, at the discretion of Georgia Power), subject to any required approvals of the Georgia PSC and the DOE.

In the event MEAG SPVJ certifies to Georgia Power that it is unable to fund its obligations under the Vogtle Joint Ownership Agreements as a result of a JEA Default and Georgia Power becomes obligated to provide funding as described above, MEAG is required to (i) assign to Georgia Power its right to vote on any future Project Adverse Event and (ii) diligently pursue JEA for its breach of PPA-J. In addition, Georgia Power agreed that it will not sue MEAG for any amounts due from MEAG SPVJ under MEAG's guarantee of MEAG SPVJ's obligations so long as MEAG SPVJ complies with the terms of the MEAG Funding Agreement as to its payment obligations and the other non-payment provisions of the Vogtle Joint Ownership Agreements.

~~Under the terms of the MEAG Funding Agreement, Georgia Power may cancel the project in lieu of providing funding in the form of advances or PTC purchases.~~

~~The ultimate outcome of these matters cannot be determined at this time.~~

~~Regulatory Matters~~

In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. At December 31, 2018, Georgia Power had recovered approximately $1.9 billion of financing costs. Financing costs related to capital costs above $4.418 billion will be recovered through AFUDC; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. On December 18, 2018, the Georgia PSC approved Georgia Power's request to increase the NCCR tariff by $88 million annually, effective January 1, 2019.

Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 of each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) Georgia Power's seventeenth VCM report, which included a recommendation to continue construction with Southern Nuclear as project manager and Bechtel serving as the primary construction contractor, and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the amounts paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related Customer Refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include carrying costs on those capital costs deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective Unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $100 million, $25 million, and $20 million in 2018, 2017, and 2016, respectively, and are estimated to have negative earnings impacts of approximately $75 million in 2019 and an aggregate of approximately $615 million from 2020 to 2022.

In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.

On February 12, 2018, Georgia Interfaith Power & Light, Inc. (GIPL) and Partnership for Southern Equity, Inc. (PSE) filed a petition appealing the Georgia PSC's January 11, 2018 order with the Fulton County Superior Court. On March 8, 2018, Georgia Watch filed a similar appeal to the Fulton County Superior Court for judicial review of the Georgia PSC's decision and denial of Georgia Watch's motion for reconsideration. On December 21, 2018, the Fulton County Superior Court granted Georgia Power's motion to dismiss the two appeals. On January 9, 2019, GIPL, PSE, and Georgia Watch filed an appeal of this decision with the Georgia Court of Appeals. Georgia Power believes the appeal has no merit; however, an adverse outcome in the appeal combined with subsequent adverse action by the Georgia PSC could have a material impact on Southern Company's results of operations, financial condition, and liquidity.

In preparation for its nineteenth VCM filing, Georgia Power requested Southern Nuclear to perform a full cost reforecast for the project. This reforecast, performed prior to the nineteenth VCM filing, resulted in a $0.7 billion increase to the base capital cost forecast reported in the second quarter 2018. This base cost increase primarily resulted from changed assumptions related to the finalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, labor productivity rates, and craft labor incentives, as well as the related levels of project management, oversight, and support, including field supervision and engineering support.

Although Georgia Power believes these incremental costs are reasonable and necessary to complete the project and the Georgia PSC's order in the seventeenth VCM proceeding specifically states that the construction of Plant Vogtle Units 3 and 4 is not subject to a cost cap, Georgia Power did not seek rate recovery for these cost increases included in the current base capital cost forecast (or any related financing costs) in the nineteenth VCM report. In connection with future VCM filings, Georgia Power may request the Georgia PSC to evaluate costs currently included in the construction contingency estimate for rate recovery as and when they are appropriately included in the base capital cost forecast. After considering the significant level of uncertainty that exists regarding the future recoverability of costs included in the construction contingency estimate since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in these future regulatory proceedings, Georgia Power recorded a total pre-tax charge to income of $1.1 billion ($0.8 billion after

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~tax) in the second quarter 2018, which includes the total increase in the base capital cost forecast and construction contingency estimate.~~

On August 31, 2018, Georgia Power filed its nineteenth VCM report with the Georgia PSC, which requested approval of $578 million of construction capital costs incurred from January 1, 2018 through June 30, 2018. On February 19, 2019, the Georgia PSC approved the nineteenth VCM, but deferred approval of $51.6 million of expenditures related to Georgia Power's portion of an administrative claim filed in the Westinghouse bankruptcy proceedings. Through the nineteenth VCM, the Georgia PSC has approved total construction capital costs incurred through June 30, 2018 of $5.4 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds). In addition, the staff of the Georgia PSC requested, and Georgia Power agreed, to file its twentieth VCM report concurrently with the twenty-first VCM report by August 31, 2019.

~~The ultimate outcome of these matters cannot be determined at this time.~~

~~DOE Financing~~

At December 31, 2018, Georgia Power had borrowed $2.6 billion related to Plant Vogtle Units 3 and 4 costs through the Loan Guarantee Agreement and a multi-advance credit facility among Georgia Power, the DOE, and the FFB, which provides for borrowings of up to $3.46 billion, subject to the satisfaction of certain conditions. In September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion in additional guaranteed loans under the Loan Guarantee Agreement. In September 2018, the DOE extended the conditional commitment to March 31, 2019. Any further extension must be approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 8 to the financial statements under "~~Long-term Debt~~ – ~~DOE Loan Guarantee Borrowings~~" for additional information, including applicable covenants, events of default, mandatory prepayment events (including any decision not to continue construction of Plant Vogtle Units 3 and 4), and conditions to borrowing.

~~The ultimate outcome of these matters cannot be determined at this time.~~

Income Tax Matters

~~Federal Tax Reform Legislation~~Consolidated Income Taxes

~~In December 2017, the Tax Reform Legislation was signed into law and became effective on January 1, 2018.~~ The ~~Tax Reform Legislation, among other things, reduced the federal corporate income~~impact of certain tax rate to 21%, retained normalization provisions for public utility property and existing renewable energy incentives, and repealed the corporate alternative minimum tax. In addition, under the Tax Reform Legislation, NOLs generated after December 31, 2017 can no longer be carried back to previous tax years but can be carried forward indefinitely, with utilization limited to 80% of taxable income of the subsequent tax year. The projected reduction of the consolidated income tax liability resulting from the tax rate reduction also delays the expected utilization of existing tax credit carryforwards.

Following the enactment of the Tax Reform Legislation, the SEC staff issued Staff Accounting Bulletin 118 – "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provided for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes and their application under GAAP,events at Southern Company ~~considered all amounts recorded in the financial statements as a result~~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 ~~the Tax Reform Legislation "provisional" as discussed in SAB 118~~Critical Accounting Policies and ~~subject to revision prior to filing its 2017 tax return in the fourth quarter 2018. Southern Company recognized tax benefits of $30 million and $264 million in 2018 and 2017, respectively,~~Estimates – Accounting for a total net tax benefit of $294 million as a result of the Tax Reform Legislation. In addition, in total, Southern Company recorded a $417 million decrease in regulatory assets and a $6.2 billion increase in regulatory liabilities as a result of the Tax Reform Legislation and $16 million of stranded excess deferred tax balances in AOCI at December 31, 2017 were adjusted through retained earnings in 2018. As of December 31, 2018, Southern Company considered the measurement of impacts from the Tax Reform Legislation on deferred income tax assets and liabilities, primarily due to the impact of the reduction of the corporate income tax rate, to be complete.

However, the IRS continues to issue regulations that provide further interpretation and guidance on the law and each state's adoption of the provisions contained in the Tax Reform Legislation remains uncertain. In addition, the regulatory treatment of certain impacts of the Tax Reform Legislation is subject to the discretion of the FERC and each state's regulatory commission. The ultimate impact of these matters cannot be determined at this time. See Note 2 to the financial statements for additional information regarding the traditional electric operating companies' and the natural gas distribution utilities' rate filings, including

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~amounts returned to customers during 2018, to reflect the impacts of the Tax Reform Legislation. Also see FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk"~~Income Taxes" herein and Note 10 to the financial statements ~~under "Current and Deferred Income Taxes~~" for additional information.

~~Bonus Depreciation~~

Under the Tax Reform Legislation, projects with binding contracts prior to September 28, 2017 and placed in service after September 27, 2017 remain eligible for bonus depreciation under the PATH Act. The PATH Act allowed for 50% bonus depreciation for 2015 through 2017, 40% bonus depreciation for 2018, and 30% bonus depreciation for 2019 and certain long-lived assets placed in service in 2020. Based on provisional estimates, bonus depreciation is expected to result in positive cash flows of approximately $300 million for the 2018 tax year and approximately $130 million for the 2019 tax year. The ultimate outcome of this matter cannot be determined at this time.

~~Tax Credits~~Business Activities

The Tax Reform Legislation retained the renewable energy incentives that were included in the PATH Act. The PATH Act allows for 30% ITC for solar projects that commence construction by December 31, 2019; 26% ITC for solar projects that commence construction in 2020; 22% ITC for solar projects that commence construction in 2021; and a permanent 10% ITC for solar projects that commence construction on or after January 1, 2022. In addition, the PATH Act allows for 100% PTC for wind projects that commenced construction in 2016; 80% PTC for wind projects that commenced construction in 2017; 60% PTC for wind projects that commenced construction in 2018 and 40% PTC for wind projects that commence construction in 2019. Wind projects commencing construction after 2019 will not be entitled to any PTCs. Southern Company ~~has received ITCs and PTCs in connection with investments in solar, wind, and biomass facilities primarily at~~is a holding company that owns all of the common stock of three traditional electric operating companies, as well as Southern Power and ~~Georgia Power.~~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 ~~1 to the financial statements under "Income Taxes" and Note 10 to the financial statements under "Current and Deferred Income Taxes~~ – ~~Tax Credit Carryforwards" for additional information regarding the utilization and amortization of credits and the tax benefit related to basis differences.~~

~~Other Matters~~

Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as laws and regulations governing air, water, land, and protection of other natural resources. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO₂ ~~and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.~~

The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings 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 would have a material effect on Southern Company's financial statements. See Notes 2 and 316 to the financial statements for ~~a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.~~additional information.

~~Litigation~~

~~In January 2017, a putative securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi~~•The traditional electric operating companies – Alabama Power, ~~officers in the U.S. District Court for the Northern District of~~ Georgia Atlanta Division, by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain former Mississippi Power, officers made materially false and misleading statements regarding the Kemper County energy facility in violation of certain provisions under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. In June 2017, the plaintiffs filed an amended complaint that provided additional detail about their claims, increased the purported class period by one day, and added certain other former Mississippi Power officers as defendants. In July 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with prejudice, to which the plaintiffs filed an opposition in September 2017. On March 29, 2018, the U.S. District Court for the Northern District of Georgia, Atlanta Division, issued an order granting, in part, the defendants' motion to dismiss. The court dismissed certain claims against certain officers of Southern Company and Mississippi Power – 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 ~~dismissed~~manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in the ~~allegations~~wholesale market. Southern Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions, dispositions, and sales of partnership interests, development and construction of new generating facilities, and entry into PPAs primarily with investor-owned utilities, IPPs, municipalities, electric cooperatives, and other load-serving entities, as well as commercial and industrial customers. In general, Southern Power commits to the construction or acquisition of new generating capacity only after entering into or assuming long-term PPAs for the new facilities.

•Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas. Southern Company Gas owns natural gas distribution utilities in four states – Illinois, Georgia, Virginia, and Tennessee – and is also involved in several other complementary businesses. Southern Company Gas manages its business through four reportable segments – gas distribution operations, gas pipeline investments, wholesale gas services, which includes Sequent, a natural gas asset optimization company, and gas marketing services, which includes SouthStar, a Marketer and provider of energy-related products and services to natural gas markets – and one non-reportable segment, all other. See Notes 7 and 16 to the financial statements for additional information.

Many factors affect the opportunities, challenges, and risks of the Southern Company system's electric service and natural gas businesses. These factors include the ability to maintain constructive regulatory environments, to maintain and grow sales and customers, and to effectively manage and secure timely recovery of prudently-incurred costs. These costs include those related to ~~a number~~projected long-term demand growth; stringent environmental standards, including CCR rules; safety; system reliability and resilience; fuel; natural gas; restoration following major storms; and capital expenditures, including constructing new electric generating plants and expanding and improving the electric transmission and electric and natural gas distribution systems.

The traditional electric operating companies and the natural gas distribution utilities have various regulatory mechanisms that address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge the Southern Company system for the foreseeable future. See Note 2 to the financial statements for additional information.

Southern Power's future earnings will depend upon the parameters of the wholesale market and the efficient operation of its wholesale generating assets, as well as Southern Power's ability to execute its growth strategy and to develop and construct generating facilities. In addition, Southern Power's future earnings will depend upon the availability of federal and state ITCs and PTCs on its renewable energy projects, which could be impacted by future tax legislation. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters" herein and Notes 10 and 15 to the financial statements ~~that plaintiffs challenged as being false~~for additional information.

Southern Company's other business activities include providing energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. Management continues to evaluate the contribution of each of these activities to total shareholder return and may pursue acquisitions, dispositions, and other strategic ventures or ~~misleading. On April 26, 2018, the~~investments accordingly.

II-3

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Recent Developments

~~defendants filed~~COVID-19

During March 2020, COVID-19 was declared a ~~motion~~pandemic by the World Health Organization and the Centers for ~~reconsideration~~Disease Control and Prevention and has spread globally, including throughout the United States. The Southern Company system provides an essential service to its customers; therefore, it is critical that Southern Company system employees are able to continue to perform their essential duties safely and effectively. The Southern Company system has implemented applicable business continuity plans, including teleworking, canceling non-essential business travel, increasing cleaning frequency at business locations, implementing applicable safety and health guidelines issued by federal and state officials, and establishing protocols for required work on customer premises. To date, these procedures have been effective in maintaining the Southern Company system's critical operations. As a result of the ~~court's order, seeking dismissal~~COVID-19 pandemic, there have been economic disruptions in the Registrants' operating territories. The traditional electric operating companies and the natural gas distribution utilities temporarily suspended disconnections for non-payment by customers and waived late fees for certain periods. See Note 2 to the financial statements for information regarding deferral of certain incremental COVID-19-related costs, including bad debt, to a regulatory asset by certain of the ~~remaining claims~~traditional electric operating companies and the natural gas distribution utilities. In addition, the COVID-19 pandemic has impacted productivity and the pace of activity completion at Plant Vogtle Units 3 and 4, as discussed further herein. Additional information regarding the COVID-19 pandemic and its past and potential future impacts on the Registrants is provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A herein.

Alabama Power

On August 14, 2020, the Alabama PSC issued an order granting Alabama Power a CCN to procure additional capacity, and, on August 31, 2020, Alabama Power completed its acquisition of the Central Alabama Generating Station.

In October 2020, Alabama Power reduced its over-collected fuel balance by $94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing Alabama Power to reduce its over-collected fuel balance by $100 million and return that amount to customers in the ~~lawsuit. On August 10, 2018, the court denied the motion for reconsideration and denied a motion to certify the issue for interlocutory appeal.~~

~~In February 2017, Jean Vineyard filed a shareholder derivative lawsuit and, in May 2017, Judy Mesirov filed a shareholder derivative lawsuit, each~~form of bill credits, with any undistributed amount remaining in the ~~U.S. District Court~~regulatory liability for the ~~Northern District~~benefit of ~~Georgia. Each~~customers.

For the year ended December 31, 2020, Alabama Power's weighted common equity return exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of ~~these lawsuits names as defendants Southern Company, certain~~$50 million for Rate RSE refunds, which will be refunded to customers through bill credits in April 2021.

During 2020, Alabama Power recorded $51 million and $67 million against the NDR for damages incurred to its transmission and distribution facilities from Hurricane Sally and Hurricane Zeta, respectively. Alabama Power made an additional accrual of ~~its directors, certain of its officers, and certain former Mississippi Power officers. In August 2017, these two shareholder derivative lawsuits were consolidated~~$100 million to the NDR in ~~the U.S. District Court~~December 2020.

Effective for the ~~Northern District~~billing month of ~~Georgia. The complaints allege that~~January 2021, Alabama Power's Rate RSE increased 4.09%, or approximately $228 million annually, and Alabama Power's Rate ECR decreased 1.84%, or approximately $103 million annually, as approved by the ~~defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost~~Alabama PSC.

See Notes 2 and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each ~~plaintiff~~ also seeks certain changes to Southern Company's corporate governance and internal processes. On April 25, 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.

In May 2017, Helen E. Piper Survivor's Trust filed a shareholder derivative lawsuit in the Superior Court of Gwinnett County, State of Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. The complaint alleges that the individual defendants, among other things, breached their fiduciary duties in connection with schedule delays and cost overruns associated with the construction of the Kemper County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper County energy facility schedule and cost and failed to implement necessary internal controls to prevent harm to Southern Company. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and disgorgement of profits and, on its behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes. On May 4, 2018, the court entered an order staying this lawsuit until 30 days after the resolution of any dispositive motions or any settlement, whichever is earlier, in the putative securities class action.

On May 18, 2018, Southern Company and Mississippi Power received a notice of dispute and arbitration demand filed by Martin Product Sales, LLC (Martin) based on two agreements, both related to Kemper IGCC byproducts for which Mississippi Power provided termination notices in September 2017. Martin alleges breach of contract, breach of good faith and fair dealing, fraud and misrepresentation, and civil conspiracy and makes a claim for damages in the amount of approximately $143 million, as well as additional unspecified damages, attorney's fees, costs, and interest. In the first quarter 2019, Mississippi Power and Southern Company filed motions to dismiss.

Southern Company believes these legal challenges have no merit; however, an adverse outcome in any of these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in these matters, the ultimate outcome of which cannot be determined at this time.

~~Investments in Leveraged Leases~~

A subsidiary of Southern Holdings has several leveraged lease agreements, with original terms ranging up to 45 years, which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. Southern Company reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the effective tax rate, the residual value, the credit quality of the lessees, and the timing of expected tax cash flows. See Note 115 to the financial statements under "~~Leveraged Leases~~""Alabama Power" for additional information.

~~The ability~~

Georgia Power

Rate Plans

On December 15, 2020, in accordance with the terms of the ~~lessees~~2019 ARP, the Georgia PSC approved tariff adjustments effective January 1, 2021 as follows: (i) increased traditional base tariffs by approximately $120 million; (ii) increased the Environmental Compliance Cost Recovery (ECCR) tariff by approximately $2 million; (iii) decreased Demand-Side Management tariffs by approximately $15 million; and (iv) increased Municipal Franchise Fee tariffs by approximately $4 million, for a total net increase in annual base revenues of approximately $111 million. Georgia Power expects to ~~make required payments~~submit a compliance filing in the third quarter 2021 to request tariff adjustments approved pursuant to the Southern Holdings subsidiary is dependent on the operational performance of the assets. In 2017, the financial and operational performance of one of the lessees and the associated generation assets raised significant concerns about the short-term ability of the generation assets to produce cash flows sufficient to support ongoing operations and the lessee's contractual obligations and its ability to make the remaining semi-annual lease payments to the Southern Holdings subsidiary beginning in June 2018. As a result of operational improvements in 2018, the 2018 lease payments were paid in full. However, operational issues and the resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments. These operational challenges may also impact the expected residual value of the assets at the end of the lease term in 2047. If any future lease payment is not paid in full, the Southern Holdings subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the generation assets. Failure to make the required payment to the debtholders could represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the generation assets from the

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~Southern Holdings subsidiary, in effect terminating the lease and resulting~~2019 ARP effective January 1, 2022. The amounts requested in the ~~write-off of~~2019 ARP were as follows: (i) increase traditional base tariffs by approximately $192 million; (ii) increase the ~~related lease receivable, which would result~~ECCR tariff by approximately $184 million; (iii) increase Demand-Side Management tariffs by approximately $1 million; and (iv) increase Municipal Franchise Fee tariffs by approximately $9 million, for a total increase in ~~a reduction in net income~~annual base revenues of approximately $86 million after tax based on the lease receivable balance at December 31, 2018. Southern Company has evaluated the recoverability of the lease receivable and the expected residual value of the generation assets at the end of the lease under various scenarios and has concluded that its investment in the leveraged lease is not impaired at December 31, 2018. Southern Company will continue to monitor the operational performance of the underlying assets and evaluate the ability of the lessee to continue to make the required lease payments.$386 million. The ultimate outcome of this matter cannot be determined at this time.

~~Mississippi Power~~

In conjunction with Southern Company's sale of Gulf Power, Mississippi Power and Gulf Power have committed to seek a restructuring of their 50% undivided ownership interests in Plant Daniel such that each of them would, after the restructuring, own 100% of a generating unit. On January 15, 2019, Gulf Power provided notice to Mississippi Power that Gulf Power will retire its share of the generating capacity of Plant Daniel on January 15, 2024. Mississippi Power has the option to purchase Gulf Power's ownership interest for $1 on January 15, 2024, provided that Mississippi Power exercises the option no later than 120 days prior to that date. Mississippi Power is assessing the potential operational and economic effects of Gulf Power's notice. The ultimate outcome of these matters remains subject to completion of Mississippi Power's evaluations and applicable regulatory approvals, including the FERC and the Mississippi PSC, and cannot now be determined. See Note 152 to the financial statements under "~~Southern Company's Sale of Gulf~~"Georgia Power" – Rate Plans – 2019 ARP" for ~~information regarding the sale of Gulf Power.~~

~~Southern Power~~

On January 29, 2019, Pacific Gas & Electric Company (PG&E) filed petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Southern Power, together with its noncontrolling partners, owns four solar facilities where PG&E is the energy off-taker for approximately 207 MWs of capacity under long-term PPAs. PG&E is also the transmission provider for these facilities and two of Southern Power's other solar facilities. Southern Power has evaluated the recoverability of its investments in these solar facilities under various scenarios, including selling the related energy into the competitive markets, and has concluded they are not impaired. At December 31, 2018, Southern Power had outstanding accounts receivables due from PG&E of $1 million related to the PPAs and $36 million related to the transmission interconnections. Southern Company does not expect a material impact to its financial statements if, as a result of the bankruptcy proceedings, PG&E does not perform in accordance with the PPAs or the terms of the PPAs are renegotiated; however, the ultimate outcome of this matter cannot be determined at this time.

~~Southern Company Gas~~

A wholly-owned subsidiary of Southern Company Gas owns and operates a natural gas storage facility consisting of two salt dome caverns in Louisiana. Periodic integrity tests are required in accordance with rules of the Louisiana Department of Natural Resources (DNR). In August 2017, in connection with an ongoing integrity project, updated seismic mapping indicated the proximity of one of the caverns to the edge of the salt dome may be less than the required minimum and could result in Southern Company Gas retiring the cavern early. At December 31, 2018, the facility's property, plant, and equipment had a net book value of $109 million, of which the cavern itself represents approximately 20%. A potential early retirement of this cavern is dependent upon several factors including compliance with an order from the Louisiana DNR detailing the requirements to place the cavern back in service, which includes, among other things, obtaining core samples to determine the composition of the sheath surrounding the edge of the salt dome.

The cavern continues to maintain its pressures and overall structural integrity. Southern Company Gas intends to monitor the cavern and comply with the Louisiana DNR order through 2020 and place the cavern back in service in 2021. These events were considered in connection with Southern Company Gas' annual long-lived asset impairment analysis, which determined there was no impairment as of December 31, 2018. Any changes in results of monitoring activities, rates at which expiring capacity contracts are re-contracted, timing of placing the cavern back in service, or Louisiana DNR requirements could trigger impairment. Further, early retirement of the cavern could trigger impairment of other long-lived assets associated with the natural gas storage facility. The ultimate outcome of this matter cannot be determined at this time, but could have a significant impact on Southern Company's financial statements.

~~ACCOUNTING POLICIES~~

~~Application of Critical Accounting Policies and Estimates~~

Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 to the financial statements. In the application of these policies, certain estimates are made that mayadditional information.

II-4

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

have a material impact on Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Senior management has reviewed and discussed the following critical accounting policies and estimates with the Audit Committee of Southern Company's Board of Directors.

~~Utility Regulation~~

Southern Company's traditional electric operating companies and natural gas distribution utilities, which collectively comprised approximately 85% of Southern Company's total operating revenues for 2018, 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 has a further effect on Southern Company's 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 Southern Company's results of operations and financial condition than they would on a non-regulated company. See Note 15 to the financial statements for information regarding the sale of Gulf Power and three of Southern Company Gas' natural gas distribution utilities.

~~As reflected in Note 2 to the financial statements under "Southern Company~~ – ~~Regulatory Assets and Liabilities~~," significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability of these regulatory assets and any requirement to refund these regulatory liabilities based on applicable regulatory guidelines and GAAP. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact Southern Company's financial statements.

~~Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4~~

In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which resolved certain prudency matters in connection with Georgia Power's fifteenth VCM report. In December 2017, the Georgia PSC approved Georgia Power's seventeenth VCM report, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4 with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor, as well as a modification of the Vogtle Cost Settlement Agreement. The Georgia PSC's related order stated that under the modified Vogtle Cost Settlement Agreement, (i) none of the $3.3 billion of costs incurred through December 31, 2015 should be disallowed as imprudent; (ii) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proofStatus

Construction continues on any party challenging such costs; (iii) Georgia Power would have the burden of proof to show that any capital costs above $5.68 billion were prudent; (iv) Georgia Power's total project capital cost forecast of $7.3 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds) was found reasonable and did not represent a cost cap; and (v) prudence decisions would be made subsequent to achieving fuel load for Unit 4.

In its order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.

~~In the second quarter 2018, Georgia Power revised its base cost forecast and estimated contingency to complete construction and start-up of~~ Plant Vogtle Units 3 and 4 ~~to $8.0 billion and $0.4 billion, respectively, for~~(with electric generating capacity of approximately 1,100 MWs each), in which Georgia Power holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast is $8.7 billion, with expected in-service dates of $8.4 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related Customer Refunds). Although Georgia Power believes these incremental costs are reasonable and necessary to complete the project and the Georgia PSC's order in the seventeenth VCM proceeding specifically states that the construction of Plant Vogtle UnitsNovember 2021 for Unit 3 and ~~4 is not subject~~November 2022 for Unit 4.

As of June 30, 2020, assignments of contingency to ~~a cost cap, Georgia Power did not seek rate recovery for~~ the ~~$0.7 billion increase in costs included in the current~~ base capital cost forecast inexceeded the ~~nineteenth VCM report. In connection with future VCM filings, Georgia Power may request the Georgia PSC to evaluate costs currently included in~~remaining balance of the construction contingency ~~estimate for rate recovery as~~originally established in the second quarter 2018 and ~~when they are appropriately included in~~Georgia Power established $115 million of additional construction contingency. During the third and fourth quarters 2020, this construction contingency, plus an additional $5 million, was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including the April 2020 reduction in workforce designed to mitigate impacts of the COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project management, initial test program, start-up, engineering support, and operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore, Georgia Power established $171 million of additional contingency as of December 31, 2020.

After considering the significant level of uncertainty that exists regarding the future recoverability of these costs ~~included in the construction contingency estimate~~ since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $149 million ($111 million after tax) and $176 million ($131 million after tax) for the increases in the total project capital cost forecast as of June 30, 2020 and December 31, 2020, respectively. As and when these ~~future~~amounts are spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.

In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site. In April 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and began reducing the then-existing site workforce by approximately 20%. This workforce reduction lowered absenteeism, providing an improvement in operational efficiency and allowing for increased social distancing. Since April 2020, the number of active cases at the site has fluctuated and has continued to impact productivity levels and pace of activity completion.

From November 2020 through January 2021, the number of active COVID-19 cases at the site increased significantly, consistent with a national rise in cases, and the project continued to face challenges. As a result, overall production levels were not achieved at the levels anticipated, contributing to the December 31, 2020 allocation of construction contingency and increase in total project capital cost forecast. Also, after considering these factors, Southern Nuclear has further extended certain milestone dates, including the start of hot functional testing and fuel load for Unit 3, from those established in October 2020. These updated milestone dates are expected to support the regulatory-approved in-service dates of November 2021 and November 2022 for Units 3 and 4, respectively. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays from the challenges described in Note 2 to the financial statements under "Georgia Power – Nuclear Construction," could impact the ability to achieve the November 2021 in-service date.

The continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4. Georgia Power's proportionate share of the estimated incremental cost associated with COVID-19 mitigation actions and impacts on construction productivity is currently estimated to be between $150 million and $190 million and is included in the total project capital cost. The ultimate impact of the COVID-19 pandemic and other factors on the construction schedule and budget for Plant Vogtle Units 3 and 4 cannot be determined at this time.

See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.

Mississippi Power

On March 17, 2020, the Mississippi PSC approved a settlement agreement between Mississippi Power and the Mississippi Public Utilities Staff related to Mississippi Power's base rate case filed in November 2019 (Mississippi Power Rate Case Settlement Agreement). Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020.

During 2020, Mississippi Power substantially completed mine reclamation activities at the Kemper County energy facility. On September 3, 2020, Mississippi Power and Southern Company executed an agreement with the DOE completing Mississippi Power's 2018 request for property closeout certification under the contract related to DOE grants received for the Kemper County energy facility, which enabled Mississippi Power to proceed with full dismantlement of the abandoned gasifier-related assets and

II-5

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

~~regulatory proceedings, Georgia Power recorded a total pre-tax charge to income of $1.1 billion ($0.8 billion after tax) in the second quarter 2018.~~

~~Georgia Power's revised cost estimate reflects an expected in-service date of November 2021 for Unit 3 and November 2022 for Unit 4.~~

As construction continues, challenges with management of contractors, subcontractors, and vendors; labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly, and/or installation and testing, including any required engineering changes, of plant systems, structures, and components (some of whichsite restoration activities. These activities are based on new technology that only recently began initial operation in the global nuclear industry at this scale); or other issues could arise and change the projected schedule and estimated cost. Monthly construction production targets required to maintain the current project schedule will continue to increase significantly throughout 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be retained and deployed.

Georgia Power and Southern Nuclear believe it is a leading practice in connection with a construction project of this size and complexity to periodically validate recent construction progress in comparison to the projected schedule and to verify and update quantities of commodities remaining to install, labor productivity, and forecasted staffing needs. This verification process, led by Southern Nuclear, was underway as of December 31, 2018 and is expected to be completed ~~during the second quarter 2019. Georgia Power currently does not anticipate any material changes~~by 2026. See Note 3 to the ~~total estimated project capital cost forecast~~financial statements under "Other Matters – Mississippi Power – Kemper County Energy Facility" for ~~Plant Vogtle Units 3 and 4 or the expected in-service dates of November~~additional information.

On February 12, 2021, and November 2022, respectively, resulting from this verification process. However, the ultimate impact on cost and schedule, if any, will not be known until the verification process is completed. GeorgiaMississippi Power ~~is required to report the results and any project impacts~~submitted its 2021 ECO Plan filing to the ~~Georgia~~Mississippi PSC, which requested an annual decrease in revenues of approximately $9 million, as well as its ad valorem tax adjustment filing for 2021, which requested an annual increase in revenues of approximately $28 million. Mississippi Power plans to submit its 2021 PEP filing in March 2021.

On December 17, 2020, the Mississippi PSC issued an order concluding the RMP docket and requiring Mississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation by ~~May 15, 2019.~~year-end 2027 to reduce Mississippi Power's excess reserve margin. Mississippi Power's IRP is scheduled to be filed in April 2021.

~~There have been technical and procedural challenges~~See Note 2 to the ~~construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and~~financial statements under "Mississippi Power" for additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.

information. The ultimate outcome of these matters cannot be determined at this time. ~~Any extension~~

Southern Power

During 2020, Southern Power completed construction of and placed in service the 200-MW Reading and 136-MW Skookumchuck wind facilities, commenced construction of the 88-MW Garland and 72-MW Tranquillity battery energy storage facilities, and acquired and commenced construction of the 118-MW Glass Sands wind facility.

In January 2020, Southern Power completed the sale of its equity interests in Plant Mankato (including the 385-MW expansion unit completed in May 2019) to a subsidiary of Xcel for a purchase price of approximately $663 million, including final working capital adjustments.

In March 2020, Southern Power entered into an agreement to acquire a controlling membership interest in an approximately 300-MW wind facility located in South Dakota. The acquisition is subject to certain customary conditions to closing, including commercial operation of the facility, which is expected to occur in the first quarter 2021. Subsequent to the acquisition, Southern Power expects to complete a tax equity transaction. The facility's output is contracted under two long-term PPAs. The ultimate outcome of this matter cannot be determined at this time.

In May 2020, Southern Power purchased a controlling interest in the 56-MW Beech Ridge II wind facility located in West Virginia from Invenergy Renewables LLC. The facility's output is contracted under a 12-year PPA.

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 generation facilities' net book value (or expected in-service ~~dates~~value for facilities under construction) as the investment amount. With the inclusion of investments associated with the facilities currently under construction, as well as other capacity and energy contracts, Southern Power's average investment coverage ratio at December 31, 2020 was 94% through 2025 and 91% through 2030, with an average remaining contract duration of approximately 14 years.

See Note 15 to the financial statements under "Southern Power" for additional information.

Southern Company Gas

On March 24, 2020, Southern Company Gas completed the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline with aggregate proceeds of $178 million, including final working capital adjustments. On December 1, 2020, Southern Company Gas completed the sale of Jefferson Island for a purchase price of $33 million, including estimated working capital adjustments. See Note 15 to the financial statements under "Southern Company Gas" for additional information.

On June 1, 2020, Virginia Natural Gas filed a general rate case with the Virginia Commission seeking an increase in annual base revenues of $49.6 million based on a ROE of 10.35% and an equity ratio of 54%. Interim rate adjustments became effective November 1, 2020, subject to refund. The Virginia Commission is expected to rule on the requested increase in the second quarter 2021. The ultimate outcome of this matter cannot be determined at this time.

On July 1, 2020, Atlanta Gas Light filed its 2020 GRAM filing with the Georgia PSC requesting an annual base rate increase of $37.6 million. Rates became effective on January 1, 2021 in accordance with Atlanta Gas Light's 2019 rate case order.

On January 14, 2021, Nicor Gas filed a general base rate case with the Illinois Commission, requesting a $293 million increase in annual base rate revenues, including $94 million related to the recovery of investments under the Investing in Illinois program. The requested increase is based on a projected test year ending December 31, 2022, a ROE of 10.35%, and an equity ratio of 54.5%. The Illinois Commission has an 11-month statutory time limit to rule on the requested increase, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.

See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" for ~~Unit~~additional information.

II-6

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Key Performance Indicators

In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.6 million electric and gas utility customers collectively, the traditional electric operating companies and Southern Company Gas continue to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, and execution of major construction projects. In addition, Southern Company and the Subsidiary Registrants focus on earnings per share (EPS) and net income, respectively, as a key performance indicator. See RESULTS OF OPERATIONS herein for information on the Registrants' financial performance. See RESULTS OF OPERATIONS – "Southern Company Gas – Operating Metrics" for additional information on Southern Company Gas' operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.

The financial success of the traditional electric operating companies and Southern Company Gas is directly tied to customer satisfaction. Key elements of ensuring customer satisfaction include outstanding service, high reliability, and competitive prices. The traditional electric operating companies use customer satisfaction surveys to evaluate their results and generally target the top quartile of these surveys in measuring performance. Reliability indicators are also used to evaluate results. See Note 2 to the financial statements under "Alabama Power – Rate RSE" and " – Mississippi Power – Performance Evaluation Plan" for additional information on Alabama Power's Rate RSE and Mississippi Power's PEP rate plan, respectively, both of which contain mechanisms that directly tie customer service indicators to the allowed equity return.

Southern Power continues to focus on several key performance indicators, including, but not limited to, the equivalent forced outage rate and contract availability to evaluate operating results and help ensure its ability to meet its contractual commitments to customers.

RESULTS OF OPERATIONS

Southern Company

Consolidated net income attributable to Southern Company was $3.1 billion in 2020, a decrease of $1.6 billion, or 34.2%, from the prior year. The decrease was primarily due to the $2.6 billion ($1.4 billion after tax) gain on the sale of Gulf Power in 2019 and after-tax charges totaling $242 million in 2020 related to Georgia Power's construction of Plant Vogtle Units 3 and ~~November 2022~~4. See Notes 2 and 15 to the financial statements under "Georgia Power – Nuclear Construction" and "Southern Company," respectively, for ~~Unit 4 is currently estimated to result~~additional information.

Basic EPS was $2.95 in 2020 and $4.53 in 2019. Diluted EPS, which factors in additional ~~base capital~~shares related to stock-based compensation, was $2.93 in 2020 and $4.50 in 2019. EPS for 2020 and 2019 was negatively impacted by $0.03 and $0.11 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 $2.54 in 2020 and $2.46 in 2019. In January 2021, Southern Company declared a quarterly dividend of 64 cents per share. For 2020, the dividend payout ratio was 86% compared to 54% for 2019. The increase was due to the decrease in earnings in 2020.

Discussion of Southern Company's results of operations is divided into three parts – the Southern Company system's primary business of electricity sales, its gas business, and its other business activities.


	2020		2019
	(in millions)
Electricity business	$	3,115	$	3,268
Gas business	590		585
Other business activities	(586)		886
Net Income	$	3,119	$	4,739

II-7

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Electricity Business

Southern Company's electric utilities generate and sell electricity to retail and wholesale customers. A condensed statement of income for the electricity business follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Electric operating revenues	$	16,497	$	(598)
Fuel	2,967		(655)
Purchased power	799		(17)
Cost of other sales	94		18
Other operations and maintenance	4,250		(253)
Depreciation and amortization	2,941		469
Taxes other than income taxes	1,024		13
Estimated loss on Plant Vogtle Units 3 and 4	325		325
Impairment charges	—		(3)
(Gain) loss on dispositions, net	(42)		(21)
Total electric operating expenses	12,358		(124)
Operating income	4,139		(474)
Allowance for equity funds used during construction	138		17
Interest expense, net of amounts capitalized	976		(11)
Other income (expense), net	315		81
Income taxes	517		(191)
Net income	3,099		(174)
Less:
Dividends on preferred stock of subsidiaries	15		—
Net income (loss) attributable to noncontrolling interests	(31)		(21)
Net Income Attributable to Southern Company	$	3,115	$	(153)

II-8

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Electric Operating Revenues

Electric operating revenues for 2020 were $16.5 billion, reflecting a $598 million decrease from 2019. Details of electric operating revenues were as follows:


	2020			2019
	(in millions)
Retail electric — prior year	$	14,084
Estimated change resulting from —
Rates and pricing	484
Sales decline	(132)
Weather	(288)
Fuel and other cost recovery	(505)
Retail electric — current year	$	13,643		$	14,084
Wholesale electric revenues	1,945			2,152
Other electric revenues	672			636
Other revenues	237			223
Electric operating revenues	$	16,497		$	17,095
Percent change	(3.5)		%	(7.9)		%

Retail electric revenues decreased $441 million, or 3.1%, in 2020 as compared to the prior year. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2020 was primarily due to Georgia Power's recovery of environmental compliance costs and the impacts of ~~approximately $50~~accruals for customer refunds in 2019 related to the Tax Reform Legislation and earnings in excess of the allowed retail ROE range as well as the rate pricing effects of decreased customer usage throughout 2020. The increase was also due to customer bill credits at Alabama Power in 2019 related to the Tax Reform Legislation. These increases were partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing 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 changes related to sales growth (decline) and weather.

Wholesale electric revenues consist of PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not 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 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.

II-9

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Wholesale electric revenues from power sales were as follows:


	2020		2019
	(in millions)
Capacity and other	$	476	$	529
Energy	1,469		1,623
Total	$	1,945	$	2,152

In 2020, wholesale electric revenues decreased $207 million, ~~per month,~~or 9.6%, as compared to the prior year due to decreases of $154 million in energy revenues and $53 million in capacity revenues. Energy revenues decreased $98 million at Southern Power and $56 million at the traditional electric operating companies. The decrease at Southern Power primarily resulted from a net decrease in the volume of KWHs sold due to decreased demand and lower natural gas prices, partially offset by increases in sales from solar facilities, wind facilities, and fuel cell generation. The decrease at the traditional electric operating companies was primarily due to lower energy prices. The decrease in capacity revenues was primarily related to the sales of Southern Power's Plant Mankato in the first quarter 2020 and Southern Power's Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements for additional information.

Other Electric Revenues

Other electric revenues increased $36 million, or 5.7%, in 2020 as compared to the prior year. The increase was primarily due to an increase of $23 million in transmission revenues, an increase of $15 million from outdoor lighting at Georgia Power, and an increase of $10 million in energy service revenues at Alabama Power, as well as an increase of $6 million from pole attachment agreements at Alabama Power and Georgia Power. These increases were partially offset by a reduction of $26 million largely resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic.

Energy Sales

Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:


	2020

	Total KWHs	Total KWH Percent Change		Weather-Adjusted Percent Change(*)
	(in billions)
Residential	47.4	(2.2)	%	3.1	%
Commercial	45.4	(7.5)		(5.7)
Industrial	47.0	(6.2)		(6.2)
Other	0.7	(9.5)		(9.3)
Total retail	140.5	(5.3)		(3.0)	%
Wholesale	45.7	(4.9)
Total energy sales	186.2	(5.2)	%

(*)Weather-adjusted KWH sales are estimated by removing from KWH sales the effect of deviations from normal temperature conditions, based on statistical models of the historical relationship between temperatures and energy sales. 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 4.4 billion KWHs in 2020 as compared to the prior year largely due to the COVID-19 pandemic. Weather-adjusted residential usage increases are primarily due to customer growth and an increase in average customer usage, primarily due to work-from-home policies. Weather-adjusted commercial usage decreases are primarily due to lower customer usage resulting from changes in consumer and business behavior in response to the COVID-19 pandemic. Industrial usage decreases are primarily a result of disruptions in supply chain and business operations related to the COVID-19 pandemic and the overall decrease in business activity due to the resulting recession.

See "Electric Operating Revenues" above for a discussion of significant changes in wholesale revenues related to changes in price and KWH sales.

II-10

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other Revenues

Other revenues increased $14 million, or 6.3%, in 2020 as compared to the prior year. The increase was primarily due to increases in unregulated sales of products and services of $9 million at Georgia Power and $5 million at Alabama 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.

Details of the Southern Company system's generation and purchased power were as follows:


	2020	2019
Total generation (in billions of KWHs)	176	187
Total purchased power (in billions of KWHs)	18	18
Sources of generation (percent) —
Gas	53	52
Coal	18	22
Nuclear	17	16
Hydro	4	3
Wind, Solar, and Other	8	7
Cost of fuel, generated (in cents per net KWH) —
Gas	2.00	2.36
Coal	2.91	2.87
Nuclear	0.78	0.79
Average cost of fuel, generated (in cents per net KWH)	1.95	2.20
Average cost of purchased power (in cents per net KWH)(*)	4.65	4.66

(*)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider.

In 2020, total fuel and purchased power expenses were $3.8 billion, a decrease of $672 million, or 15.1%, as compared to the prior year. The decrease was primarily the result of a $363 million decrease in the volume of KWHs generated and purchased and a $309 million decrease primarily in the average cost of fuel.

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 2020, fuel expense was $3.0 billion, a decrease of $655 million, or 18.1%, as compared to the prior year. The decrease was primarily due to a 23.9% decrease in the volume of KWHs generated by coal, a 15.3% decrease in the average cost of natural gas per KWH generated, and a 2.5% decrease in the volume of KWHs generated by natural gas, partially offset by a 1.4% increase in the average cost of coal per KWH generated.

Purchased Power

In 2020, purchased power expense was $799 million, a decrease of $17 million, or 2.1%, as compared to the prior year. The decrease was primarily due to a 2.7% 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.

II-11

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other Operations and Maintenance Expenses

Other operations and maintenance expenses decreased $253 million, or 5.6%, in 2020 as compared to the prior year. The decrease reflects the impacts of cost containment activities implemented in 2020 to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease primarily results from decreases of $195 million in transmission and distribution expenses at the traditional electric operating companies, including $37 million of increases in reliability NDR credits at Alabama Power, $180 million in scheduled generation outage and maintenance expenses, and $32 million in compliance and environmental expenses at the traditional electric operating companies, partially offset by a $183 million increase in storm damage recovery at Georgia Power as authorized in the 2019 ARP and a $45 million increase in employee compensation and benefit expenses. The decrease also reflects a $32 million increase in nuclear property insurance refunds at Alabama Power and Georgia Power. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and "Georgia Power – Storm Damage Recovery" for additional information.

Depreciation and Amortization

Depreciation and amortization increased $469 million, or 19.0%, in 2020 as compared to the prior year. The increase was due to increased amortization of regulatory assets related to CCR AROs of $203 million and higher depreciation of $178 million as authorized in Georgia Power's ~~ownership interests,~~2019 ARP, as well as an increase of $104 million in depreciation associated with additional plant in service. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information.

Estimated Loss on Plant Vogtle Units 3 and ~~AFUDC~~4

In the second and fourth quarters 2020, estimated probable losses of ~~approximately $12~~$149 million ~~per month. While~~and $176 million, respectively, were recorded to reflect Georgia ~~Power is not precluded from seeking recovery of any future~~Power's revised total project capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.

~~Given the significant complexity involved in estimating the future costs~~ to complete construction and start-up of Plant Vogtle Units 3 and 4 and the significant management judgment necessary to assess the related uncertainties surrounding future rate recovery of any projected cost increases, as well as the potential impact on Southern Company's results of operations and cash flows, Southern Company considers these items to be critical accounting estimates.4. See Note 2 to the financial statements under "~~Georgia~~"Georgia Power – Nuclear ~~Construction~~"Construction" for additional information.

~~Accounting~~ (Gain) Loss on Dispositions, Net

Gain on dispositions, net increased $21 million in 2020 as compared to the prior year primarily related to the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants"for additional information.

Allowance for Equity Funds Used During Construction

Allowance for equity funds used during construction increased $17 million, or 14.0%, in 2020 as compared to the prior year primarily associated with the construction of Plant Vogtle Units 3 and 4 at Georgia Power. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction – Regulatory Matters" for additional information.

Other Income (Expense), Net

Other income (expense), net increased $81 million, or 34.6%, in 2020 as compared to the prior year primarily related to a $131 million increase in non-service cost-related retirement benefits income, partially offset by a $24 million net decrease associated with a 2019 litigation settlement at Southern Power and a $21 million increase in charitable donations, primarily at Georgia Power. See Note 11 to the financial statements for additional information.

Income Taxes

Income taxes decreased $191 million, or 27.0%, in 2020 as compared to the prior year. The ~~consolidated~~decrease was primarily due to $208 million of flowback of excess deferred income taxes in 2020 as authorized in Georgia Power's 2019 ARP and a $90 million decrease associated with lower pre-tax earnings, primarily from charges associated with the construction of Plant Vogtle Units 3 and 4 at Georgia Power, partially offset by a $75 million income tax ~~provision~~benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches and ~~deferred~~a $24 million net increase related to the application of an accounting order associated with the Tax Reform Legislation in the prior year at Alabama Power. See Note 2 to the financial statements under "Georgia Power – Rate Plans" and – "Nuclear Construction" for additional information.

Net Income (Loss) Attributable to Noncontrolling Interests

Substantially all noncontrolling interests relate to renewable projects at Southern Power. Net loss attributable to noncontrolling interests increased $21 million in 2020 as compared to the prior year. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately $26 million of 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, 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 statesrelated to a litigation settlement at Southern Power in ~~which the Southern Company system operates.~~

Southern Company files a consolidated federal income tax return and 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 no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. Certain deductions and credits can be limited at the consolidated or combined level resulting in NOL and tax credit carryforwards that would not otherwise result on a stand-alone basis. Utilization of NOL and tax credit carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of2019.

II-12

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Gas Business

Southern Company Gas distributes natural gas through utilities in four states and is involved in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services.

A condensed statement of income for the gas business follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	3,434	$	(358)
Cost of natural gas	972		(347)
Other operations and maintenance	966		78
Depreciation and amortization	500		13
Taxes other than income taxes	206		(7)
Impairment charges	—		(115)
(Gain) loss on dispositions, net	(22)		(22)
Total operating expenses	2,622		(400)
Operating income	812		42
Earnings from equity method investments	141		(16)
Interest expense, net of amounts capitalized	231		(1)
Other income (expense), net	41		21
Income taxes	173		43
Net income	$	590	$	5

Seasonality of Results

During the period from November through March when natural gas usage and operating revenues are generally higher (Heating Season), more customers are connected to Southern Company Gas' distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively equally over any given year. Thus, operating results can vary significantly from quarter to quarter as a result of seasonality. For 2020, the percentage of operating revenues and net income generated during the Heating Season (January through March and November through December) were 67.6% and 85.6%, respectively. For 2019, the percentage of operating revenues and net income generated during the Heating Season were 68.7% and 86.8%, respectively.

II-13

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Operating Revenues

Operating revenues in 2020 were $3.4 billion, a $358 million decrease compared to 2019. Details of operating revenues were as follows:


	2020
	(in millions)
Operating revenues – prior year	$	3,792
Estimated change resulting from –
Infrastructure replacement programs and base rate changes	186

Gas costs and other cost recovery	(319)

Wholesale gas services	(220)
Other	(5)
Operating revenues – current year	$	3,434
Percent change	(9.4)		%

Revenues at the natural gas distribution utilities increased in 2020 compared to the prior year due to base rate increases and continued investments recovered through infrastructure replacement programs, including increases of $107 million at Nicor Gas and $68 million at Atlanta Gas Light. 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 2020 compared to the prior year primarily due to lower natural gas prices and lower sales volumes as a result of warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. See "Cost of Natural Gas" herein for additional information.

Revenues from wholesale gas services decreased in 2020 primarily due to lower derivative gains and decreased commercial activity as a result of warmer weather.

Southern Company Gas hedged its exposure to warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. The remaining impacts of weather on earnings were immaterial.

Cost of Natural Gas

Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, the natural gas distribution utilities charge their utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The natural gas distribution utilities defer or accrue the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from the natural gas distribution utilities. Cost of natural gas at the natural gas distribution utilities represented 88.3% of the total cost of natural gas for 2020.

Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, if applicable, and gains and losses associated with certain derivatives.

Cost of natural gas was $1.0 billion, a decrease of $347 million, or 26.3%, in 2020 compared to the prior year, which reflects a 23.6% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather.

Other Operations and Maintenance Expenses

Other operations and maintenance expenses increased $78 million, or 8.8%, in 2020 compared to the prior year. The increase was primarily due to increases of $40 million in compensation and benefit expenses, $10 million in charitable donations, $12 million

II-14

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

in pipeline repair, compliance, and maintenance activities, and $19 million in expenses passed through directly to customers primarily related to bad debt.

Depreciation and Amortization

Depreciation and amortization increased $13 million, or 2.7%, in 2020 compared to the prior year. This 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.

Impairment Charges

In 2019, Southern Company Gas recorded impairment charges of $91 million related to Jefferson Island and $24 million in contemplation of the sale of its interests in Pivotal LNG and Atlantic Coast Pipeline. See Notes 3 and 15 to the financial statements under "Other Matters – Southern Company Gas" and "Southern Company Gas," respectively, for additional information.

(Gain) Loss on Dispositions, Net

In 2020, gain on dispositions, net was $22 million resulting from the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information.

Earnings from Equity Method Investments

Earnings from equity method investments decreased $16 million, or 10.2%, in 2020 compared to the prior year. This decrease was primarily due to a $12 million decrease in earnings from SNG as a result of lower demand and firm revenues and a $9 million decrease in earnings as a result of the sale of Atlantic Coast Pipeline in the first quarter 2020, partially offset by a $6 million pre-tax loss on the sale of Triton in May 2019. See Notes 7 and 15 to the financial statements under "Southern Company Gas" for additional information.

Other Income (Expense), Net

Other income (expense), net increased $21 million in 2020 compared to the prior year. This increase primarily resulted from an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information.

Income Taxes

Income taxes increased $43 million, or 33.1%, in 2020 compared to the prior year. This increase was primarily due to the reversal of a federal income tax valuation allowance in connection with the sale of Triton in 2019, a decrease in the flowback of excess deferred income taxes in 2020 at Atlanta Gas Light as previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas," Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Company Gas" for additional information.

Other Business Activities

Southern Company's ~~current financial position~~other business activities primarily include the parent company (which does not allocate operating expenses to business units); PowerSecure, a provider of energy solutions to electric utilities and ~~result~~their customers in the areas of ~~operations,~~distributed generation, energy storage and renewables, and energy efficiency; Southern Holdings, which invests in various projects, including ~~currently available information about future years,~~leveraged lease projects; and Southern Linc, which provides digital wireless communications for use by the Southern Company system and also markets these services to ~~estimate when future taxable income will be realized.~~

~~Current~~the public 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 utilize various formulas to calculate the apportionment of taxable income, primarily using sales, assets, or payrollprovides fiber optics services within the ~~jurisdiction~~Southeast.

II-15

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

A condensed statement of income for Southern Company's other business activities follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	444	$	(88)
Cost of other sales	234		(125)
Other operations and maintenance	196		(35)
Depreciation and amortization	77		(3)
Taxes other than income taxes	4		(2)
Impairment charges	—		(50)
(Gain) loss on dispositions, net	(1)		2,547
Total operating expenses	510		2,332
Operating income (loss)	(66)		(2,420)
Interest expense	614		97
Impairment of leveraged leases	206		206
Other income (expense), net	3		(6)
Income taxes (benefit)	(297)		(1,257)
Net income (loss)	$	(586)	$	(1,472)

Operating Revenues

Southern Company's operating revenues for these other business activities decreased $88 million, or 16.5%, in 2020 as compared to the ~~consolidated totals.~~ prior year primarily from the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business and an increase at Southern Linc related to a contract for the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company" for additional information.

Cost of Other Sales

Cost of other sales for these other business activities decreased $125 million, or 34.8%, in 2020 as compared to the prior year primarily from the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, as well as the wind-down of a segment of PowerSecure's distributed infrastructure business in the first quarter 2020. These decreases were partially offset by PowerSecure's continued growth in the core distributed infrastructure business. See Note 15 to the financial statements under "Southern Company" for additional information.

Other Operations and Maintenance Expenses

Other operations and maintenance expenses for these other business activities decreased $35 million, or 15.2%, in 2020 as compared to the prior year. The decrease was primarily due to the sales of PowerSecure's utility infrastructure services business in July 2019 and its lighting business in December 2019, partially offset by an increase at Southern Linc related to the design and construction of a fiber optic system. See Note 15 to the financial statements under "Southern Company" for additional information.

Impairment Charges

In ~~addition, each state varies as~~2019, goodwill and asset impairment charges totaling $50 million were recorded related to ~~whether a stand-alone, combined, or unitary filing methodology is required.~~ the sale of PowerSecure's utility infrastructure services business and in contemplation of the sale of its lighting business. See Note 15 to the financial statements under "Southern Company" for additional information.

(Gain) Loss on Dispositions, Net

The ~~calculation~~2019 gain on dispositions, net primarily relates to the gain of ~~deferred state taxes considers apportionment factors and filing methodologies that are expected~~$2.6 billion ($1.4 billion after tax) on the sale of Gulf Power. See Note 15 to ~~apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on Southern Company's~~the financial ~~statements.~~statements under "Southern Company" for additional information.

~~Given the significant judgment involved in estimating NOL and tax credit carryforwards and multi-state apportionments for all subsidiaries,~~

II-16

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company ~~considers federal~~ and ~~state deferred income tax liabilities~~Subsidiary Companies 2020 Annual Report

Interest Expense

Interest expense for these other business activities increased $97 million, or 18.8%, in 2020 as compared to the prior year primarily due to an increase in average outstanding long-term borrowings and ~~assets to be critical accounting estimates.~~

~~Asset Retirement Obligations~~

AROs are computed as the fair value of the estimated costs for an asset's future retirement and are recorded in the period in which the liability is incurred. The estimated costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlaysfees associated with the ~~asset retirements are discounted using~~extinguishment of debt at the parent company. See Note 8 to the financial statements for additional information.

Impairment of Leveraged Leases

Impairment charges totaling $206 million were recorded in 2020 related to leveraged lease investments at Southern Holdings. See Notes 1 and 3 to the financial statements under "Leveraged Leases" and "Other Matters – Southern Company," respectively, for additional information.

Other Income (Expense), Net

Other income (expense), net for these other business activities decreased $6 million, or 66.7%, in 2020 as compared to the prior year primarily due to a ~~credit-adjusted risk-free rate. Estimates~~$32 million increase in charitable donations at the parent company, partially offset by a $15 million increase in leveraged lease income at Southern Holdings, primarily due to an impairment charge in 2019, and a $9 million increase related to investment income at Southern Holdings.

Income Taxes (Benefit)

Income taxes for these other business activities decreased $1.3 billion in 2020 as compared to the prior year primarily due to the tax impacts related to the sale of Gulf Power. See Note 10 to the financial statements and Note 15 to the financial statements under "Southern Company" for additional information.

Alabama Power

Alabama Power's 2020 net income after dividends on preferred stock was $1.15 billion, representing an $80 million, or 7.5%, increase over the previous year. The increase was primarily due to a decrease in operations and maintenance expenses, an increase in retail revenues associated with the impact of customer bill credits issued in 2019 related to the Tax Reform Legislation, and an increase in non-service cost-related retirement benefits income. These increases to income were partially offset by decreases in retail revenues associated with milder weather in 2020 when compared to 2019 and lower customer usage in the industrial and commercial sectors as a result of the ~~timing~~COVID-19 pandemic. See Note 2 to the financial statements under "Alabama Power – Rate RSE" for additional information.

A condensed income statement for Alabama Power follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	5,830	$	(295)
Fuel	970		(142)
Purchased power	319		(84)
Other operations and maintenance	1,619		(202)
Depreciation and amortization	812		19
Taxes other than income taxes	416		13
Total operating expenses	4,136		(396)
Operating income	1,694		101
Allowance for equity funds used during construction	46		(6)
Interest expense, net of amounts capitalized	338		2
Other income (expense), net	100		54
Income taxes	337		67
Net income	1,165		80
Dividends on preferred stock	15		—
Net income after dividends on preferred stock	$	1,150	$	80

II-17

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and ~~amounts~~Subsidiary Companies 2020 Annual Report

Operating Revenues

Operating revenues for 2020 were $5.8 billion, reflecting a $295 million decrease from 2019. Details of ~~future cash outlays are based~~operating revenues were as follows:


	2020			2019
	(in millions)
Retail — prior year	$	5,501
Estimated change resulting from —
Rates and pricing	51
Sales decline	(50)
Weather	(105)
Fuel and other cost recovery	(184)
Retail — current year	$	5,213		$	5,501
Wholesale revenues —
Non-affiliates	269			258
Affiliates	46			81
Total wholesale revenues	315			339
Other operating revenues	302			285
Total operating revenues	$	5,830		$	6,125
Percent change	(4.8)		%	1.5		%

Retail revenues in 2020 were $5.2 billion. These revenues decreased $288 million, or 5.2%, in 2020 as compared to the prior year. The decrease in 2020 was primarily due to fuel and other cost recovery driven by decreases in generation and the average cost of fuel, milder weather in 2020 when compared to 2019, and a decline in commercial and industrial sales due to social distancing and safer-at-home guidelines related to the COVID-19 pandemic. These decreases were partially offset by customer bill credits issued in 2019 related to the Tax Reform Legislation and an increase in Rate CNP Compliance revenue in 2020.

See Note 2 to the financial statements under "Alabama Power – 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 changes related to sales decline 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 – Rate ECR" for additional information.

Wholesale revenues from power sales to non-affiliated utilities were as follows:


	2020		2019
	(in millions)
Capacity and other	$	127	$	102
Energy	142		156
Total non-affiliated	$	269	$	258

Wholesale revenues from sales to non-affiliates will vary depending on ~~projections~~fuel prices, the market prices of ~~when and how the assets will be retired and~~wholesale energy compared to the cost of ~~future removal activities.~~

~~The liability for AROs primarily relates to facilities that are subject to the CCR Rule~~Alabama Power's and the ~~related state rules, principally ash ponds,~~Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and ~~the decommissioning~~availability of the Southern Company system's ~~nuclear facilities –~~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 ~~Plant Farley~~variable cost to produce the energy.

In 2020, wholesale revenues from sales to non-affiliates increased $11 million, or 4.3%, as compared to the prior year primarily due to a $25 million increase in non-affiliated capacity revenues as a result of a new power sales agreement which began in

II-18

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

September 2020, partially offset by a 17% decrease in the price of energy due to lower natural gas prices. See Notes 2 and 15 to the financial statements under "Alabama Power – Petition for Certificate of Convenience and Necessity" and "Alabama Power," respectively, for additional information.

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 2020, wholesale revenues from sales to affiliates decreased $35 million, or 43.2%, as compared to the prior year. In 2020, KWH sales decreased 30% due to decreased generation related to lower demand and the price of energy decreased 18.4% as a result of lower natural gas prices.

In 2020, other operating revenues increased $17 million, or 6.0%, as compared to the prior year primarily due to increases in transmission and energy service revenues and unregulated sales of products and services, partially offset by decreased revenues resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic.

Energy Sales

Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:


	2020
	Total KWHs	Total KWH Percent Change		Weather-Adjusted Percent Change
	(in billions)
Residential	17.6	(3.5)	%	2.7	%
Commercial	12.4	(8.3)		(6.3)
Industrial	20.4	(8.0)		(8.0)
Other	0.2	(11.3)		(11.3)
Total retail	50.6	(6.6)		(4.0)	%
Wholesale
Non-affiliates	6.3	23.8
Affiliates	2.5	(30.0)
Total wholesale	8.8	1.9
Total energy sales	59.4	(5.4)	%

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 2020 when compared to 2019 largely due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales were 2.7% higher compared to 2019 primarily due to COVID-19 pandemic impacts. Weather-adjusted commercial KWH sales decreased 6.3% primarily due to lower customer usage resulting from social distancing and safer-at-home guidelines related to the COVID-19 pandemic. Industrial KWH sales decreased 8.0% primarily as a result of disruptions in supply chain and business operations related to the COVID-19 pandemic.

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-19

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Details of Alabama Power's generation and purchased power were as follows:


	2020	2019
Total generation (in billions of KWHs)	55.2	56.9
Total purchased power (in billions of KWHs)	6.9	9.5
Sources of generation (percent) —
Coal	39	45
Nuclear	27	25
Gas	24	21
Hydro	10	9
Cost of fuel, generated (in cents per net KWH) —
Coal	2.74	2.69
Nuclear	0.75	0.77
Gas	1.90	2.47
Average cost of fuel, generated (in cents per net KWH)(a)	1.92	2.11
Average cost of purchased power (in cents per net KWH)(b)	4.82	4.39

(a)KWHs generated by hydro are excluded from the average cost of fuel, generated.

(b)Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider.

Fuel and purchased power expenses were $1.3 billion in 2020, a decrease of $226 million, or 14.9%, compared to 2019. The decrease was primarily due to a $189 million decrease related to the volume of KWHs purchased and generated and a $37 million net decrease in the average cost of fuel and purchased power.

Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. 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 expenses were $970 million in 2020, a decrease of $142 million, or 12.8%, compared to 2019. The decrease was primarily due to a 23.1% decrease in the average cost of KWHs generated by natural gas, which excludes tolling agreements, a 15.6% decrease in the volume of KWHs generated by coal, and a 14.2% increase in the volume of KWHs generated by hydro.

Purchased Power – Non-Affiliates

Purchased power expense from non-affiliates was $191 million in 2020, a decrease of $12 million, or 5.9%, compared to 2019. This decrease was primarily due to a 6.4% decrease in the amount of energy purchased as a result of milder weather during 2020 as compared to 2019, partially offset by a 1.9% increase in the average cost per KWH purchased due to decreased generation from PPAs.

Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.

Purchased Power – Affiliates

Purchased power expense from affiliates was $128 million in 2020, a decrease of $72 million, or 36.0%, compared to 2019. This decrease was primarily due to a 41.9% decrease in the amount of energy purchased primarily related to milder weather during 2020 as compared to 2019. This decrease was partially offset by a 10.3% increase in the average cost per KWH purchased due to decreased generation from PPAs.

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.

II-20

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other Operations and Maintenance Expenses

In 2020, other operations and maintenance expenses decreased $202 million, or 11.1%, as compared to the prior year. The decrease reflects the impact of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. The decrease was primarily due to decreases of $88 million in generation expenses, $27 million in vegetation management costs, $27 million in accruals to the NDR, and $20 million in Rate CNP Compliance-related expenses, as well as a $37 million increase in reliability NDR credits. See Note 2 to the financial statements under "Alabama Power – Rate NDR" and " – Rate CNP Compliance" for additional information.

Other Income (Expense), Net

Other income (expense), net increased $54 million, or 117.4%, in 2020 as compared to the prior year primarily due to an increase in non-service cost-related retirements benefits income. See Note 11 to the financial statements for additional information.

Income Taxes

Income taxes increased $67 million, or 24.8%, in 2020 as compared to the prior year primarily due to an increase in pre-tax net income and the application in 2019 of an Alabama PSC accounting order related to the Tax Reform Legislation. See Note 2 to the financial statements under "Alabama Power – Tax Reform Accounting Order" for additional information.

Georgia Power

Georgia Power's ~~ownership interests~~2020 net income was $1.6 billion, representing a $145 million, or 8.4%, decrease from the previous year. The decrease was primarily due to after-tax charges totaling $242 million in ~~Plant Hatch and~~2020 related to the construction of Plant Vogtle Units 3 and 4, as well as lower retail revenues associated with milder weather as compared to 2019 and decreased customer usage resulting from the COVID-19 pandemic, partially offset by related cost containment activities and the impacts of accruals in 2019 for customer refunds. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information on the construction of Plant Vogtle Units 3 and 4.

A condensed income statement for Georgia Power follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	8,309	$	(99)
Fuel	1,141		(303)
Purchased power	1,049		(47)
Other operations and maintenance	1,953		(19)
Depreciation and amortization	1,425		444
Taxes other than income taxes	444		(10)
Estimated loss on Plant Vogtle Units 3 and 4	325		325
Total operating expenses	6,337		390
Operating income	1,972		(489)
Interest expense, net of amounts capitalized	425		16
Other income (expense), net	180		40
Income taxes	152		(320)
Net income	$	1,575	$	(145)

II-21

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Operating Revenues

Operating revenues for 2020 were $8.3 billion, a $99 million decrease from 2019. Details of operating revenues were as follows:


	2020			2019
	(in millions)
Retail — prior year	$	7,707
Estimated change resulting from —
Rates and pricing	462
Sales decline	(71)
Weather	(179)
Fuel cost recovery	(310)
Retail — current year	7,609			$	7,707
Wholesale revenues	115			140
Other operating revenues	585			561
Total operating revenues	$	8,309		$	8,408
Percent change	(1.2)		%	(0.1)		%

Retail revenues of $7.6 billion in 2020 decreased $98 million, or 1.3%, compared to 2019. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing was primarily due to an increase in revenue recognized under the ECCR tariff effective January 1, 2020 as authorized in the 2019 ARP and 2.the impacts of accruals in 2019 for customer refunds related to the Tax Reform Legislation and earnings in excess of the allowed retail ROE range, as well as the rate pricing effects of decreased customer usage throughout 2020 in the commercial and industrial classes. Partially offsetting these increases were lower contributions from commercial and industrial customers with variable demand-driven pricing. See Note 2 to the financial statements under "Georgia Power – Rate Plans" for additional information.

See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to the sales decline in 2020.

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.

Wholesale revenues from power sales were as follows:


	2020		2019
	(in millions)
Capacity and other	$	51	$	55
Energy	64		85
Total	$	115	$	140

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 2020, wholesale revenues decreased $25 million, or 17.9%, as compared to 2019 primarily due to the expiration of a non-affiliate PPA and lower energy prices.

II-22

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other operating revenues increased $24 million, or 4.3%, in 2020 from the prior year primarily due to increases of $33 million in unregulated sales associated with power delivery construction and maintenance contracts and outdoor lighting, $8 million in pole attachment revenues, and $6 million in open access transmission tariff sales, partially offset by decreases of $13 million largely resulting from the temporary suspension of customer disconnections and late fees related to the COVID-19 pandemic and $10 million from unregulated sales associated with energy conservation projects.

Energy Sales

Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:


	2020
	Total KWHs	Total KWH Percent Change		Weather-Adjusted Percent Change
	(in billions)
Residential	27.8	(1.3)	%		3.4	%
Commercial	30.5	(7.1)			(5.3)
Industrial	22.0	(4.8)			(4.5)
Other	0.5	(9.3)			(9.1)
Total retail	80.8	(4.6)			(2.2)	%
Wholesale	2.7	(9.8)
Total energy sales	83.5	(4.8)	%

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 2020 when compared to 2019 largely due to the COVID-19 pandemic. In 2020, weather-adjusted residential KWH sales increased 3.4% compared to 2019 primarily due to customer growth and an increase in average customer usage, primarily due to work-from-home policies. Weather-adjusted commercial KWH sales decreased 5.3% primarily due to lower customer usage resulting from changes in consumer and business behavior in response to the COVID-19 pandemic. Weather-adjusted industrial KWH sales decreased 4.5% primarily as a result of disruptions in supply chain and business operations related to the COVID-19 pandemic.

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.

II-23

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Details of Georgia Power's generation and purchased power were as follows:


	2020	2019
Total generation (in billions of KWHs)	56.8	62.6
Total purchased power (in billions of KWHs)	30.5	29.1
Sources of generation (percent) —
Gas	52	47
Nuclear	27	26
Coal	16	24
Hydro and other	5	3
Cost of fuel, generated (in cents per net KWH) —
Gas	2.19	2.42
Nuclear	0.80	0.81
Coal	3.23	3.09
Average cost of fuel, generated (in cents per net KWH)	1.96	2.16
Average cost of purchased power (in cents per net KWH)(*)	3.69	4.21

(*) Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider.

Fuel and purchased power expenses were $2.2 billion in 2020, a decrease of $350 million, or 13.8%, compared to 2019. The decrease was due to a decrease of $215 million related to the average cost of fuel and purchased power and a net decrease of $135 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 $1.1 billion in 2020, a decrease of $303 million, or 21.0%, compared to 2019. The decrease was primarily due to a 40.3% decrease in the volume of KWHs generated by coal and a 9.5% decrease in the average cost of natural gas per KWH generated.

Purchased Power - Non-Affiliates

Purchased power expense from non-affiliates was $540 million in 2020, an increase of $19 million, or 3.6%, compared to 2019. The increase was primarily due to an increase of 4.7% in the volume of KWHs purchased primarily due to the availability of lower cost market resources, partially offset by a 2.8% decrease in the average cost per KWH purchased primarily resulting from lower energy prices.

Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation.

Purchased Power - Affiliates

Purchased power expense from affiliates was $509 million in 2020, a decrease of $66 million, or 11.5%, compared to 2019. The decrease was primarily due to the expiration of a PPA and a 19.9% decrease in the average cost per KWH purchased primarily resulting from lower energy prices, partially offset by an increase of 4.4% in the volume of KWHs purchased due to lower cost Southern Company system resources as compared to available Georgia Power-owned generation.

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

In 2020, other operations and maintenance expenses decreased $19 million, or 1.0%, compared to 2019. The decrease was primarily due to decreases of $85 million in distribution- and transmission-related expenses, $78 million associated with

II-24

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

generation maintenance and scheduled outages, $19 million in customer service and sales expense, and $12 million associated with generation environmental projects. These decreases reflect the impacts of cost containment activities implemented to help offset the effects of the recessionary economy resulting from the COVID-19 pandemic. Other expense reductions include a decrease of $15 million related to an adjustment in 2019 for FERC fees following the conclusion of a multi-year audit of headwater benefits associated with hydro facilities and an $11 million increase in nuclear property insurance refunds. Partially offsetting these decreases were increases of $183 million in storm damage recovery as authorized in the 2019 ARP and $20 million in employee benefit expenses. See Note 2 to the financial statements under "Georgia Power –Storm Damage Recovery" for additional information.

Depreciation and Amortization

Depreciation and amortization increased $444 million, or 45.3%, in 2020 compared to 2019. The increase primarily reflects increased amortization of regulatory assets related to CCR AROs of $203 million and higher depreciation of $178 million as authorized in the 2019 ARP. Also contributing to the increase was a $67 million increase in depreciation associated with additional plant in service. See Notes 2 and 5 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" and "Depreciation and Amortization," respectively, for additional information.

Estimated Loss on Plant Vogtle Units 3 and 4

In the second and fourth quarters 2020, estimated probable losses of $149 million and $176 million, respectively, were recorded to reflect Georgia Power's revised total project capital cost forecast to complete construction and start-up of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.

Interest Expense, Net of Amounts Capitalized

In 2020, interest expense, net of amounts capitalized increased $16 million, or 3.9%, compared to 2019. The increase was primarily due to a $36 million increase in interest expense associated with an increase in average outstanding long-term borrowings, partially offset by a $20 million increase in amounts capitalized in connection with the construction of Plant Vogtle Units 3 and 4. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings and Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.

Other Income (Expense), Net

In 2020, other income (expense), net increased $40 million, or 28.6%, compared to the prior year primarily due to a $42 million increase in non-service cost-related retirement benefits income and a $23 million increase in AFUDC equity primarily associated with the construction of Plant Vogtle Units 3 and 4, partially offset by a $20 million increase 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 and Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.

Income Taxes

Income taxes decreased $320 million, or 67.8%, in 2020 compared to the prior year primarily as a result of the flowback of excess deferred income taxes in 2020 as authorized in the 2019 ARP and lower pre-tax earnings, which includes the charges in the second and fourth quarters 2020 associated with the construction of Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" and Note 10to the financial statements for additional information.

Mississippi Power

Mississippi Power's net income was $152 million in 2020 compared to $139 million in 2019. The increase was primarily due to a decrease in operations and maintenance expenses primarily associated with a 2019 accrual for the closeout of a DOE contract related to the Kemper County energy facility, a decrease in income taxes associated with the flowback of excess deferred income taxes, and a decrease in amortization associated with ECO Plan regulatory assets, substantially offset by a decrease in revenues as a result of a base rate reduction that became effective for the first billing cycle of April 2020, as well as a decrease in customer usage due to the COVID-19 pandemic.

II-25

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

A condensed income statement for Mississippi Power follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	1,172	$	(92)
Fuel	350		(57)
Purchased power	22		2
Other operations and maintenance	284		(23)
Depreciation and amortization	183		(9)
Taxes other than income taxes	124		11
Total operating expenses	963		(76)
Operating income	209		(16)
Interest expense, net of amounts capitalized	60		(9)
Other income (expense), net	17		4
Income taxes (benefit)	14		(16)
Net income	$	152	$	13

Operating Revenues

Operating revenues for 2020 were $1.2 billion, a $92 million decrease from 2019. Details of operating revenues were as follows:


	2020			2019
	(in millions)
Retail — prior year	$	877
Estimated change resulting from —
Rates and pricing	(29)
Sales decline	(11)
Weather	(5)
Fuel and other cost recovery	(11)
Retail — current year	821			$	877
Wholesale revenues —
Non-affiliates	215			237
Affiliates	111			132
Total wholesale revenues	326			369
Other operating revenues	25			18
Total operating revenues	$	1,172		$	1,264
Percent change	(7.3)		%	(0.1)		%

Total retail revenues for 2020 decreased $56 million, or 6.4%, compared to 2019 primarily due to decreases in rates in accordance with the Mississippi Power Rate Case Settlement Agreement, a decrease in customer usage due to the COVID-19 pandemic, and a decrease in fuel and other cost recovery revenues primarily as a result of lower recoverable fuel costs.

See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" for additional information. See "Energy Sales" below for a discussion of changes in the volume of energy sold, including changes related to sales and weather.

Electric rates for Mississippi Power include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel and emissions portion of wholesale revenues from energy sold to customers outside Mississippi

II-26

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

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:


	2020		2019
	(in millions)
Capacity and other	$	3	$	3
Energy	212		234
Total non-affiliated	$	215	$	237

Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of Mississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers. Short-term opportunity energy sales are also included in sales for resale to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Mississippi Power's variable cost to produce the energy.

Wholesale revenues from sales to non-affiliates decreased $22 million, or 9.3%, compared to 2019. This decrease was primarily due to decreases in revenue from MRA customers as a result of lower fuel costs, milder weather, decreased customer usage as a result of the COVID-19 pandemic, and fewer opportunity sales.

Wholesale revenues from sales to affiliates will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.

Wholesale revenues from sales to affiliates decreased $21 million, or 15.9%, in 2020 compared to 2019. This decrease was primarily due to a $34 million decrease associated with lower natural gas prices, partially offset by a $13 million increase associated with higher KWH sales due to the dispatch of Mississippi Power's generation resources to serve the Southern Company system's territorial load.

Other operating revenues increased $7 million, or 38.9%, in 2020 as compared to the prior year primarily due to an increase in open access transmission tariff revenues.

II-27

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Energy Sales

Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for 2020 and the percent change from the prior year were as follows:


	2020
	Total KWHs	Total KWH Percent Change		Weather-Adjusted Percent Change
	(in millions)
Residential	2,023	(1.9)	%	3.3	%
Commercial	2,513	(7.4)		(7.0)
Industrial	4,558	(4.9)		(4.9)
Other	35	(3.3)		(3.3)
Total retail	9,129	(5.0)		(3.8)	%
Wholesale
Non-affiliated	3,784	(4.6)
Affiliated	5,226	9.8
Total wholesale	9,010	3.3
Total energy sales	18,139	(1.1)	%

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 2020 when compared to 2019 largely due to the COVID-19 pandemic. Weather-adjusted residential KWH sales increased 3.3% compared to 2019 primarily due to an increase in average customer usage as a result of changes in customer behavior and work-from-home policies in response to the COVID-19 pandemic. Weather-adjusted commercial KWH sales decreased 7.0% primarily due to lower customer usage resulting from changes in consumer and business behavior, including the temporary closure of casinos, in response to the COVID-19 pandemic. Industrial KWH sales decreased 4.9% primarily as a result of disruptions in supply chain and business operations driven by the COVID-19 pandemic and the overall decrease in business activity due to the resulting recession.

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:


	2020	2019
Total generation (in millions of KWHs)	17,833	18,269
Total purchased power (in millions of KWHs)	688	529
Sources of generation (percent) –
Gas	94	94
Coal	6	6
Cost of fuel, generated (in cents per net KWH) –
Gas	1.97	2.26
Coal	3.62	4.05
Average cost of fuel, generated (in cents per net KWH)	2.08	2.37
Average cost of purchased power (in cents per net KWH)	3.27	3.71

Fuel and purchased power expenses were $372 million in 2020, a decrease of $55 million, or 12.9%, as compared to the prior year. The decrease was primarily due to the lower average cost of natural gas.

II-28

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

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

Fuel expense decreased $57 million, or 14.0%, in 2020 compared to 2019 primarily due to a 12.6% decrease in the average cost of natural gas per KWH generated, a 10.7% decrease in the average cost of coal per KWH generated, and a 3.0% decrease in the volume of KWHs generated by natural gas.

Purchased Power

Purchased power expense increased $2 million, or 10.0%, in 2020 compared to 2019. The increase was primarily the result of a 30.2% increase in the volume of KWHs purchased, partially offset by an 11.9% decrease in the average cost per KWH purchased.

Energy purchases will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's 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 $23 million, or 7.5%, in 2020 compared to the prior year. The decrease primarily reflects the impacts of a $23 million accrual in 2019 for the closeout of a DOE contract related to the Kemper County energy facility. See Note 3 to the financial statements under "Other Matters – Mississippi Power – Kemper County Energy Facility" for additional information.

Depreciation and Amortization

Depreciation and amortization decreased $9 million, or 4.7%, in 2020 compared to 2019. The decrease was primarily due to a decrease in regulatory asset amortization of $21 million primarily as a result of completing amortization of the ECO Plan regulatory asset in 2019. This decrease was partially offset by an increase in depreciation of $12 million related to additional plant in service and an increase in depreciation rates in accordance with the Mississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" and " – Environmental Compliance Overview Plan" for additional information.

Taxes Other Than Income Taxes

Taxes other than income taxes increased $11 million, or 9.7%, in 2020 compared to 2019 primarily due to an increase in ad valorem taxes.

Interest Expense, Net of Amounts Capitalized

Interest expense, net of amounts capitalized decreased $9 million, or 13.0%, in 2020 compared to 2019 primarily as the result of a decrease in outstanding long-term borrowings. See Note 8 to the financial statements for additional information.

Income Taxes (Benefit)

Income tax expense decreased $16 million, or 53.3%, in 2020 compared to 2019 primarily due to the flowback of excess deferred income taxes as a result of the Mississippi Power Rate Case Settlement Agreement. See Note 2 to the financial statements under "Mississippi Power – 2019 Base Rate Case" and Note 10 to the financial statements for additional information.

Southern Power

Net income attributable to Southern Power for 2020 was $238 million, a $101 million decrease from 2019, primarily due to the $88 million after-tax gain on the sale of Plant Nacogdoches in the second quarter 2019, partially offset by the $23 million after-tax gain on the sale of Plant Mankato in the first quarter 2020. In addition, the decrease reflects the reduced net income resulting from these dispositions. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" for additional information.

II-29

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company ~~system~~and Subsidiary Companies 2020 Annual Report

A condensed statement of income follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	1,733	$	(205)
Fuel	470		(107)
Purchased power	74		(34)
Other operations and maintenance	353		(6)

Depreciation and amortization	494		15
Taxes other than income taxes	39		(1)
Asset impairment	—		(3)
(Gain) loss on dispositions, net	(39)		(16)
Total operating expenses	1,391		(152)
Operating income	342		(53)
Interest expense, net of amounts capitalized	151		(18)
Other income (expense), net	19		(28)
Income taxes (benefit)	3		59
Net income	207		(122)
Net income (loss) attributable to noncontrolling interests	(31)		(21)
Net income attributable to Southern Power	$	238	$	(101)

Operating Revenues

Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas facilities and a biomass generating facility (through the second quarter 2019 sale of Plant Nacogdoches), and PPA energy revenues from Southern Power's generation facilities. To the extent Southern Power has ~~AROs~~capacity not contracted under a PPA, it may sell power into an accessible wholesale market, or, to the extent those generation assets are part of the FERC-approved IIC, it may sell power into the Southern Company power pool.

Natural Gas and Biomass Capacity and Energy Revenue

Capacity revenues generally represent the greatest contribution to operating income and are designed to provide recovery of fixed costs plus a return on investment.

Energy is generally sold at variable cost or is indexed to published natural gas indices. Energy revenues will vary depending on the energy demand of Southern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost of Southern Power's energy. Energy revenues also include fees for support services, fuel storage, and unit start charges. Increases and decreases in energy revenues under PPAs that are driven by fuel or purchased power prices are accompanied by an increase or decrease in fuel and purchased power costs and do not have a significant impact on net income.

Solar and Wind Energy Revenue

Southern Power's energy sales from solar and wind generating facilities are predominantly through long-term PPAs that do not have capacity revenue. Customers either purchase the energy output of a dedicated renewable facility through an energy charge or pay a fixed price related to ~~various landfill sites, asbestos removal, mine reclamation, land restoration~~the energy generated from the respective facility and sold to the grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and other factors.

See FUTURE EARNINGS POTENTIAL – "Southern Power's Power Sales Agreements" herein for additional information regarding Southern Power's PPAs.

II-30

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Operating Revenues Details

Details of Southern Power's operating revenues were as follows:


	2020		2019
	(in millions)
PPA capacity revenues	$	384	$	482
PPA energy revenues	1,019		1,081
Total PPA revenues	1,403		1,563
Non-PPA revenues	316		363
Other revenues	14		12
Total operating revenues	$	1,733	$	1,938

Operating revenues for 2020 were $1.7 billion, a $205 million, or 11%, decrease from 2019. The decrease in operating revenues was primarily due to the following:

•PPA capacity revenuesdecreased $98 million, or 20%, primarily due to decreases of $72 million related to the dispositions of Plant Nacogdoches in the second quarter 2019 and Plant Mankato in the first quarter 2020 and $24 million from the contractual expiration of an affiliate natural gas PPA.

•PPA energy revenues decreased $62 million, or 6%, primarily due to a $125 million decrease in sales from natural gas facilities resulting from an $89 million decrease in the volume of KWHs sold due to decreased demand and a $36 million decrease in the price of fuel and purchased power. This decrease was partially offset by increases of $33 million in sales primarily driven by the volume of KWHs generated by solar and wind facilities and ~~disposal~~$30 million in sales from fuel cell generation acquired in 2019.

•Non-PPA revenues decreased $47 million, or 13%, due to a $99 million decrease in the market price of ~~polychlorinated biphenyls~~energy, partially offset by a $52 million increase in the volume of KWHs sold through short-term sales.

Fuel and Purchased Power Expenses

Details of Southern Power's generation and purchased power were as follows:


	Total KWHs	Total KWH % Change	Total KWHs
	2020		2019
	(in billions of KWHs)
Generation	44		47
Purchased power	3		3
Total generation and purchased power	47	(6)%	50
Total generation and purchased power (excluding solar, wind, and tolling agreements)	28	(3)%	29

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-31

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Details of Southern Power's fuel and purchased power expenses were as follows:


	2020		2019
	(in millions)
Fuel	$	470	$	577
Purchased power	74		108
Total fuel and purchased power expenses	$	544	$	685

In 2020, total fuel and purchased power expenses decreased $141 million, or 21%, compared to 2019. Fuel expensedecreased $107 million, or 19%, due to an $82 million decrease in the average cost of fuel per KWH generated and a $25 million decrease associated with the volume of KWHs generated. Purchased power expense decreased $34 million, or 31%, due to a $21 million decrease associated with the average cost of purchased power and a $13 million decrease associated with the volume of KWHs purchased.

(Gain) Loss on Dispositions, Net

In 2020, gain on dispositions, net increased $16 million, or 70%, compared to 2019 reflecting the sale of Plant Mankato in the first quarter 2020 and the sale of Plant Nacogdoches in the second quarter 2019. See Note 15 to the financial statements under "Southern Power – Sales of Natural Gas and Biomass Plants" for additional information.

Interest Expense, Net of Amounts Capitalized

In 2020, interest expense, net of amounts capitalized decreased $18 million, or 11%, compared to 2019, primarily due to a decrease in the amount of outstanding debt. See Note 8 to the financial statements for additional information.

Other Income (Expense), Net

In 2020, other income (expense), net decreased $28 million, or 60%, compared to 2019 primarily due to a $36 million gain arising from a litigation settlement in 2019, partially offset by the resolution of certain ~~transformers.~~related contingencies in the third quarter 2020.

Income Taxes (Benefit)

In 2020, income tax expense was $3 million compared to a $56 million benefit for 2019, a change of $59 million, primarily due to a $75 million income tax benefit in 2019 resulting from ITCs recognized upon the sale of Plant Nacogdoches, partially offset by a decrease in income tax expense as a result of lower pre-tax earnings in 2020. See Notes 1, 10, and 15 to the financial statements under "Income Taxes," "Effective Tax Rate," and "Southern Power," respectively, for additional information.

Net Income (Loss) Attributable to Noncontrolling Interests

In 2020, net loss attributable to noncontrolling interests increased $21 million compared to 2019. The increased loss was primarily due to an allocation to the noncontrolling interest partner of approximately $26 million of income related to a litigation settlement in 2019.

Southern Company Gas

Operating Metrics

Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.

Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas on Southern Company Gas' distribution system. Southern Company Gas has various regulatory mechanisms, such as weather and revenue normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utility's respective service territory, including Nicor Gas following the approval of a revenue decoupling mechanism for residential customers in its base rate case that concluded in 2019. Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather.

The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations and gas marketing services' customers are primarily located in Georgia and Illinois.

II-32

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas. Wholesale gas services' physical sales volumes represent the daily average natural gas volumes sold to its customers.

Seasonality of Results

During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Occasionally in the summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding cost of natural gas, bad debt expense, and certain incentive compensation costs, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, 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.


	Percent Generated During Heating Season
	Operating Revenues		Net Income
2020	67.6	%	85.6	%
2019	68.7	%	86.8	%

Net Income

Net income attributable to Southern Company Gas in 2020 was $590 million, an increase of $5 million, or 0.9%, compared to the prior year. This increase was primarily due to impairment charges in 2019 of $69 million related to Jefferson Island and $17 million in contemplation of the sale of interests in Pivotal LNG and Atlantic Coast Pipeline, a $16 million gain in 2020 related to the sale of Jefferson Island, and a $53 million increase at gas distribution operations primarily due to base rate increases for all of the natural gas distribution utilities and continued investment in infrastructure replacement programs, partially offset by reduced flowback of excess deferred income taxes at Atlanta Gas Light in 2020. These increases were partially offset by a $149 million decrease at wholesale gas services in 2020 primarily due to lower commercial activity and lower derivative gains. See Note 2 to the financial statements under "Southern Company Gas" for additional information.

A condensed income statement for Southern Company Gas follows:



	2020		Increase (Decrease) from 2019
	(in millions)
Operating revenues	$	3,434	$	(358)
Cost of natural gas	972		(347)

Other operations and maintenance	966		78
Depreciation and amortization	500		13
Taxes other than income taxes	206		(7)
Impairment charges	—		(115)
(Gain) loss on dispositions, net	(22)		(22)

Total operating expenses	2,622		(400)
Operating income	812		42

Earnings from equity method investments	141		(16)
Interest expense, net of amounts capitalized	231		(1)
Other income (expense), net	41		21

Income taxes	173		43




Net Income	$	590	$	5

II-33

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Operating Revenues

Operating revenues in 2020 were $3.4 billion, a $358 million decrease compared to 2019. Details of operating revenues were as follows:


	2020
	(in millions)
Operating revenues – prior year	$	3,792
Estimated change resulting from –
Infrastructure replacement programs and base rate changes	186

Gas costs and other cost recovery	(319)

Wholesale gas services	(220)

Other	(5)
Operating revenues – current year	$	3,434
Percent change	(9.4)		%

Revenues associated with gas costs and other cost recovery decreased in 2020 compared to the prior year primarily due to lower natural gas prices and lower sales volumes as a result of warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. See "Cost of Natural Gas" herein for additional information.

Revenues from wholesale gas services decreased in 2020 primarily due to lower derivative gains and decreased commercial activity as a result of warmer weather. See "Segment Information – Wholesale Gas Services" herein for additional information.

Heating Degree Days

During Heating Season, natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the Heating Season. The following table presents Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather.


	Years Ended December 31,			2020 vs. normal		2020 vs. 2019
	Normal(a)	2020	2019	(warmer)		(warmer)
	(in thousands)
Illinois(b)	5,777	5,477	6,136	(5.2)	%	(10.7)	%
Georgia	2,483	2,122	2,157	(14.5)	%	(1.6)	%

(a)Normal represents the 10-year average from January 1, 2010 through December 31, 2019 for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center.

(b)Heating Degree Days in Illinois had a limited financial impact in 2020 and the impact is expected to be limited in future years. In October 2019, Nicor Gas received approval for a volume balancing adjustment, a revenue decoupling mechanism for residential customers that provides a monthly benchmark level of revenue per rate class for recovery.

II-34

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Customer Count

The following table provides the number of customers served by Southern Company Gas at December 31, 2020 and 2019:


	2020		2019
	(in thousands, except market share %)
Gas distribution operations	4,308		4,277
Gas marketing services
Energy customers(*)	666		631
Market share of energy customers in Georgia	28.9	%	28.9	%

(*)Gas marketing services' customers are primarily located in Georgia and Illinois. December 31, 2020 also includes approximately 50,000 customers in Ohio contracted through an annual auction process to serve for 12 months beginning April 1, 2020.

Southern Company Gas anticipates continued customer growth as it expects continued low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to attract new customers and to retain existing customers.

Cost of Natural Gas

Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, gas distribution operations charges its utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. Gas distribution operations defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred natural gas costs are reflected as regulatory assets and accrued natural gas costs are reflected as regulatory liabilities. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 88.3% of the total cost of natural gas for 2020.

In 2020, cost of natural gas was $1.0 billion, a decrease of $347 million, or 26.3%, compared to the prior year, which reflects a 23.6% decrease in natural gas prices compared to 2019 and decreased volumes primarily as a result of warmer weather.

Volumes of Natural Gas Sold

The following table details the volumes of natural gas sold during all periods presented.


			2020 vs. 2019
	2020	2019		% Change
Gas distribution operations (mmBtu in millions)
Firm	623	677		(8.0)	%
Interruptible	92	92		—	%
Total	715	769		(7.0)	%
Wholesale gas services (mmBtu in millions/day)
Daily physical sales	6.9	6.4		7.8	%
Gas marketing services (mmBtu in millions)
Firm:
Georgia	33	33		—	%
Illinois	9	12		(25.0)	%
Other	13	15		(13.3)	%

Interruptible large commercial and industrial	14	14		—	%
Total	69	74		(6.8)	%

II-35

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other Operations and Maintenance Expenses

In 2020, other operations and maintenance expenses increased $78 million, or 8.8%, compared to the prior year. The increase was primarily due to increases of $40 million in compensation and benefit expenses, $10 million in charitable donations, $12 million in pipeline repair, compliance, and maintenance activities, and $19 million in expenses passed through directly to customers primarily related to bad debt.

Depreciation and Amortization

In 2020, depreciation and amortization increased $13 million, or 2.7%, compared to the prior year. This increase was primarily due to continued infrastructure investments at gas distribution operations. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information.

Impairment Charges

(Gain) Loss on Dispositions, Net

In 2020, gain on dispositions, net was $22 million resulting from the sale of Jefferson Island. See Note 15 to the financial statements under "Southern Company Gas" for additional information.

Earnings from Equity Method Investments

In 2020, earnings from equity method investments decreased $16 million, or 10.2%, compared to the prior year. This decrease was primarily due to a $12 million decrease in earnings from SNG as a result of lower demand and firm revenues and a $9 million decrease in earnings as a result of the sale of Atlantic Coast Pipeline in the first quarter 2020, partially offset by a $6 million pre-tax loss on the sale of Triton in May 2019. See Notes 7 and 15 to the financial statements under "Southern Company Gas" for additional information.

Other Income (Expense), Net

In 2020, other income (expense), net increased $21 million compared to the prior year. This increase primarily resulted from an increase in non-service cost-related retirement benefits income. See Note 11 to the financial statements for additional information.

Income Taxes

In 2020, income taxes increased $43 million, or 33.1%, compared to the prior year. This increase was primarily due to the reversal of a federal income tax valuation allowance in connection with the sale of Triton in 2019, a decrease in the flowback of excess deferred income taxes in 2020 at Atlanta Gas Light as previously authorized by the Georgia PSC, and higher pre-tax earnings. See Note 2 to the financial statements under "Southern Company Gas," Note 10 to the financial statements, and Note 15 to the financial statements under "Southern Company Gas" for additional information.

Performance and Non-GAAP Measures

Adjusted operating margin is a non-GAAP measure that is calculated as operating revenues less cost of natural gas, cost of other sales, and revenue tax expense. Adjusted operating margin excludes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, impairment charges, and (gain) loss on dispositions, net, which are included in the calculation of operating income as calculated in accordance with GAAP and reflected in the statements of income. The presentation of adjusted operating margin is believed to provide useful information regarding the contribution resulting from base rate changes, infrastructure replacement programs and capital projects, and customer growth at gas distribution operations since the cost of natural gas and revenue tax expense can vary significantly and are generally billed directly to customers. Southern Company Gas further believes that utilizing adjusted operating margin at gas pipeline investments, wholesale gas services, and gas marketing services allows it to focus on a direct measure of performance before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.

Adjusted operating margin should not be considered an alternative to, or a more meaningful indicator of, Southern Company Gas' operating performance than operating income as determined in accordance with GAAP. In addition, Southern Company Gas' adjusted operating margin may not be comparable to similarly titled measures of other companies.

II-36

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Detailed variance explanations of Southern Company Gas' financial performance are provided herein.

Reconciliations of operating income to adjusted operating margin are as follows:



	2020		2019
	(in millions)
Operating Income	$	812	$	770
Other operating expenses(a)	1,650		1,703
Revenue taxes(b)	(104)		(114)
Adjusted Operating Margin	$	2,358	$	2,359

(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges, and (gain) loss on dispositions, net.

(b)Nicor Gas' revenue tax expenses, which are passed through directly to customers.

Segment Information


	2020						2019
	Adjusted Operating Margin(*)		Operating Expenses(*)		Net Income (Loss)		Adjusted Operating Margin(*)		Operating Expenses (*)		Net Income (Loss)
	(in millions)						(in millions)
Gas distribution operations	$	1,990	$	1,335	$	390	$	1,799	$	1,226	$	337
Gas pipeline investments	32		12		99		32		12		94
Wholesale gas services	73		53		14		273		54		163
Gas marketing services	240		121		89		234		122		83
All other	29		36		(2)		28		182		(92)
Intercompany eliminations	(6)		(11)		—		(7)		(7)		—
Consolidated	$	2,358	$	1,546	$	590	$	2,359	$	1,589	$	585

(*)Adjusted operating margin and operating expenses are adjusted for Nicor Gas' revenue tax expenses, which are passed through directly to customers.

Gas Distribution Operations

Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by regulatory agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas with the opportunity to generate revenues to recover the cost of natural gas delivered to its customers and its fixed and variable costs, including depreciation, interest expense, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments.

With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various regulatory and other mechanisms, such as weather and revenue normalization mechanisms and weather derivative instruments, that limit its exposure to changes in customer consumption, including weather changes within typical ranges in its natural gas distribution utilities' service territories.

In 2020, net income increased $53 million, or 16%, compared to the prior year. The increase primarily relates to $191 million in adjusted operating margin which reflects base rate increases for all of the natural gas distribution utilities and continued investments recovered through infrastructure replacement programs. The $109 million increase in operating expenses includes increases for compensation and benefit expenses and pipeline compliance as well as bad debt costs passed through directly to customers. The increase also reflects higher depreciation primarily due to additional assets placed in service. The $27 million increase in other income is primarily due to an increase in non-service cost-related retirement benefits income. The $51 million increase in income tax expense is primarily due to higher pre-tax earnings and a decrease in the flowback of excess deferred income taxes at Atlanta Gas Light as authorized by the Georgia PSC.

See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings – Atlanta Gas Light" and " – Infrastructure Replacement Programs and Capital Projects – Atlanta Gas Light" herein for additional information on Atlanta Gas

II-37

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Light's stipulation reflecting the impacts of the Tax Reform Legislation. Also see Note 11 to the financial statements for additional information on retirement benefits.

Gas Pipeline Investments

Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG, PennEast Pipeline, Dalton Pipeline, and Atlantic Coast Pipeline (until its sale on March 24, 2020). Net income in 2020 increased $5 million, or 5%, compared to the prior year. This increase primarily relates to a $25 million decrease in income taxes primarily related to a 2019 increase associated with changes in state apportionment rates, partially offset by a $12 million decrease in earnings from SNG and a $9 million decrease in earnings as a result of the sale of the interest in Atlantic Coast Pipeline. See Note 7 to the financial statements under "Southern Company Gas" for additional information.

Wholesale Gas Services

Wholesale gas services is involved in asset management and optimization, storage, transportation, producer and peaking services, natural gas supply, natural gas services, and wholesale gas marketing. Southern Company Gas has positioned the business to generate positive economic earnings on an annual basis even under low volatility market conditions that can result from a number of factors. When market price volatility increases, wholesale gas services is well positioned to capture significant value and generate stronger results. Operating expenses primarily reflect employee compensation and benefits.

Net income in 2020 decreased $149 million, or 91%, compared to the prior year. This decrease primarily relates to a $200 million decrease in adjusted operating margin, partially offset by a $49 million decrease in income taxes due to lower pre-tax earnings.

Details of adjusted operating margin are provided in the table below.


	2020		2019
	(in millions)
Commercial activity recognized	$	(40)	$	54
Gain on storage derivatives	8		40
Gain on transportation and forward commodity derivatives	106		186
LOCOM adjustments, net of current period recoveries	—		(16)
Purchase accounting adjustments to fair value inventory and contracts	(1)		9
Adjusted operating margin	$	73	$	273

Change in Commercial Activity

The commercial activity at wholesale gas services includes recognition of storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. The decrease in commercial activity in 2020 compared to the prior year was primarily due to warmer-than-normal weather conditions and tightening transportation spreads.

Change in Storage and Transportation Derivatives

Volatility in the natural gas market arises from a number of factors, such as weather fluctuations or changes in supply or demand for natural gas in different regions of the U.S. The volatility of natural gas commodity prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of wholesale gas services to capture value from locational and seasonal spreads. Forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions in 2020 resulted in storage derivative gains. Transportation and forward commodity derivative gains in 2020 are primarily the result of narrowing transportation spreads due to supply constraints and increases in natural gas supply, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.

The natural gas that wholesale gas services purchases and injects into storage is accounted for at the LOCOM value utilizing gas daily or spot prices at the end of the year. See Note 1 to the financial statements under "Natural Gas for Sale" for additional information.

Withdrawal Schedule and Physical Transportation Transactions

II-38

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

delivery points. Wholesale gas services' expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, and exclude estimated profit sharing under asset management agreements. Further, the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at December 31, 2020. A portion of wholesale gas services' storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.


	Storage Withdrawal			Physical Transportation Transactions
	Total storage(a)	Expected net operating gains (losses)(b)		Expected net operating gains (losses)(c)
	(in mmBtu in millions)	(in millions)		(in millions)
2021	40	$	23	$	(65)
2022 and thereafter	7	6		(41)
Total at December 31, 2020	47	$	29	$	(106)

(a)At December 31, 2020, the WACOG of wholesale gas services' expected natural gas withdrawals from storage was $1.81 per mmBtu.

(b)Represents expected operating gains from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations.

(c)Represents the expected net losses during the periods in which the derivatives will be settled and the physical transportation transactions will occur that offset the derivative gains and losses previously recognized.

Gas Marketing Services

Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts.

Net income increased $6 million, or 7%, in 2020 compared to the prior year. This increase primarily relates to a $6 million increase in adjusted operating margin, which primarily reflects recovery of prior period hedge losses.

All Other

All other includes natural gas storage businesses, including Jefferson Island through its sale on December 1, 2020, fuels operations through the sale of Southern Company Gas' interest in Pivotal LNG on March 24, 2020, the investment in Triton through its sale on May 29, 2019, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense) associated with affiliate financing arrangements.

Net loss decreased $90 million, or 98%, in 2020 compared to the prior year. This decrease primarily reflects a $146 million decrease in operating expenses primarily related to impairment charges in 2019 of $91 million related to Jefferson Island and $24 million in contemplation of the sale of Southern Company Gas' interests in Pivotal LNG and Atlantic Coast Pipeline. Also included was the $22 million pre-tax gain on the sale of Jefferson Island and a $5 million increase in earnings from equity method investments primarily due to a pre-tax loss on the sale of Triton in 2019, partially offset by a $65 million increase in income taxes as a result of lower pre-tax losses. See Note 15 to the financial statements under "Southern Company Gas"for additional information.

Segment Reconciliations

Reconciliations of operating income to adjusted operating margin for 2020 and 2019 are provided in the following tables. See Note 16 to the financial statements under "Southern Company Gas" for additional segment information.

II-39

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report


	2020
	Gas Distribution Operations		Gas Pipeline Investments		Wholesale Gas Services		Gas Marketing Services		All Other		Intercompany Elimination		Consolidated
	(in millions)
Operating Income (Loss)	$	655	$	20	$	20	$	119	$	(7)	$	5	$	812
Other operating expenses(a)	1,439		12		53		121		36		(11)		1,650
Revenue tax expense(b)	(104)		—		—		—		—		—		(104)
Adjusted Operating Margin	$	1,990	$	32	$	73	$	240	$	29	$	(6)	$	2,358


	2019
	Gas Distribution Operations		Gas Pipeline Investments		Wholesale Gas Services		Gas Marketing Services		All Other		Intercompany Elimination		Consolidated
	(in millions)
Operating Income (Loss)	$	573	$	20	$	219	$	112	$	(154)	$	—	$	770
Other operating expenses(a)	1,340		12		54		122		182		(7)		1,703
Revenue tax expense(b)	(114)		—		—		—		—		—		(114)
Adjusted Operating Margin	$	1,799	$	32	$	273	$	234	$	28	$	(7)	$	2,359

(a)Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, impairment charges and (gain) loss on dispositions, net.

(b)Nicor Gas' revenue tax expenses, which are passed through directly to customers.

FUTURE EARNINGS POTENTIAL

General

Prices for electric service provided by the traditional electric operating companies and natural gas distributed by the natural gas distribution utilities to retail customers are set by state PSCs or other applicable state regulatory agencies under cost-based regulatory principles. Retail rates and earnings are reviewed and may be adjusted periodically within certain limitations. 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 disposition activities described in Note 15 to the financial statements have reduced earnings for the applicable Registrants. The level of the Registrants' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Registrants' primary businesses of selling electricity and/or distributing natural gas, as described further herein.

For the traditional electric operating companies, these factors include the ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs during a time of increasing costs, continued customer growth, and the trend of reduced electricity usage per customer, especially in residential and commercial markets. For Georgia Power, completing construction of Plant Vogtle Units 3 and 4 and related cost recovery proceedings is another major factor.

Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce transactions, which could contribute to a net reduction in customer usage.

Global and U.S. economic conditions have been significantly affected by a series of demand and supply shocks that have caused a global and national economic recession. Most prominently, the COVID-19 pandemic has negatively impacted global supply chains and global demand for goods and services and public policy responses of social distancing and closing non-essential businesses have further restricted economic activity. The drivers, speed, and depth of this economic contraction are unprecedented and have reduced energy demand across the Southern Company system's service territory, primarily in the commercial and industrial classes. The negative impacts, which started in late-March 2020, of the COVID-19 pandemic and related recession on the Southern Company system's retail electric sales began to improve in the middle of May 2020; however, retail electric revenues declined slightly in 2020 compared to 2019. Recovery is expected to continue into the second half of 2021, but responses to the

II-40

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

COVID-19 pandemic by both customers and governments could significantly affect the pace of recovery. The ultimate extent of the negative impact on revenues depends on the depth and duration of the economic contraction in the Southern Company system's service territory and cannot be determined at this time. See RESULTS OF OPERATIONS herein for information on COVID-19-related impacts on energy demand in the Southern Company system's service territory during 2020.

The traditional electric operating companies have established installment payment plans to allow customers to repay over a period of time past due accounts resulting from the COVID-19 pandemic. See Note 2 to the financial statements for additional information on the status of disconnections and the deferral of costs resulting from the COVID-19 pandemic at Georgia Power, Mississippi Power, and the natural gas distribution utilities. The ultimate outcome of these matters cannot be determined at this time.

The level of future earnings for Southern Power's competitive wholesale electric business depends on numerous factors including Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects while containing costs, as well as regulatory matters, creditworthiness of customers, total electric generating capacity available in Southern Power's market areas, and Southern Power's ability to successfully remarket capacity as current contracts expire. In addition, renewable portfolio standards, availability of tax credits, transmission constraints, cost of generation from units within the Southern Company power pool, and operational limitations could influence Southern Power's future earnings.

The level of future earnings for Southern Company Gas' primary business of distributing natural gas and its complementary businesses in the gas pipeline investments, wholesale gas services, 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, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, and Southern Company Gas' ability to optimize its transportation and storage positions and to re-contract storage rates at favorable prices. The volatility of natural gas prices has an impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a portion of Southern Company Gas' operations to earnings variability. Over the longer term, volatility is expected to be low to moderate and locational and/or transportation spreads are expected to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of the Northeast U.S. To the extent these pipelines are delayed or not built, volatility could increase. See Note 3 to the financial statements under "Other Matters – Southern Company Gas – PennEast Pipeline Project" for additional information on permitting challenges experienced by the PennEast Pipeline. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. In addition, if the COVID-19 pandemic results in continued economic uncertainty for a sustained period, demand for natural gas may decrease, resulting in further downward pressure on natural gas prices and lower volatility in the natural gas markets on a longer-term basis.

Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, government incentives to reduce overall energy usage, the prices of electricity and natural gas, and the price elasticity of demand. Demand for electricity and natural gas in the Registrants' service territories is primarily driven by the pace of economic growth or decline that may be affected by changes in regional and global economic conditions, which may impact future earnings.

Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based electric tariffs which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of Mississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers.

As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of 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 ~~also have identified~~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.

II-41

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Environmental Matters

The Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and 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. 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 ~~obligations, such as obligations related to certain electric transmission~~ and ~~distribution facilities, certain asbestos containing material within long-term assets not~~replacement decisions (which are subject to ~~ongoing repair~~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 ~~maintenance activities,~~monitoring of CCR facilities, unit retirements, or changing fuel sources for certain ~~wireless communication towers, the disposal of polychlorinated biphenyls in certain transformers, leasehold improvements, equipment on customer property, and property associated with~~existing units, as well as related upgrades to the Southern Company system's ~~rail lines~~transmission and distribution (electric and natural ~~gas pipelines. However, liabilities~~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, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of operations for the ~~removal~~Subsidiary Registrants. The impact of ~~these assets have not been recorded as the fair value of the retirement obligations~~any such changes 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 retirement obligation.~~

~~The cost estimates for AROs related to the disposal of CCR are based on information using various assumptions related to closure and post-closure~~determined at this time. Environmental compliance costs ~~timing of future~~could affect earnings, cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule. During 2018, Alabama Power and Georgia Power recorded increases of approximately $1.2 billion and $3.1 billion, respectively, to their AROs related to the disposal of CCR and increases of approximately $300 million and $130 million, respectively, to their AROs related to updated nuclear decommissioning cost site studies. Alabama Power's CCR-related update resulted from feasibility studies performed on ash ponds in use at the plants it operates, which indicated that additional closureflows, and/or financial condition if such costs primarily related to increases in estimated ash volume, water management requirements, and design revisions, will be required to close these ash ponds under the planned closure-in-place methodology. Georgia Power's CCR-related update resulted from a strategic assessment which indicated additional closure costs will be required to close its ash ponds, primarily due to changes in closure strategies, the estimated amount of ashcannot continue to be ~~excavated, and additional water management requirements necessary to support closure strategies. The~~recovered on a timely basis in rates for the traditional electric operating companies ~~expect~~and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power.

Alabama Power and Mississippi Power recover environmental compliance costs through separate mechanisms, Rate CNP Compliance and the ECO Plan, respectively. Georgia Power's base rates include an ECCR tariff that allows for the recovery of environmental compliance costs. The natural gas distribution utilities of Southern Company Gas generally recover environmental remediation expenditures through rate mechanisms approved by their applicable state regulatory agencies. See Notes 2 and 3 to ~~periodically update~~the financial statements for additional information.

Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations. Since Southern Power's units are generally newer natural gas and renewable generating facilities, costs associated with environmental compliance for these facilities have been less significant than for similarly situated coal or older natural gas generating facilities. Environmental, natural resource, and land use concerns, including the applicability of air quality limitations, the potential presence of wetlands or threatened and endangered species, the availability of water withdrawal rights, uncertainties regarding impacts such as increased light or noise, and concerns about potential adverse health impacts can, however, increase the cost of siting and operating any type of future electric generating 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 for some 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 2025 based on the current environmental compliance strategy for the Southern Company system and the traditional electric operating companies are as follows:


	2021		2022		2023		2024		2025		Total
	(in millions)
Southern Company	$	120	$	145	$	257	$	255	$	152	$	929
Alabama Power	67		78		78		99		70		392
Georgia Power	34		42		164		151		59		450
Mississippi Power	19		15		9		5		14		62

These estimates do not include any costs associated with potential regulation of GHG emissions. See "Global Climate Issues" herein for additional information. The Southern Company system also anticipates substantial expenditures associated with ash

II-42

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

pond closure and ground water monitoring under the CCR Rule and related state rules, which are reflected in the applicable Registrants' ARO ~~cost estimates.~~liabilities. See ~~FUTURE EARNINGS POTENTIAL~~FINANCIAL CONDITION AND LIQUIDITY – "~~Environmental Matters~~ – ~~Environmental Laws and Regulations~~ – ~~Coal Combustion Residuals~~""Cash Requirements" herein and Note 6 to the financial statements for additional information.

~~Given~~Environmental Laws and Regulations

Executive Orders

On January 20, 2021, President Biden issued a regulatory freeze that requires further reviews of certain regulatory actions authorized under the ~~significant judgment involved in estimating AROs,~~previous administration before they become effective. President Biden also signed executive orders related to federal regulations and subsequently signed additional orders to address climate change and other environmental issues.

Air Quality

The Southern Company ~~considers~~system reduced SO2 and NOX air emissions by 99% and 91%, respectively, from 1990 to 2019. The Southern Company system reduced mercury air emissions by over 97% from 2005 to 2019.

The EPA finalized regional haze regulations in 2005 and 2017. These regulations require states, tribal governments, and various federal agencies to develop and implement plans to reduce pollutants that impair visibility and demonstrate reasonable progress toward the ~~liabilities~~goal of restoring natural visibility conditions in certain areas, including national parks and wilderness areas. States are required to submit state implementation plans for ~~AROs~~the second 10-year planning period (2018 through 2028) by July 31, 2021. These plans could require further reductions in particulate matter, SO2, and/or NOX, which could result in increased compliance costs at affected electric generating units.

Water Quality

In 2014, the EPA finalized requirements under Section 316(b) of the Clean Water Act (CWA) to regulate cooling water intake structures (CWIS) to minimize their effects on fish and other aquatic life at existing power plants. The regulation requires plant-specific studies to determine applicable CWIS changes to protect organisms. The results of these plant-specific studies, which are ongoing within the Southern Company system, are being submitted with each plant's next National Pollutant Discharge Elimination System (NPDES) permit cycle. The Southern Company system anticipates applicable CWIS changes may include fish-friendly CWIS screens with fish return systems and minor additions of monitoring equipment at certain plants. The impact of this rule will depend on the outcome of these plant-specific studies, any additional protective measures required to be ~~critical accounting estimates.~~incorporated into each plant's NPDES permit based on site-specific factors, and the outcome of any legal challenges.

~~Pension~~In 2015, the EPA finalized the steam electric effluent limitations guidelines (ELG) rule (2015 ELG Rule) that set national standards for wastewater discharges from new and ~~Other Postretirement Benefits~~

existing steam electric generating units generating greater than 50 MWs, including substantially all of the coal-fired generating units in the Southern ~~Company's calculation~~Company system. The 2015 ELG Rule prohibits effluent discharges of ~~pension~~certain wastestreams and ~~other postretirement benefits expense~~imposes stringent limits on flue gas desulfurization (FGD) wastewater discharges. On October 13, 2020, the EPA published the final ELG reconsideration rule, a reconsideration of the 2015 ELG Rule's limits on bottom ash transport water and FGD wastewater that extends the latest applicability date for both discharges to December 31, 2025. The ELG reconsideration rule also updates the voluntary incentive program and provides new subcategories for low utilization electric generating units and electric generating units that will permanently cease coal combustion by 2028. An initial notice of planned participation (NOPP) must be submitted to the applicable permitting authority no later than October 13, 2021 for units seeking to qualify for these subcategories. A subsequent NOPP must be submitted to transfer a unit to an alternative compliance option. The 2015 ELG Rule and the ELG reconsideration rule (ELG rules) are expected to require capital expenditures and increased operational costs for the traditional electric operating companies and SEGCO. For Georgia Power's Plant Wansley Units 1 and 2, which are currently challenged due to their operating profiles and positions within the economic dispatch, the anticipated cost of the controls necessary to comply with the ELG rules could accelerate a determination that continued operation is ~~dependent~~uneconomical. As a result, Georgia Power may request in its 2022 IRP filing to accelerate the retirement of these units, which had a net book value totaling approximately $665 million at December 31, 2020. However, the ultimate impact of the ELG rules will depend on ~~a number~~the Southern Company system's final assessment of ~~assumptions. These assumptions include discount rates, healthcare cost trend rates, expected long-term return on plan assets, mortality rates, expected salary~~compliance options, the incorporation of these assessments into each of the traditional electric operating company's IRP processes, the incorporation of these new requirements into each generating unit's NPDES permit, and ~~wage increases,~~the outcome of legal challenges. The ELG reconsideration rule has been challenged by several environmental organizations and ~~other factors. Components~~the cases have been consolidated in the U.S. Court of ~~pension and other postretirement benefits expense include~~Appeals for the Fourth Circuit.

II-43

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Coal Combustion Residuals

~~interest~~In 2015, the EPA finalized non-hazardous solid waste regulations for the disposal of CCR, including coal ash and ~~service cost on~~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 ~~pension~~CCR Rule. The EPA is in the process of amending portions of the CCR Rule.

In addition to the CCR Rule, the States of Alabama and ~~other postretirement benefit plans, expected return on plan assets, and amortization~~Georgia finalized state regulations regarding the handling of ~~certain unrecognized costs and obligations. Actual results that differ~~CCR within their respective states. The State of Georgia received approval from the ~~assumptions utilized~~EPA on its partial permit program implementing the state CCR permit program in lieu of the federal self-implementing rule in accordance with the Water Infrastructure Improvements for the Nation Act. On February 15, 2021, revisions to align State of Alabama regulations with the federal CCR Rule became effective, as approved by the Alabama Environmental Management Commission. The State of Mississippi has not yet developed a state CCR permit program.

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 ash pond 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 ~~accumulated~~subject to approval by environmental regulatory agencies. Absent continued recovery of ARO costs through regulated rates, results of operations, cash flows, and ~~amortized over future periods and, therefore, generally affect recognized expense~~financial condition for Southern Company and the recorded obligation in future periods. While Southern Company believes that the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect its pension and other postretirement benefit costs and obligations.

Key elements in determining Southern Company's pension and other postretirement benefit expense are the expected long-term return on plan assets and the discount rate used to measure the benefit plan obligations and the periodic benefit plan expense for future periods. The expected long-term return on pension and other postretirement benefit plan assets is based on Southern Company's investment strategy, historical experience, and expectations for long-term rates of return that consider external actuarial advice. Southern Company determines the long-term return on plan assets by applying the long-term rate of expected returns on various asset classes to Southern Company's target asset allocation. For purposes of determining its liability relatedtraditional electric operating companies could be materially impacted. See FINANCIAL CONDITION AND LIQUIDITY – "Cash Requirements," Note 2 to the ~~pension~~financial statements under "Georgia Power – Rate Plans," 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 following table illustrates the sensitivity to changes in Southern Company's long-term assumptions with respect to the discount rate, salary increases, and the long-term rate of return on plan assets:



~~Change in Assumption~~	~~Increase/(Decrease) in Total Benefit Expense for 2019~~	~~Increase/(Decrease) in Projected Obligation for Pension Plan at December 31, 2018~~	~~Increase/(Decrease) in Projected Obligation for Other Postretirement Benefit Plans at December 31, 2018~~
	~~(in millions)~~
~~25 basis point change in discount rate~~	~~$37/$(36)~~	~~$434/$(411)~~	~~$50/$(48)~~
~~25 basis point change in salaries~~	~~$11/$(11)~~	~~$105/$(101)~~	~~$–/$–~~
~~25 basis point change in long-term return on plan assets~~	~~$33/$(33)~~	~~N/A~~	~~N/A~~

~~N/A – Not applicable~~

~~See~~ Note 116 to the financial statements for additional ~~information regarding pension and other postretirement benefits.~~information.

~~Goodwill and Other Intangible Assets~~Environmental Remediation

The ~~acquisition method of accounting requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values.~~ Southern Company ~~recognizes goodwill as~~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 ~~acquisition date, as a residual over~~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 ~~fair values~~extent of any required cleanup and have recognized the ~~identifiable net assets acquired. Goodwill is tested~~estimated costs to clean up known impacted sites in their financial statements. Amounts for ~~impairment on an annual basis~~cleanup and ongoing monitoring costs were not material for any year presented. The traditional electric operating companies and the natural gas distribution utilities in ~~the fourth quarter of the year as well as on an interim basis as events~~Illinois and ~~changes in circumstances occur. Primarily as a result of the acquisitions~~Georgia (which represent substantially all of Southern Company Gas' accrued remediation costs) have all received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental remediation costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies. The traditional electric operating companies and Southern Company Gas may be liable for some or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements under "Environmental Remediation" for additional information.

Global Climate Issues

In July 2019, the EPA published the final Affordable Clean Energy rule (ACE Rule) to repeal and ~~PowerSecure~~replace the CPP. The ACE Rule requires states to develop unit-specific CO2 emission rate standards for existing coal-fired units based on heat-rate efficiency improvements. On January 19, 2021, the D.C. Circuit Court of Appeals vacated and remanded the ACE Rule back to the EPA. Once the decision becomes final, the ACE Rule will no longer be in ~~2016, goodwill totaled approximately $5.3 billion at December 31, 2018. As~~effect.

On January 20, 2021, President Biden accepted the Paris Agreement on behalf of the United States, which will result in the United States officially becoming a ~~result~~party to the agreement on February 19, 2021. 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.

Additional GHG policies, including legislation, may emerge in the future requiring the United States to transition to a lower GHG emitting economy; however, associated impacts are currently unknown. The Southern Company system has transitioned from an electric generating mix of 70% coal and 15% natural gas in 2007 to a mix of 18% coal and 53% natural gas in 2020, along with over 10,000 MWs of renewable resource capacity. This transition has been supported in part by the Southern Company ~~Gas Dispositions, goodwill was reduced by $910 million during 2018.~~system retiring over 5,600 MWs of coal- and oil-fired generating capacity since 2010 and converting over 3,400 MWs of generating capacity from coal to natural gas since 2015. In addition, Southern Company Gas ~~recorded a $42~~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 ~~goodwill impairment charge in 2018 in contemplation~~metric tons of ~~the sale of Pivotal Home Solutions.~~

Definite-lived intangible assets acquired are amortized over the estimated useful lives of the respective assets to reflect the pattern in which the economic benefits of the intangible assets are consumed. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment. Primarily as a result of the acquisitions of Southern Company Gas and PowerSecure and PPA fair value adjustments resultingCO2 equivalents from ~~Southern Power's acquisitions, other intangible assets, net of amortization totaled approximately $613 million at December 31, 2018.~~

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 Southern Company'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, Southern Company considers these estimates to be critical accounting estimates.

~~See Note 1 to the financial statements under "Goodwill and Other Intangible Assets and Liabilities" for additional information regarding Southern Company's goodwill and other intangible assets and Note 15 to the financial statements for additional~~its natural gas distribution system since 1998.

II-44

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

The following table provides the Registrants' 2019 and preliminary 2020 GHG emissions based on equity share of facilities:

~~information related~~


	2019	Preliminary 2020
	(in million metric tons of CO2 equivalent)
Southern Company(*)	88	75
Alabama Power	33	28
Georgia Power	28	21
Mississippi Power	9	8
Southern Power(*)	13	12
Southern Company Gas	1	1

(*)Includes GHG emissions attributable to ~~Southern Company's 2016 acquisitions of Southern Company Gas and PowerSecure, as well as~~disposed assets through the ~~Southern Company Gas Dispositions.~~

~~Derivatives and Hedging Activities~~

Derivative instruments are recorded on the balance sheets as either assets or liabilities measured at their fair value, unless the transactions qualify for the normal purchases or normal sales scope exception and are instead subject to traditional accrual accounting. For those transactions that do not qualify as a normal purchase or normal sale, changes in the derivatives' fair values are recognized concurrently in earnings unless specific hedge accounting criteria are met. If the derivatives meet those criteria, derivative gains and losses offset related resultsdate of the hedged item in the income statement in the case of a fair value hedge, or gains and losses are deferred in OCI until the hedged transaction affects earnings in the case of a cash flow hedge. Certain subsidiaries of Southern Company enter into energy-related derivatives that are designated as regulatory hedges where gains and losses are initially recorded as regulatory liabilities and assets and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through billings to customers.

Southern Company uses derivative instruments to reduce the impact to the results of operations due to the risk of changes in the price of natural gas, to manage fuel hedging programs per guidelines of state regulatory agencies,applicable disposition and to ~~mitigate residual changes in~~acquired assets beginning with the price of electricity, weather, interest rates, and foreign currency exchange rates. The fair value of commodity derivative instruments used to manage exposure to changing prices reflects the estimated amounts that Southern Company would receive or pay to terminate or close the contracts at the reporting date. To determine the fair valuedate of the derivative instruments, Southern Company utilizes market data or assumptions that market participants would use in pricing the derivative asset or liability, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

Southern Company classifies derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The determination of the fair value of the derivative instruments incorporates various required factors. These factors include:

~~the creditworthiness of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit);~~

~~events specific to a given counterparty; and~~

~~the impact of Southern Company's nonperformance risk on its liabilities.~~

~~Given the assumptions used in pricing the derivative asset or liability, Southern Company considers the valuation of derivative assets and liabilities a critical accounting estimate.~~applicable acquisition. See ~~FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" herein and~~ Note 1415 to the financial statements for ~~more~~additional information.

~~Contingent Obligations~~With 2007 as a baseline, in 2018, Southern Company system management established an interim goal of a 50% reduction in carbon emissions by 2030 and a long-term goal of low- to no-carbon operations by 2050. In 2020, Southern Company system management updated the long-term GHG emissions reduction goal to net zero emissions by 2050. Based on the preliminary 2020 emissions, the Southern Company system achieved an estimated GHG emission reduction of 52% since 2007. In 2020, the combination of the COVID-19 pandemic and relatively mild weather significantly reduced demand. As these factors fluctuate, coal generation and GHG emissions may temporarily increase in future years. Southern Company system management expects to achieve sustained GHG emissions reductions of at least 50% as early as 2025. Southern Company system management, working with applicable regulators, plans to transition its generating fleet in a manner responsible to customers, communities, employees, and other stakeholders. Achievement of these goals is dependent on many factors, including natural gas prices and the pace and extent of development of low- to no-carbon energy technologies and negative carbon concepts. Southern Company system management will continue to pursue a diverse portfolio including low-carbon and carbon-free resources and energy efficiency resources; 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, and customers to support outcomes leading to a net zero future.

Regulatory Matters

See OVERVIEW – "Recent Developments" herein and Note 2 to the financial statements for a discussion of regulatory matters related to Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas, including items that could impact the applicable registrants' future earnings, cash flows, and/or financial condition.

Construction Programs

The Subsidiary Registrants are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, expanding and improving the electric transmission and electric and natural gas distribution systems, and undertaking projects to comply with environmental laws and regulations.

For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information. Also see Note 2 to the financial statements under "Alabama Power – Petition for Certificate of Convenience and Necessity" for information regarding Alabama Power's construction of Plant Barry Unit 8.

See Note 15 to the financial statements under "Southern Power" for information about costs relating to Southern Power's acquisitions that involve construction of renewable energy facilities.

Southern Company Gas is ~~subject~~engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a ~~number of federal and state laws and regulations as well as other factors and conditions that subject it to environmental, litigation, and other risks.~~return associated with these infrastructure programs through their regulated rates. See ~~FUTURE EARNINGS POTENTIAL herein and~~ Notes 2 and 3 to the financial statements ~~for more information regarding certain of these contingencies.~~under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" and "Other Matters – Southern Company periodically evaluates its exposure to such risks and records 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 Southern Company's results of operations, cash flows, or financial condition.

~~Recently Issued Accounting Standards~~

~~See Note 1 to the financial statements under~~ Gas – PennEast Pipeline Project,"~~Recently Adopted Accounting Standards~~" respectively, for additional ~~information.~~

~~In 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ ~~(ASU 2016-02). ASU 2016-02 requires lessees to recognize~~information on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged and there is no change to the accounting for existing leveraged leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and Southern Company ~~adopted the new standard effective January 1, 2019.~~

~~Southern Company elected the transition methodology provided by ASU No. 2018-11,~~ ~~Leases (Topic 842): Targeted Improvements~~, whereby the requirements of ASU 2016-02 are applied on a prospective basis as of the adoption date of January 1, 2019, without restating prior periods. Southern Company elected the package of practical expedients provided by ASU 2016-02Gas' construction program.

II-45

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

that allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. Additionally, Southern Company applied the use-of-hindsight practical expedient in determining lease terms as of the date of adoption and elected the practical expedient that allows existing land easements not previously accounted for as leases not to be reassessed. Southern Company also made accounting policy elections to account for short-term leases in all asset classes as off-balance sheet leases and combined lease and non-lease components in the computations of lease obligations and right-of-use assets for most asset classes.

The Southern Company system completed the implementation of a new application to track and account for its leases and updated its internal controls and accounting policies to support the accounting for leases under ASU 2016-02. The Southern Company system completed its lease inventory and determined its most significant leases involve PPAs, real estate, and communication towers where certain of Southern Company's subsidiaries are the lessee and PPAs where certain of Southern Company's subsidiaries are the lessor. In the first quarter 2019, the adoption of ASU 2016-02 resulted in recording lease liabilities and right-of-use assets on Southern Company's balance sheet each totaling approximately $2.0 billion, with no impact on Southern Company's statement of income.

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.

~~Overview~~

~~Earnings~~Southern Power's Power Sales Agreements

General

Southern Power has PPAs with some of the traditional electric operating companies, other investor-owned utilities, IPPs, municipalities, and other load-serving entities, as well as commercial and industrial customers. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

Many of Southern Power's PPAs have provisions that require Southern Power or the counterparty to post collateral or an acceptable substitute guarantee if (i) S&P or Moody's downgrades the credit ratings of the respective company to an unacceptable credit rating, (ii) the counterparty is not rated, or (iii) the counterparty fails to maintain a minimum coverage ratio.

Southern Power is working to maintain and expand its share of the wholesale markets. During 2020, Southern Power continued to be successful in ~~all periods presented were negatively affected~~remarketing 350 MWs to 1,130 MWs of annual natural gas generation capacity to load-serving entities through several PPAs extending over the next 17 years. Market demand is being driven by ~~charges associated with plants under construction; however,~~ load-serving entities replacing expired purchase contracts and/or retired generation, as well as planning for future growth. However, generation capacity market forecasts indicate an oversupply, especially in the Southeast, and the highly competitive remarketing environment is expected to continue in the near term.

Natural Gas

Southern ~~Company's financial condition remained stable at December 31, 2018.~~

~~The Southern Company system's cash requirements~~Power's electricity sales from natural gas facilities are primarily through long-term PPAs that consist of ~~funding ongoing operations, common stock dividends, capital expenditures,~~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 ~~debt maturities. The Southern Company system's capital expenditures and other investing activities include investments to meet projected long-term demand~~energy requirements including to build new electric generation facilities, to maintain existing electric generation facilities, to comply with environmental regulations including adding environmental modifications to certain existing electricfrom a combination of the customer's own generating units and ~~closures of ash ponds,~~from Southern Power resources not dedicated to ~~expand and improve electric transmission and distribution facilities,~~serve unit or block sales. Southern Power has rights to ~~update and expand natural gas distribution systems, and for restoration following major storms. Operating cash flows provide~~purchase power provided by the requirements customers' resources when economically viable.

As a ~~substantial portion~~general matter, substantially all of the PPAs provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern ~~Company system's cash needs. For~~Power for substantially all of the ~~three-year period from 2019 through 2021, Southern Company's projected common stock dividends, capital expenditures, and debt maturities are expected~~cost of fuel or purchased power relating to exceed operating cash flows. Southern Company plans to finance future cash needs in excess of its operating cash flows primarily by accessing borrowings from financial institutions and through debt and equity issuancesthe energy delivered under such PPAs. To the extent a particular generating facility does not meet the operational requirements contemplated in the ~~capital markets.~~PPAs, Southern ~~Company intends~~Power may be responsible for excess fuel costs. With respect to ~~continue to monitor its access to short-term and long-term capital markets as well as bank credit arrangements to meet future capital and liquidity needs. See "Sources~~fuel transportation risk, most of ~~Capital," "Financing Activities," and "Capital Requirements and Contractual Obligations" herein~~Southern Power's PPAs provide that the counterparties are responsible for ~~additional information.~~

~~Southern Company's investments in~~ the ~~qualified pension plans and the nuclear decommissioning trust funds decreased in value at December 31, 2018 as compared to December 31, 2017. No contributions~~availability of fuel transportation to the ~~qualified pension plan were made for~~particular generating facility.

Capacity charges that form part of the ~~year ended December 31, 2018~~PPA payments are designed to recover fixed and ~~no mandatory contributions~~variable operation and maintenance costs based on dollars-per-kilowatt year. In general, to ~~the qualified pension plans are anticipated during 2019.~~reduce Southern Power's exposure to certain operation and maintenance costs, Southern Power has LTSAs. See "~~Contractual Obligations" herein and Notes 6 and 11~~Note 1 to the financial statements under "~~Nuclear Decommissioning" and "Pension Plans," respectively,~~"Long-Term Service Agreements" for additional information.

~~Net cash provided~~Solar and Wind

Southern Power's electricity sales from ~~operating activities in 2018 totaled $6.9 billion,~~solar and wind (renewable) generating facilities are also primarily through long-term PPAs; however, these solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an ~~increase of $0.6 billion from 2017. The increase in net cash provided from operating activities was primarily due~~energy charge or provide Southern Power a certain fixed price for the electricity sold to the ~~timing~~grid. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of ~~vendor payments~~energy generated from these facilities, which can be impacted by weather conditions, equipment performance, transmission constraints, and increased fuel cost recovery. Net cash provided from operating activities in 2017 totaled $6.4 billion, an increase of $1.5 billion from 2016. Significant changes in operating cash flow for 2017 as comparedother factors. Generally, under the renewable generation PPAs, the purchasing party retains the right to ~~2016 included increases of $1.2 billion related to operating activities of Southern Company Gas, which was acquired on July 1, 2016, and $1.0 billion related to voluntary contributions to~~keep or resell the ~~qualified pension plan in 2016, partially offset by the timing of vendor payments.~~renewable energy credits.

Net cash used for investing activities in 2018, 2017, and 2016 totaled $5.8 billion, $7.2 billion, and $20.0 billion, respectively. The cash used for investing activities in 2018 was primarily due to the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities and capital expenditures for

Southern Company Gas' ~~infrastructure replacement programs, partially offset by proceeds from~~Affiliate Asset Management Agreements

With the ~~sale transactions described in Note 15~~exception of Nicor Gas, the natural gas distribution utilities use asset management agreements with an affiliate, Sequent, for the primary purpose of reducing utility customers' gas cost recovery rates through payments to the ~~financial statements. The cash used~~utilities by Sequent. For Atlanta Gas Light, these payments are set by the Georgia PSC and are utilized for ~~investing activities in 2017 was primarily due~~infrastructure improvements and to fund heating assistance programs, rather than as a reduction to gas cost recovery rates. Under these asset management agreements, Sequent supplies natural gas to the ~~traditional electric operating companies' installation~~utility and markets available pipeline and storage capacity to improve the overall cost of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities, capital expenditures for Southern Company Gas' infrastructure replacement programs, and Southern Power's renewable acquisitions. The cash used for investing activities in 2016 was primarily duesupplying gas to the ~~closing of~~utility customers. Currently, the ~~Merger, the acquisition of PowerSecure, Southern Company Gas' investment in SNG, the traditional electric operating companies' construction of electric generation, transmission, and~~natural gas distribution ~~facilities and~~utilities primarily purchase their gas from

II-46

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

~~installation of equipment at electric generating facilities~~Sequent. The purchase agreements require Sequent to ~~comply with environmental standards, and Southern Power's acquisitions and construction of renewable facilities and a~~provide firm gas to the natural gas ~~facility.~~distribution utilities, but the natural gas distribution utilities maintain the right and ability to make their own long-term supply arrangements if they believe it is in the best interest of their customers.

~~Net cash used~~Each agreement provides for ~~financing activities totaled $1.8 billion in 2018 primarily due~~Sequent to ~~net redemptions and repurchases~~make payments to the natural gas distribution utility through an annual minimum guarantee within a profit sharing structure, a profit sharing structure without an annual minimum guarantee, or a fixed fee.

Income Tax Matters

Consolidated Income Taxes

The impact of long-term debt, common stock dividend payments, and a decrease in commercial paper borrowings, partially offset by net issuances of short-term bank debt, proceeds from Southern Power's sales of non-controlling equity interests in entities indirectly owning substantially all of its solar facilities and eight of its wind facilities, and the issuance of common stock. Net cash provided from financing activities totaled $1.0 billion in 2017 primarily due to net issuances of long-term and short-term debt, partially offset by common stock dividend payments. Net cash provided from financing activities totaled $15.7 billion in 2016 primarily due to issuances of long-term debt and common stock associated with completing the Merger and funding the subsidiaries' continuous construction programs, Southern Power's acquisitions, andcertain tax events at Southern Company ~~Gas' investment in SNG, partially offset by redemptions~~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 ~~long-term debt~~Critical Accounting Policies and ~~common stock dividend payments. Fluctuations in cash flow from financing activities vary from year to year based on capital needs~~Estimates – Accounting for Income Taxes" herein and ~~the maturity or redemption of securities.~~

Significant balance sheet changes in 2018 included the reclassification of $5.7 billion and $3.3 billion in total assets and liabilities held for sale, respectively, primarily associated with Gulf Power, as well as decreases of $3.0 billion and $0.4 billion in total assets and liabilities, respectively, associated with the sales described in Note ~~15 to the financial statements under "Southern Power" and "Southern Company Gas." Also see Note 15 to the financial statements under "Southern Company's Sale of Gulf Power" and "Assets Held for Sale~~" for additional information. After adjusting for these changes, other significant balance sheet changes included an increase of $7.1 billion in total property, plant, and equipment primarily related to the $4.7 billion increase in AROs at Alabama Power and Georgia Power, as well as the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities and Southern Company Gas' capital expenditures for infrastructure replacement programs, partially offset by the second quarter 2018 charge related to the construction of Plant Vogtle Units 3 and 4; a decrease of $3.1 billion in long-term debt (including amounts due within one year) resulting from the repayment of long-term debt; an increase of $3.0 billion in noncontrolling interests at Southern Power as a result of sales of interests in entities indirectly owning substantially all of its solar facilities and eight of its wind facilities; and an increase of $1.9 billion in other regulatory assets, deferred primarily related to AROs at Georgia Power. See Notes 2 and 15 to the financial statements under "~~Georgia Power~~ – ~~Nuclear Construction" and "Southern Power~~ – ~~Sales of Renewable Facility Interests," respectively, as well as Notes 6 and 8 to the financial statements and "Financing Activities" herein for additional information.~~

At the end of 2018, the market price of Southern Company's common stock was $43.92 per share (based on the closing price as reported on the NYSE) and the book value was $23.91 per share, representing a market-to-book value ratio of 184%, compared to $48.09, $23.99, and 201%, respectively, at the end of 2017.

~~Southern Company's consolidated ratio of common equity to total capitalization plus short-term debt was 32.5% and 31.5% at December 31, 2018 and 2017, respectively. See Note 8~~10 to the financial statements for additional information.

~~Sources of Capital~~

Southern Company intends to meet its future capital needs through operating cash flows, borrowings from financial institutions, and debt and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The amount and timing of additional equity and debt issuances in 2019, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements and will depend upon prevailing market conditions and other factors. See "~~Capital Requirements and Contractual Obligations" herein for additional information.~~

Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, borrowings from financial institutions, and equity contributions or loans from Southern Company. Southern Power also plans to utilize tax equity partnership contributions, as well as funds resulting from its pending sale of Plant Mankato. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See Note 15 to the financial statements under "~~Southern Power~~ – ~~Sales of Natural Gas Plants" herein for additional information.~~

In addition, in 2014, Georgia Power entered into the Loan Guarantee Agreement with the DOE, under which the proceeds of borrowings may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4. Under the Loan Guarantee Agreement, the DOE agreed to guarantee borrowings of up to $3.46 billion (not to exceed 70% of Eligible Project Costs) to be made by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, and the FFB. At December 31, 2018, Georgia Power had borrowed $2.6 billion under

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

the FFB Credit Facility. In July 2017, Georgia Power entered into an amendment to the Loan Guarantee Agreement, which provides that further advances are conditioned upon the DOE's approval of any agreements entered into in replacement of the Vogtle 3 and 4 Agreement and satisfaction of certain other conditions.

In September 2017, the DOE issued a conditional commitment to Georgia Power for up to approximately $1.67 billion of additional guaranteed loans under the Loan Guarantee Agreement. This conditional commitment expires on March 31, 2019, subject to any further extension approved by the DOE. Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. See Note 8 to the financial statements under "~~Long-term Debt~~ – ~~DOE Loan Guarantee Borrowings~~" for additional information regarding the Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events (including any decision not to continue construction of Plant Vogtle Units 3 and 4), and additional conditions to borrowing. Also see Note 2 to the financial statements under "~~Georgia Power~~ – ~~Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.~~

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 and certain of its 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 continuously monitored and appropriate filings are made to ensure flexibility in the capital markets.

Southern Company, each traditional electric operating company, and Southern Power generally obtain financing separately without credit support from any affiliate. 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.

In addition, 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. 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.

~~See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information.~~

At December 31, 2018, Southern Company's current liabilities exceeded current assets by $4.7 billion, primarily due to $3.2 billion of long-term debt that is due within one year (including approximately $1.3 billion at the parent company, $0.2 billion at Alabama Power, $0.6 billion at Georgia Power, $0.6 billion at Southern Power, and $0.4 billion at Southern Company Gas) and $2.9 billion of notes payable (including approximately $1.8 billion at the parent company, $0.3 billion at Georgia Power, $0.1 billion at Southern Power, and $0.7 billion at Southern Company Gas). Subsequent to December 31, 2018, using proceeds from the sale of Gulf Power, the Southern Company parent entity repaid $0.7 billion of its long-term debt due within one year and all $1.8 billion of its notes payable at December 31, 2018. See "~~Financing Activities~~" herein for additional information. To meet short-term cash needs and contingencies, the Southern Company system has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional electric operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

At December 31, 2018, Southern Company and its subsidiaries had approximately $1.4 billion of cash and cash equivalents. Committed credit arrangements with banks at December 31, 2018 were as follows:

Expires Executable Term Loans Expires Within One Year
Company 2019
2020
2022 Total
Unused^(d)

One
Year

Two
Years
Term Out No Term Out
(in millions)
Southern Company^(a)
$ —
$ —
$ 2,000
$ 2,000
$ 1,999
$ —
$ —
$ —
$ —
Alabama Power 33
500
800
1,333
1,333
—
—
—
33
Georgia Power —
—
1,750
1,750
1,736
—
—
—
—
Mississippi Power 100
—
—
100
100
—
—
—
100
Southern Power^(b)
—
—
750
750
727
—
—
—
—
Southern Company Gas^(c)
—
—
1,900
1,900
1,895
—
—
—
—
Other 30
—
—
30
30
—
—
—
30
Southern Company Consolidated^(e)
$ 163
$ 500
$ 7,200
$ 7,863
$ 7,820
$ —
$ —
$ —
$ 163


~~(a)~~	~~Represents the Southern Company parent entity.~~


~~(b)~~	Does not include Southern Power Company's $120 million continuing letter of credit facility for standby letters of credit expiring in 2021, of which $17 million was unused at December 31, 2018. Southern Power's subsidiaries are not parties to its bank credit arrangement.

~~(c)~~

Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.4 billion of this arrangement. Southern Company Gas' committed credit arrangement also includes $500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas. Pursuant to this multi-year credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted.


~~(d)~~	~~Amounts used are for letters of credit.~~


~~(e)~~	~~Excludes $280 million of committed credit arrangements of Gulf Power, which was sold on January 1, 2019. See Note 15 to the financial statements under "Southern Company's Sale of Gulf Power" for additional information.~~

~~See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information.~~

Most of these bank credit arrangements, as well as the term loan arrangements of Alabama Power and Southern Power Company, contain covenants that limit debt levels and contain cross-acceleration or cross-default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of the individual company. Such cross-default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross-acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. At December 31, 2018, Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, and Nicor Gas were in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.

Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.

A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, and Nicor Gas. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at December 31, 2018 was approximately $1.6 billion, which included $82 million related to Gulf Power. In addition, at December 31, 2018, the traditional electric operating companies had approximately $403 million of revenue bonds outstanding that are required to be remarketed within the next 12 months, which included $58 million related to Gulf Power. See Note 15 to the financial statements under "~~Southern Company's Sale of Gulf Power~~" for information regarding the sale of Gulf Power on January 1, 2019. Subsequent to December 31, 2018, Georgia Power redeemed approximately $108 million of obligations related to outstanding variable rate pollution control revenue bonds.

Southern Company, Alabama Power, Georgia Power, Southern Power Company, Southern Company Gas, Nicor Gas, and SEGCO make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Short-term borrowings are included in notes payable in the balance sheets.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~Details of short-term borrowings were as follows:~~

Short-term Debt at the End of the Period
Short-term Debt During the Period ^(*)
Amount Outstanding Weighted Average Interest Rate Average Amount Outstanding Weighted Average Interest Rate Maximum Amount Outstanding
(in millions) (in millions) (in millions)
December 31, 2018:
Commercial paper $ 1,064
3.0 % $ 1,655
2.3 % $ 3,042
Short-term bank debt 1,851
3.1 % 1,722
2.9 % 2,504
Total $ 2,915
3.1 % $ 3,377
2.6 %
December 31, 2017:
Commercial paper $ 1,832
1.8 % $ 2,117
1.3 % $ 2,946
Short-term bank debt 607
2.3 % 555
2.1 % 1,020
Total $ 2,439
1.9 % $ 2,672
1.5 %
December 31, 2016:
Commercial paper $ 1,909
1.1 % $ 976
0.8 % $ 1,970
Short-term bank debt 123
1.7 % 176
1.7 % 500
Total $ 2,032
1.1 % $ 1,152
1.1 %


~~(*)~~	~~Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2018, 2017, and 2016.~~

In addition to the short-term borrowings of Southern Power Company included in the table above, at December 31, 2016, Southern Power Company subsidiaries assumed credit agreements (Project Credit Facilities) with the acquisition of certain solar facilities, which were non-recourse to Southern Power Company, the proceeds of which were used to finance project costs related to such solar facilities. The Project Credit Facilities were fully repaid in January 2017. For the year ended December 31, 2016, the Project Credit Facilities had a maximum amount outstanding of $828 million and an average amount outstanding of $566 million at a weighted average interest rate of 2.1% and had total amounts outstanding of $209 million at a weighted average interest rate of 2.1% at December 31, 2016.

~~Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank term loans, and operating cash flows.~~

~~Financing Activities~~

~~During 2018, Southern Company issued approximately 11.6 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $442 million.~~

In addition, during the third and fourth quarters 2018, Southern Company issued a total of approximately 12.1 million and 2.5 million shares, respectively, of common stock through at-the-market issuances pursuant to sales agency agreements related to Southern Company's continuous equity offering program and received cash proceeds of approximately $540 million and $108 million, respectively, net of $5 million and $1 million in commissions, respectively.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the year ended December 31, 2018:~~

Company
Senior
Note
Issuances

Senior Note
Maturities, Redemptions, and Repurchases

Revenue
Bond
Issuances and
Reofferings
of Purchased
Bonds

Revenue
Bond
Maturities, Redemptions,
and Repurchases

Other
Long-Term
Debt
Issuances

Other
Long-Term
Debt
Redemptions
and
Maturities^(a)
(in millions)
Southern Company^(b)
$ 750
$ 1,000
$ —
$ —
$ —
$ —
Alabama Power 500
—
120
120
—
1
Georgia Power —
1,500
108
469
—
111
Mississippi Power 600
155
—
43
—
900
Southern Power —
350
—
—
—
420
Southern Company Gas —
155
—
200
300
—
Other^(c)
—
100
—
—
100
13
Elimination^(d)
—
—
—
—
—
(4 )
Southern Company Consolidated $ 1,850
$ 3,260
$ 228
$ 832
$ 400
$ 1,441


~~(a)~~	~~Includes reductions in capital lease obligations resulting from cash payments under capital leases.~~


~~(b)~~	~~Represents the Southern Company parent entity.~~

~~(c)~~

In November 2018, SEGCO, as borrower, and Alabama Power, as guarantor, entered into a $100 million long-term delayed draw floating rate bank term loan bearing interest based on three-month LIBOR, which SEGCO used to repay at maturity $100 million aggregate principal amount of Series 2013A Senior Notes due December 1, 2018. See Note 9 to the financial statements under "~~Guarantees" for additional information.~~


~~(d)~~	~~Represents reductions in affiliate capital lease obligations at Georgia Power, which are eliminated in Southern Company's consolidated financial statements.~~

Except as otherwise described herein, Southern Company and its subsidiaries used the proceeds of debt issuances for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including working capital. The subsidiaries also used the proceeds for their construction programs.

~~In March 2018, Southern Company entered into a $900 million short-term floating rate bank loan bearing interest based on one-month LIBOR, which was repaid in August 2018.~~

In April 2018, Southern Company borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement, bearing interest at a rate agreed upon by Southern Company and the bank from time to time and payable on no less than 30 days' demand by the bank. Subsequent to December 31, 2018, Southern Company repaid this loan.

~~In June 2018, Southern Company repaid at maturity two $100 million short-term floating rate bank term loans.~~

In August 2018, Southern Company issued $750 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due February 14, 2020 bearing interest based on three-month LIBOR, entered into a $1.5 billion short-term floating rate bank loan bearing interest based on one-month LIBOR, and repaid $250 million borrowed in August 2017 pursuant to a short-term uncommitted bank credit arrangement. Subsequent to December 31, 2018, Southern Company repaid the $1.5 billion short-term floating rate bank loan.

In the third quarter 2018, Southern Company repaid at maturity $500 million aggregate principal amount of 1.55% Senior Notes and $500 million aggregate principal amount of Series 2013A 2.45% Senior Notes.

Subsequent to December 31, 2018, through cash tender offers, Southern Company repurchased and retired approximately $522 million of the $1.0 billion aggregate principal amount outstanding of its 1.85% Senior Notes due July 1, 2019 (1.85% Notes), approximately $180 million of the $350 million aggregate principal amount outstanding of its Series 2014B 2.15% Senior Notes due September 1, 2019 (Series 2014B Notes), and approximately $504 million of the $750 million aggregate principal amount outstanding of its Series 2018A Floating Rate Notes due February 14, 2020 (Series 2018A Notes), for an aggregate purchase price, excluding accrued and unpaid interest, of approximately $1.2 billion. In addition, subsequent to December 31, 2018, and following the completion of the cash tender offers, Southern Company completed the redemption of all of the Series 2018A Notes remaining outstanding and called for redemption all of the 1.85% Notes and Series 2014B Notes remaining outstanding.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~Subsequent to December 31, 2018, Alabama Power repaid at maturity $200 million aggregate principal amount of Series Z 5.125% Senior Notes.~~

~~In January 2018, Georgia Power repaid its outstanding $150 million short-term floating rate bank loan due May 31, 2018.~~

In May 2018, through cash tender offers, Georgia Power repurchased and retired $89 million of the $250 million aggregate principal amount outstanding of its Series 2007A 5.65% Senior Notes due March 1, 2037, $326 million of the $500 million aggregate principal amount outstanding of its Series 2009A 5.95% Senior Notes due February 1, 2039, and $335 million of the $600 million aggregate principal amount outstanding of its Series 2010B 5.40% Senior Notes due June 1, 2040, for an aggregate purchase price, excluding accrued and unpaid interest, of $902 million.

Subsequent to December 31, 2018, Georgia Power redeemed approximately $13 million, $20 million, and $75 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1992, Eighth Series 1994, and Second Series 1995, respectively.

In March 2018, Mississippi Power entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $200 million was repaid in the second quarter 2018 and $100 million was repaid in the third quarter 2018. The proceeds of this loan, together with the proceeds of Mississippi Power's $600 million senior notes issuances, were used to repay Mississippi Power's $900 million unsecured floating rate term loan.

In October 2018, Mississippi Power completed the redemption of all 334,210 outstanding shares of its preferred stock (as well as related depositary shares), with an aggregate par value of approximately $33.4 million.

In May 2018, Southern Power entered into two short-term floating rate bank loans, each for an aggregate principal amount of $100 million, which bear interest based on one-month LIBOR. In November 2018, Southern Power repaid one of these short-term loans.

~~During 2018, Southern Power received approximately $148 million of third-party tax equity related to certain of its renewable facilities. See Note 15 to the financial statements under "Southern Power" for additional information.~~

~~Prior to its sale, in the second quarter 2018, Pivotal Utility Holdings caused $200 million aggregate principal amount of gas facility revenue bonds to be redeemed.~~

In May 2018, Southern Company Gas Capital borrowed $95 million pursuant to a short-term uncommitted bank credit arrangement, guaranteed by Southern Company Gas, bearing interest at a rate agreed upon by Southern Company Gas Capital and the bank from time to time and payable on no less than 30 days' demand by the bank. In July 2018, Southern Company Gas Capital repaid this loan.

Other long-term debt issuances for Southern Company Gas include the issuance by Nicor Gas of $300 million aggregate principal amount of first mortgage bonds in a private placement, of which $100 million was issued in August 2018 and $200 million was issued in November 2018.

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

~~Credit Rating Risk~~

At December 31, 2018, Southern Company and its subsidiaries did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain subsidiaries to BBB and/or Baa2 or below. These contracts are for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~The maximum potential collateral requirements under these contracts at December 31, 2018 were as follows:~~

Credit Ratings
Maximum
Potential
Collateral
Requirements^(a)
(in millions)
At BBB and/or Baa2 $ 30
At BBB- and/or Baa3 $ 542
At BB+ and/or Ba1^(b)
$ 2,176


~~(a)~~	Includes potential collateral requirements related to Gulf Power of $111 million and $221 million at a credit rating of BBB- and/or Baa3 and BB+ and/or Ba1, respectively. See Note 15 to the financial statements under "~~Southern Company's Sale of Gulf Power" for information regarding the sale of Gulf Power on January 1, 2019.~~


~~(b)~~	~~Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million.~~

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Company and its subsidiaries to access capital markets and would be likely to impact the cost at which they do so.

On February 26, 2018, Moody's revised its rating outlook for Mississippi Power from stable to positive. On August 8, 2018, Moody's upgraded Mississippi Power's senior unsecured rating to Baa3 from Ba1 and maintained the positive rating outlook.

~~On February 28, 2018, Fitch removed Mississippi Power from rating watch negative and revised its rating outlook from stable to positive.~~

Also on February 28, 2018, Fitch downgraded the senior unsecured long-term debt rating of Southern Company to BBB+ from A- with a stable outlook and of Georgia Power to A from A+ with a negative outlook. On August 9, 2018, Fitch downgraded the senior unsecured long-term debt rating of Georgia Power to A- from A.

~~On March 14, 2018, S&P upgraded the senior unsecured long-term debt rating of Mississippi Power to A- from BBB+. The outlook remained negative.~~

~~On August 8, 2018, Moody's downgraded the senior unsecured debt rating of Georgia Power to Baa1 from A3.~~

~~On September 28, 2018, Moody's revised its rating outlooks for Southern Company, Alabama Power, and Georgia Power from negative to stable.~~

~~Also on September 28, 2018, Fitch assigned a negative rating outlook to the ratings of Southern Company and its subsidiaries (excluding Mississippi Power).~~

As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries may be negatively impacted. Southern Company and most of its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, include adjusting capital structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, the credit ratings of Southern Company and certain of its subsidiaries could be negatively affected. See Note 2 to the financial statements for additional information related to state PSC or other regulatory agency actions related to the Tax Reform Legislation, including approvals of capital structure adjustments for Alabama Power, Georgia Power, and Atlanta Gas Light by their respective state PSCs, which are expected to help mitigate the potential adverse impacts to certain of their credit metrics.

~~Market Price Risk~~

The Southern Company system is exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, the applicable company nets the exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the applicable company's policies in areas such as counterparty exposure and risk management practices. Southern Company Gas' wholesale gas operations use various contracts in its commercial activities that generally meet the definition of derivatives. For the traditional electric operating companies, Southern Power, and Southern Company Gas' other businesses, each company's policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

To mitigate future exposure to a change in interest rates, Southern Company and certain of its subsidiaries enter into derivatives that have been designated as hedges. Derivatives that have been designated as hedges outstanding at December 31, 2018 have a notional amount of $2.0 billion and are intended to mitigate interest rate volatility related to existing fixed rate obligations. The weighted average interest rate on $5.8 billion of long-term variable interest rate exposure at December 31, 2018 was 3.02%. If Southern Company sustained a 100 basis point change in interest rates for all long-term variable interest rate exposure, the change would affect annualized interest expense by approximately $58 million at December 31, 2018. See Note 1 to the financial statements under "~~Financial Instruments" and Note 14 to the financial statements for additional information.~~

Southern Power Company had foreign currency denominated debt of €1.1 billion at December 31, 2018. Southern Power Company has mitigated its exposure to foreign currency exchange rate risk through the use of foreign currency swaps converting all interest and principal payments to fixed-rate U.S. dollars.

Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional electric operating companies and natural gas distribution utilities continue to have limited exposure to market volatility in interest rates, foreign currency exchange rates, commodity fuel prices, and prices of electricity. In addition, Southern Power's exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. 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. 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. Southern Company had no material change in market risk exposure for the year ended December 31, 2018 when compared to the year ended December 31, 2017.

The changes in fair value of energy-related derivative contracts are substantially attributable to both the volume and the price of natural gas. For the years ended December 31, the changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, were as follows:

2018 2017
(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net $ (163 ) $ 41
Contracts realized or settled 93
(8 )
Current period changes^(a)
(131 ) (196 )
Contracts outstanding at the end of the period, assets (liabilities), net^(b)(c)
$ (201 ) $ (163 )


~~(a)~~	~~Current period changes also include the changes in fair value of new contracts entered into during the period, if any.~~


~~(b)~~	~~Excludes premium and intrinsic value associated with weather derivatives of $8 million and $11 million at December 31, 2018 and 2017, respectively.~~


~~(c)~~	~~Includes $6 million of net liabilities related to Gulf Power. See Note 15 to the financial statements under "Southern Company's Sale of Gulf Power" for information regarding the sale of Gulf Power on January 1, 2019.~~

~~The net hedge volumes of energy-related derivative contracts were 431 million mmBtu and 621 million mmBtu at December 31, 2018 and 2017, respectively.~~

For the traditional electric operating companies and Southern Power, the weighted average swap contract cost above market prices was approximately $0.12 per mmBtu at December 31, 2018 and $0.15 per mmBtu at December 31, 2017. The majority of the natural gas hedge gains and losses are recovered through the traditional electric operating companies' fuel cost recovery clauses.

At December 31, 2018 and 2017, a portion of the Southern Company system's energy-related derivative contracts were designated as regulatory hedges and were related to the applicable company's fuel-hedging program. Therefore, gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the energy cost recovery clause. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in OCI before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred. See Note 14 to the financial statements for additional information.

The Southern Company system uses exchange-traded market-observable contracts, which are categorized as Level 1 of the fair value hierarchy, and over-the-counter contracts that are not exchange traded but are fair valued using prices which are market

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

observable, and thus fall into Level 2 of the fair value hierarchy. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts at December 31, 2018 were as follows:

Fair Value Measurements
December 31, 2018

Total
Fair Value
Maturity
Year 1 Years 2&3 Years 4&5
(in millions)
Level 1 $ (179 ) $ (59 ) $ (86 ) $ (34 )
Level 2 (22 ) 20
(17 ) (25 )
Level 3 —
—
—
—
Fair value of contracts outstanding at end of period $ (201 ) $ (39 ) $ (103 ) $ (59 )

The Southern Company system is exposed to market price risk in the event of nonperformance by counterparties to energy-related and interest rate derivative contracts. The Southern Company system only enters 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 Southern Company system does 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.~~

With the exception of Southern Company Gas' subsidiary, Atlanta Gas Light, and the Southern Company Gas wholesale gas services business, the Southern Company system is not exposed to concentrations of credit risk. Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of 15 Marketers in Georgia responsible for the retail sale of natural gas to end-use customers in Georgia. For 2018, the four largest Marketers based on customer count, which includes SouthStar, accounted for 20% of Southern Company Gas' adjusted operating margin. Southern Company Gas' wholesale gas services business has a concentration of credit risk for services it provides to its counterparties as measured by its 30-day receivable exposure plus forward exposure. At December 31, 2018, Southern Company Gas' wholesale gas services business' top 20 counterparties represented approximately 48%, or $298 million, of its total counterparty exposure and had a weighted average S&P equivalent credit rating of A-, all of which is consistent with the prior year.

Southern Company performs periodic reviews of its leveraged lease transactions, both domestic and international, and the creditworthiness of the lessees, including a review of the value of the underlying leased assets and the credit ratings of the lessees. Southern Company's domestic lease transactions generally do not have any credit enhancement mechanisms; however, the lessees in its international lease transactions have pledged various deposits as additional security to secure the obligations. The lessees in Southern Company's international lease transactions are also required to provide additional collateral in the event of a credit downgrade below a certain level.

~~Capital Requirements and Contractual Obligations~~

The Southern Company system's construction program is currently estimated to total approximately $8.0 billion for 2019, $7.7 billion for 2020, $6.7 billion for 2021, $6.3 billion for 2022, and $6.0 billion for 2023. These amounts include expenditures of approximately $1.5 billion, $1.2 billion, $1.0 billion, and $0.5 billion for the construction of Plant Vogtle Units 3 and 4 in 2019, 2020, 2021, and 2022, respectively. These amounts do not include up to approximately $0.5 billion per year on average for 2019 through 2023 for Southern Power's planned expenditures for plant acquisitions and placeholder growth. These amounts also include capital expenditures related to contractual purchase commitments for nuclear fuel and capital expenditures covered under LTSAs. Estimated capital expenditures to comply with environmental laws and regulations included in these amounts are $0.5 billion, $0.2 billion, $0.3 billion, $0.3 billion, and $0.2 billion for 2019, 2020, 2021, 2022, and 2023, respectively. These estimated expenditures do not include any potential compliance costs associated with pending regulation of CO₂ ~~emissions from fossil fuel-fired electric generating units. See FUTURE EARNINGS POTENTIAL – "Environmental Matters~~ – ~~Environmental Laws and Regulations" and " –~~ ~~Global Climate Issues" herein for additional information.~~

The traditional electric operating companies also anticipate costs associated with closure and monitoring of ash ponds in accordance with the CCR Rule, which are reflected in Southern Company's ARO liabilities. These costs, which are expected to change and could change materially as underlying assumptions are refined and the cost and the method and timing of compliance activities continue to be evaluated, are currently estimated to be approximately $0.5 billion, $0.5 billion, $0.7 billion, $0.9 billion, and $0.9 billion for 2019, 2020, 2021, 2022, and 2023, respectively. See FUTURE EARNINGS POTENTIAL – "~~Environmental~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~Matters~~ – ~~Environmental Laws and Regulations~~ – ~~Coal Combustion Residuals" herein and Note 6 to the financial statements for additional information.~~

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in electric generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 15 to the financial statements under "~~Southern Power" for additional information regarding Southern Power's plant acquisitions.~~

The construction program also includes Plant Vogtle Units 3 and 4, which includes components based on new technology that only recently began initial operation in the global nuclear industry at this scale and which may be subject to additional revised cost estimates during construction. The ability to control costs and avoid cost and schedule overruns during the development, construction, and operation of new facilities is subject to a number of factors, including, but not limited to, changes in labor costs, availability, and productivity; challenges with management of contractors, subcontractors, or vendors; adverse weather conditions; shortages, increased costs, or inconsistent quality of equipment, materials, and labor; contractor or supplier delay; non-performance under construction, operating, or other agreements; operational readiness, including specialized operator training and required site safety programs; engineering or design problems; design and other licensing-based compliance matters, including the timely resolution of ITAAC and the related approvals by the NRC; challenges with start-up activities, including major equipment failure and system integration; and/or operational performance. See Note 2 to the financial statements under "~~Georgia Power~~ – ~~Nuclear Construction" for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction expenditures.~~

As a result of NRC requirements, Alabama Power and Georgia Power have external trust funds for nuclear decommissioning costs; however, Alabama Power currently has no additional funding requirements. For additional information, see Note 6 to the financial statements under "~~Nuclear Decommissioning~~."

In addition, as discussed in Note 11 to the financial statements, the Southern Company system provides postretirement benefits to the majority of its employees and funds trusts to the extent required by PSCs, other applicable state regulatory agencies, or the FERC.

Funding requirements related to obligations associated with scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred stock dividends of subsidiaries, leases, pipeline charges, storage capacity, gas supply, asset management agreements, other purchase commitments, ARO settlements, and trusts are detailed in the contractual obligations table that follows. See Notes 1, 6, 8, 9, 11, and 14 to the financial statements for additional information.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~Contractual Obligations~~

~~The Southern Company system's contractual obligations at December 31, 2018 (excluding Gulf Power) were as follows:~~

2019 2020- 2021 2022- 2023 After 2023 Total
(in millions)
Long-term debt^(a) —

Principal $ 3,133
$ 7,204
$ 4,354
$ 28,950
$ 43,641
Interest 1,668
3,082
2,270
25,796
32,816
Preferred stock dividends of subsidiaries^(b)
15
29
29
—
73
Financial derivative obligations^(c)
610
243
109
—
962
Operating leases^(d)
156
244
177
1,040
1,617
Capital leases^(d)
25
22
8
143
198
Pipeline charges, storage capacity, and gas supply^(e)
781
1,104
901
1,871
4,657
Asset management agreements^(f)
10
8
—
—
18
Purchase commitments—

Capital^(g)
7,600
13,608
11,486
—
32,694
Fuel^(h)
3,168
3,854
1,863
5,862
14,747
Purchased power⁽ⁱ⁾
304
653
545
2,494
3,996
Other^(j)
328
642
464
2,265
3,699
ARO settlements^(k)
451
1,186
1,841
—
3,478
Trusts —

Nuclear decommissioning^(l)
5
11
11
88
115
Pension and other postretirement benefit plans^(m)
137
265
—
—
402
Total $ 18,391
$ 32,155
$ 24,058
$ 68,509
$ 143,113

~~(a)~~

All amounts are reflected based on final maturity dates except for amounts related to FFB borrowings and certain revenue bonds. As it relates to the FFB borrowings, the final maturity date is February 20, 2044; however, principal amortization is reflected beginning in 2020. See Note 8 to the financial statements under "~~Long-term Debt~~ – ~~DOE Loan Guarantee Borrowings" and "Securities Due Within One Year~~" for additional information. Southern Company and its subsidiaries plan to continue, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit. Variable rate interest obligations are estimated based on rates at December 31, 2018, as reflected in the statements of capitalization. Fixed rates include, where applicable, the effects of interest rate derivatives employed to manage interest rate risk. Long-term debt excludes capital lease amounts (shown separately).


~~(b)~~	~~Represents preferred stock of Alabama Power. Preferred stock does not mature; therefore, amounts are provided for the next five years only.~~


~~(c)~~	~~See Notes 1 and 14 to the financial statements.~~


~~(d)~~	~~Excludes PPAs that are accounted for as leases and included in "Purchased power."~~

~~(e)~~

Includes charges recoverable through a natural gas cost recovery mechanism, or alternatively billed to Marketers selling retail natural gas, and demand charges associated with Southern Company Gas' wholesale gas services. The gas supply balance includes amounts for gas commodity purchase commitments associated with Southern Company Gas' gas marketing services of 47 million mmBtu at floating gas prices calculated using forward natural gas prices at December 31, 2018 and valued at $150 million. Southern Company Gas provides guarantees to certain gas suppliers for certain of its subsidiaries in support of payment obligations.


~~(f)~~	~~Represents fixed-fee minimum payments for asset management agreements associated with wholesale gas services.~~

~~(g)~~

The Southern Company system provides estimated capital expenditures for a five-year period, including capital expenditures associated with environmental regulations. These amounts exclude contractual purchase commitments for nuclear fuel, capital expenditures covered under LTSAs, and estimated capital expenditures for AROs, which are reflected in "Fuel," "Other," and "ARO settlements," respectively. These amounts also exclude up to approximately $0.5 billion per year on average for 2019 through 2023 for Southern Power's planned expenditures for plant acquisitions and placeholder growth. At December 31, 2018, significant purchase commitments were outstanding in connection with the construction program. See FUTURE EARNINGS POTENTIAL – "~~Environmental Matters~~ – ~~Environmental Laws and Regulations" and "Construction Programs" herein for additional information.~~

~~(h)~~

Primarily includes commitments to purchase coal, nuclear fuel, and natural gas, 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. Amounts reflected for natural gas purchase commitments have been estimated based on the NYMEX future prices at December 31, 2018.


~~(i)~~	Estimated minimum long-term obligations for various PPA purchases from gas-fired, biomass, and wind-powered facilities and capacity payments related to Plant Vogtle Units 1 and 2. See Note 9 to the financial statements under "~~Fuel and Power Purchase Agreements" for additional information.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~


~~(j)~~	Includes LTSAs, contracts for the procurement of limestone, contractual environmental remediation liabilities, and operation and maintenance agreements. LTSAs include price escalation based on inflation indices.

~~(k)~~

Represents estimated costs for a five-year period associated with closing and monitoring ash ponds in accordance with the CCR Rule and the related state rules, which are reflected in Southern Company's ARO liabilities. Material expenditures in future years for ARO settlements also will be required for ash ponds, nuclear decommissioning, and other liabilities reflected in Southern Company's AROs. See FUTURE EARNINGS POTENTIAL – "~~Environmental Matters~~ – ~~Environmental Laws and Regulations~~ – ~~Coal Combustion Residuals" herein and Note 6 to the financial statements for additional information.~~

~~(l)~~

~~Projections of nuclear decommissioning trust fund contributions for Plant Hatch and Plant Vogtle Units 1 and 2 are based on the 2013 ARP~~ ~~for Georgia Power. Alabama Power also has external trust funds for nuclear decommissioning costs; however, Alabama Power currently has no additional funding requirements.~~ ~~See Note 6 to the financial statements under "Nuclear Decommissioning" for additional information.~~

~~(m)~~

The Southern Company system forecasts contributions to the pension and other postretirement benefit plans over a three-year period. Southern Company anticipates no mandatory contributions to the qualified pension plans during the next three years. Amounts presented represent estimated benefit payments for the nonqualified pension plans, estimated non-trust benefit payments for the other postretirement benefit plans, and estimated contributions to the other postretirement benefit plan trusts, all of which will be made from corporate assets of Southern Company's subsidiaries. See Note 11 to the financial statements for additional information related to the pension and other postretirement benefit plans, including estimated benefit payments. Certain benefit payments will be made through the related benefit plans. Other benefit payments will be made from corporate assets of Southern Company's subsidiaries.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Alabama Power Company 2018 Annual Report~~

~~OVERVIEW~~

Business Activities

Southern Company is a holding company that owns all of the common stock of three traditional electric operating companies, as well as Southern Power and Southern Company Gas, and owns other direct and indirect subsidiaries. The primary businesses of the Southern Company system are electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas by Southern Company Gas. Southern Company's reportable segments are the sale of electricity by the traditional electric operating companies, the sale of electricity in the competitive wholesale market by Southern Power, and the sale of natural gas and other complementary products and services by Southern Company Gas. See Note 16 to the financial statements for additional information.

•The traditional electric operating companies – Alabama Power, ~~operates as a~~Georgia Power, and Mississippi Power – are vertically integrated ~~utility~~utilities providing electric service to retail ~~and wholesale~~ customers ~~within its traditional service territory located~~ in ~~the State of Alabama~~three Southeastern states in addition to wholesale customers in the Southeast.

•Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in the wholesale market. Southern Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions, dispositions, and sales of partnership interests, development and construction of new generating facilities, and entry into PPAs primarily with investor-owned utilities, IPPs, municipalities, electric cooperatives, and other load-serving entities, as well as commercial and industrial customers. In general, Southern Power commits to the construction or acquisition of new generating capacity only after entering into or assuming long-term PPAs for the new facilities.

Many factors affect the opportunities, challenges, and risks of ~~Alabama Power's business of providing~~the Southern Company system's electric ~~service.~~service and natural gas businesses. These factors include the ability to maintain a constructive regulatory ~~environment,~~environments, to maintain and grow ~~energy~~ sales and customers, and to effectively manage and secure timely recovery of prudently-incurred costs. These costs include those related to projected long-term demand ~~growth,~~growth; stringent environmental standards, including CCR ~~rules,~~rules; safety; system reliability ~~fuel,~~and resilience; fuel; natural gas; restoration following major storms; and capital expenditures, including constructing new electric generating plants and expanding and improving the electric transmission and electric and natural gas distribution ~~systems,~~systems.

The traditional electric operating companies and ~~restoration following major storms. Alabama Power has~~the natural gas distribution utilities have various regulatory mechanisms that ~~operate to~~ address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge ~~Alabama Power~~the Southern Company system for the foreseeable future. ~~On May 1, 2018,~~See Note 2 to the ~~Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address~~financial statements for additional information.

Southern Power's future earnings will depend upon the ~~retail rate impact~~parameters of the wholesale market and the ~~growing pressure~~efficient operation of its wholesale generating assets, as well as Southern Power's ability to execute its growth strategy and to develop and construct generating facilities. In addition, Southern Power's future earnings will depend upon the availability of federal and state ITCs and PTCs on its ~~credit quality resulting from the Tax Reform Legislation.~~renewable energy projects, which could be impacted by future tax legislation. See FUTURE EARNINGS POTENTIAL – ~~"Retail Regulatory~~"Income Tax Matters" herein and ~~FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" herein~~Notes 10 and 15 to the financial statements for additional information.

II-3

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Recent Developments

COVID-19

During March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention and has spread globally, including throughout the United States. The Southern Company system provides an essential service to its customers; therefore, it is critical that Southern Company system employees are able to continue to perform their essential duties safely and effectively. The Southern Company system has implemented applicable business continuity plans, including teleworking, canceling non-essential business travel, increasing cleaning frequency at business locations, implementing applicable safety and health guidelines issued by federal and state officials, and establishing protocols for required work on customer premises. To date, these procedures have been effective in maintaining the Southern Company system's critical operations. As a result of the COVID-19 pandemic, there have been economic disruptions in the Registrants' operating territories. The traditional electric operating companies and the natural gas distribution utilities temporarily suspended disconnections for non-payment by customers and waived late fees for certain periods. See Note 2 to the financial statements for information regarding deferral of certain incremental COVID-19-related costs, including bad debt, to a regulatory asset by certain of the traditional electric operating companies and the natural gas distribution utilities. In addition, the COVID-19 pandemic has impacted productivity and the pace of activity completion at Plant Vogtle Units 3 and 4, as discussed further herein. Additional information regarding the COVID-19 pandemic and its past and potential future impacts on the Registrants is provided throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A herein.

Alabama Power

In October 2020, Alabama Power reduced its over-collected fuel balance by $94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing Alabama Power to reduce its over-collected fuel balance by $100 million and return that amount to customers in the form of bill credits, with any undistributed amount remaining in the regulatory liability for the benefit of customers.

For the year ended December 31, 2020, Alabama Power's weighted common equity return exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $50 million for Rate RSE refunds, which will be refunded to customers through bill credits in April 2021.

Effective for the billing month of January 2021, Alabama Power's Rate RSE increased 4.09%, or approximately $228 million annually, and Alabama Power's Rate ECR decreased 1.84%, or approximately $103 million annually, as approved by the Alabama PSC.

See Notes 2 and 15 to the financial statements under "Alabama Power" for additional information.

Georgia Power

Rate Plans

On December 15, 2020, in accordance with the terms of the 2019 ARP, the Georgia PSC approved tariff adjustments effective January 1, 2021 as follows: (i) increased traditional base tariffs by approximately $120 million; (ii) increased the Environmental Compliance Cost Recovery (ECCR) tariff by approximately $2 million; (iii) decreased Demand-Side Management tariffs by approximately $15 million; and (iv) increased Municipal Franchise Fee tariffs by approximately $4 million, for a total net increase in annual base revenues of approximately $111 million. Georgia Power expects to submit a compliance filing in the third quarter 2021 to request tariff adjustments approved pursuant to the 2019 ARP effective January 1, 2022. The amounts requested in the 2019 ARP were as follows: (i) increase traditional base tariffs by approximately $192 million; (ii) increase the ECCR tariff by approximately $184 million; (iii) increase Demand-Side Management tariffs by approximately $1 million; and (iv) increase Municipal Franchise Fee tariffs by approximately $9 million, for a total increase in annual base revenues of approximately $386 million. The ultimate outcome of this matter cannot be determined at this time. See Note 2 to the financial statements under "Georgia Power – Rate Plans – 2019 ARP" for additional information.

II-4

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Plant Vogtle Units 3 and 4 Status

Construction continues on Plant Vogtle Units 3 and 4 (with electric generating capacity of approximately 1,100 MWs each), in which Georgia Power holds a 45.7% ownership interest. Georgia Power's share of the total project capital cost forecast is $8.7 billion, with expected in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4.

As of June 30, 2020, assignments of contingency to the base capital cost forecast exceeded the remaining balance of the construction contingency originally established in the second quarter 2018 and Georgia Power established $115 million of additional construction contingency. During the third and fourth quarters 2020, this construction contingency, plus an additional $5 million, was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including the April 2020 reduction in workforce designed to mitigate impacts of the COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project management, initial test program, start-up, engineering support, and operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore, Georgia Power established $171 million of additional contingency as of December 31, 2020.

After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $149 million ($111 million after tax) and $176 million ($131 million after tax) for the increases in the total project capital cost forecast as of June 30, 2020 and December 31, 2020, respectively. As and when these amounts are spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.

See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.

Mississippi Power

II-5

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

site restoration activities. These activities are expected to be completed by 2026. See Note 3 to the financial statements under "Other Matters – Mississippi Power – Kemper County Energy Facility" for additional information.

On February 12, 2021, Mississippi Power submitted its 2021 ECO Plan filing to the Mississippi PSC, which requested an annual decrease in revenues of approximately $9 million, as well as its ad valorem tax adjustment filing for 2021, which requested an annual increase in revenues of approximately $28 million. Mississippi Power plans to submit its 2021 PEP filing in March 2021.

On December 17, 2020, the Mississippi PSC issued an order concluding the RMP docket and requiring Mississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation by year-end 2027 to reduce Mississippi Power's excess reserve margin. Mississippi Power's IRP is scheduled to be filed in April 2021.

See Note 2 to the financial statements under "Mississippi Power" for additional information. The ultimate outcome of these matters cannot be determined at this time.

Southern Power

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 generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount. With the inclusion of investments associated with the facilities currently under construction, as well as other capacity and energy contracts, Southern Power's average investment coverage ratio at December 31, 2020 was 94% through 2025 and 91% through 2030, with an average remaining contract duration of approximately 14 years.

See Note 15 to the financial statements under "Southern Power" for additional information.

Southern Company Gas

See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" for additional information.

II-6

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Key Performance Indicators

In striving to achieve attractive risk-adjusted returns while providing cost-effective energy to approximately 8.6 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 ~~including,~~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, ~~after dividends~~respectively, as a key performance indicator. See RESULTS OF OPERATIONS herein for information on ~~preferred stock. Alabama Power's~~the Registrants' financial performance. See RESULTS OF OPERATIONS – "Southern Company Gas – Operating Metrics" for additional information on Southern Company Gas' operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.

~~See RESULTS OF OPERATIONS herein for information on Alabama Power's financial performance.~~

~~Earnings~~

Alabama Power's 2018 net income after dividends on preferred and preference stock was $930 million, representing an $82 million, or 9.7%, increase over the previous year. The increase was primarily due Reliability indicators are also used to a decrease in income tax expense, partially offset by a decrease in retail revenues associated with customer bill credits related to the Tax Reform Legislation. The increase also reflects an increase in revenues associated with colder weather in the first quarter 2018 and warmer weather in the second and third quarters 2018 compared to the corresponding periods in 2017, partially offset by an accrual for a Rate RSE refund. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate RSE" herein for additional information.

Alabama Power's 2017 net income after dividends on preferred and preference stock was $848 million, representing a $26 million, or 3.2%, increase over the previous year. The increase was primarily due to an increase in rates under Rate RSE effective in January 2017 and the impact of a Rate RSE refund recorded in 2016. These increases to income were partially offset by a decrease in retail revenues associated with milder weather, lower customer usage, and an increase in non-fuel operations and maintenance expenses in 2017 as compared to 2016. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate RSE" herein for additional information.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Alabama Power Company 2018 Annual Report~~

~~RESULTS OF OPERATIONS~~

~~A condensed income statement for Alabama Power follows:~~

Amount
Increase (Decrease)
from Prior Year
2018 2018 2017
(in millions)
Operating revenues $ 6,032
$ (7 ) $ 150
Fuel 1,301
76
(72 )
Purchased power 432
104
(6 )
Other operations and maintenance 1,669
(40 ) 152
Depreciation and amortization 764
28
33
Taxes other than income taxes 389
5
4
Total operating expenses 4,555
173
111
Operating income 1,477
(180 ) 39
Allowance for equity funds used during construction 62
23
11
Interest expense, net of amounts capitalized 323
18
3
Other income (expense), net 20
(23 ) 17
Income taxes 291
(277 ) 37
Net income 945
79
27
Dividends on preferred and preference stock 15
(3 ) 1
Net income after dividends on preferred and preference stock $ 930
$ 82
$ 26

~~Operating Revenues~~

~~Operating revenues for 2018 were $6.0 billion, reflecting a $7 million decrease from 2017. Details of operating revenues were as follows:~~

2018 2017
(in millions)
Retail — prior year $ 5,458
$ 5,322
Estimated change resulting from —
Rates and pricing (354 ) 362
Sales decline (10 ) (44 )
Weather 137
(89 )
Fuel and other cost recovery 136
(93 )
Retail — current year 5,367
5,458
Wholesale revenues —
Non-affiliates 279
276
Affiliates 119
97
Total wholesale revenues 398
373
Other operating revenues 267
208
Total operating revenues $ 6,032
$ 6,039
Percent change (0.1 )% 2.6 %

Retail revenues in 2018 were $5.4 billion. These revenues decreased $91 million, or 1.7%, in 2018 as compared to the prior year. The decrease in 2018 was primarily due to customer bill credits related to the Tax Reform Legislation and an accrual for a Rate RSE refund, partially offset by an increase in fuel revenues and colder weather in the first quarter and warmer weather in the second and third quarters 2018 as compared to the corresponding periods in 2017.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Alabama Power Company 2018 Annual Report~~

Retail revenues in 2017 were $5.5 billion. These revenues increased $136 million, or 2.6%, in 2017 as compared to the prior year. The increase in 2017 was primarily due to an increase in rates under Rate RSE effective in January 2017, partially offset by a decrease in fuel revenues and milder weather in the first and third quarters 2017 as compared to the corresponding periods in 2016.

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.

RESULTS OF OPERATIONS

Southern Company

Consolidated net income attributable to Southern Company was $3.1 billion in 2020, a decrease of $1.6 billion, or 34.2%, from the prior year. The decrease was primarily due to the $2.6 billion ($1.4 billion after tax) gain on the sale of Gulf Power in 2019 and after-tax charges totaling $242 million in 2020 related to Georgia Power's construction of Plant Vogtle Units 3 and 4. See Notes 2 and 15 to the financial statements under "Georgia Power – Nuclear Construction" and "Southern Company," respectively, for additional information.

Basic EPS was $2.95 in 2020 and $4.53 in 2019. Diluted EPS, which factors in additional shares related to stock-based compensation, was $2.93 in 2020 and $4.50 in 2019. EPS for 2020 and 2019 was negatively impacted by $0.03 and $0.11 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.


	2020		2019
	(in millions)
Electricity business	$	3,115	$	3,268
Gas business	590		585
Other business activities	(586)		886
Net Income	$	3,119	$	4,739

II-7

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Electricity Business

Southern Company's electric utilities generate and sell electricity to retail and wholesale customers. A condensed statement of income for the electricity business follows:


	2020		Increase (Decrease) from 2019
	(in millions)
Electric operating revenues	$	16,497	$	(598)
Fuel	2,967		(655)
Purchased power	799		(17)
Cost of other sales	94		18
Other operations and maintenance	4,250		(253)
Depreciation and amortization	2,941		469
Taxes other than income taxes	1,024		13
Estimated loss on Plant Vogtle Units 3 and 4	325		325
Impairment charges	—		(3)
(Gain) loss on dispositions, net	(42)		(21)
Total electric operating expenses	12,358		(124)
Operating income	4,139		(474)
Allowance for equity funds used during construction	138		17
Interest expense, net of amounts capitalized	976		(11)
Other income (expense), net	315		81
Income taxes	517		(191)
Net income	3,099		(174)
Less:
Dividends on preferred stock of subsidiaries	15		—
Net income (loss) attributable to noncontrolling interests	(31)		(21)
Net Income Attributable to Southern Company	$	3,115	$	(153)

II-8

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Electric Operating Revenues

Electric operating revenues for 2020 were $16.5 billion, reflecting a $598 million decrease from 2019. Details of electric operating revenues were as follows:


	2020			2019
	(in millions)
Retail electric — prior year	$	14,084
Estimated change resulting from —
Rates and pricing	484
Sales decline	(132)
Weather	(288)
Fuel and other cost recovery	(505)
Retail electric — current year	$	13,643		$	14,084
Wholesale electric revenues	1,945			2,152
Other electric revenues	672			636
Other revenues	237			223
Electric operating revenues	$	16,497		$	17,095
Percent change	(3.5)		%	(7.9)		%

Retail electric revenues decreased $441 million, or 3.1%, in 2020 as compared to the prior year. The significant factors driving this change are shown in the preceding table. The increase in rates and pricing in 2020 was primarily due to Georgia Power's recovery of environmental compliance costs and the impacts of accruals for customer refunds in 2019 related to the Tax Reform Legislation and earnings in excess of the allowed retail ROE range as well as the rate pricing effects of decreased customer usage throughout 2020. The increase was also due to customer bill credits at Alabama Power in 2019 related to the Tax Reform Legislation. These increases were partially offset by lower contributions from commercial and industrial customers with variable demand-driven pricing at Georgia Power.

See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" for additional information. ~~See~~Also see "Energy Sales" herein for a discussion of changes in the volume of energy sold, including changes related to sales ~~decline~~growth (decline) and weather.

~~Electric rates include provisions~~Wholesale electric revenues consist of PPAs and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues generally represent the greatest contribution to ~~recognize the~~net income and are designed to provide recovery of ~~fuel~~fixed costs ~~purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under these provisions, fuel and other cost recovery~~plus a return on investment. Energy revenues ~~generally equal fuel and other cost recovery expenses and do not affect net income. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate ECR" herein for additional information.~~

~~Wholesale revenues from power sales to non-affiliated utilities were as follows:~~

2018 2017 2016
(in millions)
Capacity and other $ 101
$ 96
$ 93
Energy 178
180
190
Total non-affiliated $ 279
$ 276
$ 283

~~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~~have a significant impact on net income. ~~Short-term opportunity~~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 ~~are also included in wholesale energy sales to non-affiliates. These~~as well as market-based sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above ~~Alabama Power's~~the Southern Company system's variable cost to produce the energy.

~~In 2018, wholesale~~

II-9

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Wholesale electric revenues from power sales ~~to non-affiliates increased $3~~were as follows:


	2020		2019
	(in millions)
Capacity and other	$	476	$	529
Energy	1,469		1,623
Total	$	1,945	$	2,152

In 2020, wholesale electric revenues decreased $207 million, or ~~1.1%, as compared to the prior year. In 2017, wholesale revenues from sales to non-affiliates decreased $7 million, or 2.5%, as compared to the prior year.~~

In 2018, wholesale revenues from sales to affiliates increased $22 million, or 22.7%, as compared to the prior year. In 2018, the price of energy increased 12.3% as a result of higher natural gas prices and KWH sales increased 10.0% primarily due to an increase in hydro generation. In 2017, wholesale revenues from sales to affiliates increased $28 million, or 40.6%, as compared to the prior year. In 2017, KWH sales increased 31.1% as a result of supporting Southern Company system transmission reliability and a 6.9% increase in the price of energy primarily due to higher natural gas prices.

~~In 2018, other operating revenues increased $59 million, or 28.4%~~9.6%, as compared to the prior year due to decreases of $154 million in energy revenues and $53 million in capacity revenues. Energy revenues decreased $98 million at Southern Power and $56 million at the traditional electric operating companies. The decrease at Southern Power primarily resulted from a net decrease in the volume of KWHs sold due to decreased demand and lower natural gas prices, partially offset by increases in sales from solar facilities, wind facilities, and fuel cell generation. The decrease at the traditional electric operating companies was primarily due to lower energy prices. The decrease in capacity revenues was primarily related to ~~unregulated~~the sales of ~~products~~Southern Power's Plant Mankato in the first quarter 2020 and ~~services that were reclassified as other revenues as a result of~~Southern Power's Plant Nacogdoches in the ~~adoption of ASC 606,~~ ~~Revenue from Contracts with Customers~~ ~~(ASC 606). In prior periods, these revenues were included in other income (expense), net.~~second quarter 2019. See Note 115 to the financial statements for additional ~~information regarding~~information.

Other Electric Revenues

Other electric revenues increased $36 million, or 5.7%, in 2020 as compared to the prior year. The increase was primarily due to an increase of $23 million in transmission revenues, an increase of $15 million from outdoor lighting at Georgia Power, and an increase of $10 million in energy service revenues at Alabama ~~Power's adoption~~Power, as well as an increase of ~~ASC 606. This increase was~~$6 million from pole attachment agreements at Alabama Power and Georgia Power. These increases were partially offset by ~~decreases in open access transmission tariff revenues primarily due to~~ a ~~lower rate~~reduction of $26 million largely resulting from the temporary suspension of customer disconnections and late fees related to the ~~Tax Reform Legislation.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Alabama Power Company 2018 Annual Report~~

COVID-19 pandemic.

Energy Sales

Changes in revenues are influenced heavily by the change in the volume of energy sold from year to year. KWH sales for ~~2018~~2020 and the percent change from the prior year were as follows:


	2020

	Total KWHs	Total KWH Percent Change		Weather-Adjusted Percent Change(*)
	(in billions)
Residential	47.4	(2.2)	%	3.1	%
Commercial	45.4	(7.5)		(5.7)
Industrial	47.0	(6.2)		(6.2)
Other	0.7	(9.5)		(9.3)
Total retail	140.5	(5.3)		(3.0)	%
Wholesale	45.7	(4.9)
Total energy sales	186.2	(5.2)	%

Total
KWHs

Total KWH
Percent Change

Weather-Adjusted
Percent Change
2018 2018 2017 2018 2017
(in billions)
Residential 18.6
8.2 % (6.1 )% (0.4 )% (1.2 )%
Commercial 13.9
1.9
(3.4 ) (1.0 ) (1.3 )
Industrial 23.0
1.4
1.7
1.4
1.7
Other 0.2
(5.7 ) (5.0 ) (5.7 ) (5.0 )
Total retail 55.7
3.7
(2.3 ) 0.2 % (0.1 )%
Wholesale
Non-affiliates 5.0
(8.7 ) (6.5 )
Affiliates 4.6
9.6
31.1

Total wholesale 9.6
(0.9 ) 6.6

Total energy sales 65.3
3.0 % (1.0 )%
(*)Weather-adjusted KWH sales are estimated by removing from KWH sales the effect of deviations from normal temperature conditions, based on statistical models of the historical relationship between temperatures and energy sales. 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, ~~changes in~~ weather, and ~~changes in~~ the number of customers. ~~Retail~~Weather-adjusted retail energy sales decreased 4.4 billion KWHs in 2018 were 3.7% higher than in 2017. Residential sales and commercial sales increased 8.2% and 1.9% in 2018, respectively, primarily due to colder weather in the first quarter and warmer weather in the second and third quarters 20182020 as compared to the ~~corresponding periods in 2017.~~prior year largely due to the COVID-19 pandemic. Weather-adjusted residential ~~sales were 0.4% lower~~usage increases are primarily due to customer growth and an increase in ~~2018~~average customer usage, primarily due to work-from-home policies. Weather-adjusted commercial usage decreases are primarily due to lower customer usage resulting from ~~an increase~~changes in ~~penetration of energy-efficient residential appliances. Weather-adjusted commercial sales were 1.0% lower~~consumer and business behavior in ~~2018 primarily due to lower customer usage resulting from customer initiatives in energy savings and an ongoing migration~~response to the ~~electronic commerce business model.~~COVID-19 pandemic. Industrial ~~sales increased 1.4% in 2018 as compared to 2017 as~~usage decreases are primarily a result of ~~an increase~~disruptions in ~~demand resulting from changes~~supply chain and business operations related to the COVID-19 pandemic and the overall decrease in ~~production levels primarily in the primary metals, pipelines, and mining sectors offset by the paper sector.~~

~~Retail energy sales in 2017 were 2.3% lower than in 2016. Residential sales and commercial sales decreased 6.1% and 3.4% in 2017, respectively, primarily~~business activity due to ~~milder weather in~~ the ~~first and third quarters 2017 as compared to the corresponding periods in 2016. Weather-adjusted residential sales were 1.2% lower in 2017 primarily due to lower customer usage~~ resulting from an increase in penetration of energy-efficient residential appliances, partially offset by customer growth. Weather-adjusted commercial sales were 1.3% lower in 2017 primarily due to lower customer usage resulting from customer initiatives in energy savings and an ongoing migration to the electronic commerce business model, partially offset by customer growth. Industrial sales increased 1.7% in 2017 as compared to 2016 as a result of an increase in demand resulting from changes in production levels primarily in the primary metals, chemicals, and mining sectors offset by the pipelines and paper sectors.recession.

See ~~"Operating~~"Electric 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.

II-10

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Other Revenues

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, ~~demand,~~ and the availability of generating units. Additionally, ~~Alabama Power purchases~~the electric utilities purchase a portion of ~~its~~their electricity needs from the wholesale market.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Alabama Power Company 2018 Annual Report~~

Details of ~~Alabama Power's~~the Southern Company system's generation and purchased power were as follows:


	2018	2017	2016		2020		2019
Total generation (in billions of KWHs)	60.5	60.3	60.2	Total generation (in billions of KWHs)	176		187
Total purchased power (in billions of KWHs)	8.1	6.4	7.1	Total purchased power (in billions of KWHs)	18		18
Sources of generation (percent) —				Sources of generation (percent) —
Gas				Gas	53		52
Coal	50	50	53	Coal	18		22
Nuclear	23	24	23	Nuclear	17		16
Hydro				Hydro	4		3
Wind, Solar, and Other				Wind, Solar, and Other	8		7
Cost of fuel, generated (in cents per net KWH) —				Cost of fuel, generated (in cents per net KWH) —
Gas	19	20	19	Gas	2.00		2.36
Hydro	8	6	5
Cost of fuel, generated (in cents per net KWH) —
Coal	2.73	2.60	2.75	Coal	2.91		2.87
Nuclear	0.77	0.75	0.78	Nuclear	0.78		0.79
Gas	2.84	2.72	2.67
Average cost of fuel, generated (in cents per net KWH)^(b)	2.26	2.14	2.26	1.95		2.20
Average cost of purchased power (in cents per net KWH)^(c)	5.47	5.29	4.80
Average cost of purchased power (in cents per net KWH)(*)				Average cost of purchased power (in cents per net KWH)(*)	4.65		4.66



~~(a)~~	~~For 2018,~~(*)Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. In 2020, total fuel generated and average cost of fuel, generated excludes a $30 million adjustment associated with a May 2018 Alabama PSC accounting order related to excess deferred income taxes. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Tax Reform Accounting Order" herein for additional information.
~~(b)~~	~~KWHs generated by hydro are excluded from the average cost of fuel, generated.~~
~~(c)~~	~~Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider.~~

~~PPA capacity revenuesincreased $58 million, or 11%, primarily due to additional customer capacity requirements and a new PPA related to Plant Mankato acquired in late 2016.~~

II-46

PPA energy revenues increased $276 million, or 40%, primarily due to a $213 million increase in renewable energy sales arising from new solar and wind facilities and a $50 million increase in sales related to existing natural gas PPAs primarily due to an $85 million increase in the average cost of fuel, partially offset by a $35 million decrease in the volume of KWHs sold primarily due to reduced customer load.

Non-PPA revenues increased $164 million, or 50%, primarily due to a $156 million increase in the volume of KWHs sold primarily from uncovered natural gas capacity through short-term opportunity sales, as well as an $8 million increase in the market price of energy.

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power~~ Company and Subsidiary Companies ~~2018~~2020 Annual Report

Sequent. The purchase agreements require Sequent to provide firm gas to the natural gas distribution utilities, but the natural gas distribution utilities maintain the right and ability to make their own long-term supply arrangements if they believe it is in the best interest of their customers.

~~Fuel~~Each agreement provides for Sequent to make payments to the natural gas distribution utility through an annual minimum guarantee within a profit sharing structure, a profit sharing structure without an annual minimum guarantee, or a fixed fee.

Income Tax Matters

Consolidated Income Taxes

The impact of certain tax events at Southern Company and/or its other subsidiaries can, and ~~Purchased~~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.

Tax Credits

The Tax Reform Legislation, as modified by the 2021 Consolidated Appropriations Act signed into law in December 2020, retained solar energy incentives of 30% ITC for projects that commenced construction by December 31, 2019; 26% ITC for projects that commence construction in 2020 through 2022; 22% ITC for projects that commence construction in 2023; and a permanent 10% ITC for projects that commence construction on or after January 1, 2024, or projects which are placed in service after December 31, 2025 regardless of when construction began. In addition, the Tax Reform Legislation retained wind energy incentives for projects that commenced construction in 2016, 2017, 2018, and 2019 of 100% PTC, 80% PTC, 60% PTC, and 40% PTC, respectively. As a result of a tax extenders bill passed in December 2019 and the 2021 Consolidated Appropriations Act, projects that begin construction in 2020 or 2021 are entitled to 60% PTC. Projects commencing construction after 2021 will not be entitled to any PTCs. Southern Company has received ITCs and PTCs in connection with investments in solar, wind, fuel cell, and biomass facilities primarily at Southern Power ~~Expenses~~

~~Details of Southern Power's generation~~ and ~~purchased power were as follows:~~

Total
KWHs Total KWH % Change Total
KWHs Total KWH % Change
2018 2017
(in billions of KWHs)
Generation 46 44
Purchased power 4 5
Total generation and purchased power 50 2% 49 23%
Total generation and purchased power, excluding solar, wind, and tolling agreements 29 4% 28 22%
Georgia Power.

Southern Power's ~~PPAs for natural gas~~ITCs relate to its investment in new solar facilities acquired or constructed and ~~biomass generation generally provide that~~its PTCs relate to the ~~purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing~~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, 2020, Southern Company and Southern Power had approximately $1.4 billion and $1.1 billion, respectively, of unutilized ITCs and PTCs, which are currently expected to be fully utilized by 2024, but could be further delayed. Since 2018, Southern Power has been utilizing tax equity partnerships for ~~substantially~~wind and solar projects, where the tax partner takes significantly all of the ~~cost of fuel relating to the energy delivered under such PPAs. Consequently, changes~~respective federal tax benefits. These tax equity partnerships are consolidated in ~~such fuel costs are generally accompanied by a corresponding change in related fuel revenues~~Southern Company's and do not have a significant impact on net income. Southern Power is responsible for the cost of fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the wholesale market or into the power pool for capacity owned directly by Southern Power.

Purchased power expenses will vary depending on demand, availability, and the cost of generating resources throughout the Southern Company system and other contract resources. Load requirements are submitted to the power pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is generation owned by Southern Power, an affiliate company, or external parties. Such purchased power costs are generally recovered through PPA revenues.

~~Details of~~ Southern Power's ~~fuel~~financial statements using the HLBV methodology to allocate partnership gains and ~~purchased power expenses were as follows:~~

2018 2017 2016
(in millions)
Fuel $ 699
$ 621
$ 456
Purchased power 176
149
102
Total fuel and purchased power expenses $ 875
$ 770
$ 558

~~In 2018, total fuel and purchased power expenses increased $105 million, or 14%, compared to 2017. Fuel expense~~increased $78 million, or 13%, primarily due to a $60 million increase associated with the volume of KWHs generated, excluding solar, wind, and tolling agreements, primarily due to customer load, and an $18 million increase associated with the average cost of natural gas per KWH generated. Purchased power expense increased $27 million, or 18%, primarily due to a $43 million increase associated with the average cost of purchased power, primarily in the first quarter 2018, partially offset by a $16 million decrease associated with the volume of KWHs purchased.

~~In 2017, total fuel and purchased power expenses increased $212 million, or 38%, compared to 2016. Fuel expense~~increased $165 million, or 36%, primarily due to an $83 million increase associated with the volume of KWHs generated, excluding solar, wind, and tolling agreements, and an $82 million increase associated with the average cost of natural gas per KWH generated. Purchased power expense increased $47 million, or 46%, primarily due to a $37 million increase associated with the volume of KWHs purchased and an $11 million increase associated with the average cost of purchased power.

~~Other Operations and Maintenance Expenses~~

In 2018, other operations and maintenance expenses increased $9 million, or 2%, compared to 2017. The increase was primarily due to scheduled outage and maintenance expenses. In 2017, other operations and maintenance expenses increased $32 million, or 9%, compared to 2016. The increase was primarily due to increases of $56 million associated with new facilities, $21 million in business development and support expenses, and $6 million in employee compensation, all associated with Southern Power's overall growth. These 2017 increases were partially offset by decreases of $35 million associated with scheduled outage and maintenance expenses and $15 million in non-outage operations and maintenance expenses.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

~~Depreciation and Amortization~~

In 2018, depreciation and amortization decreased $10 million, or 2%, compared to 2017, primarily due to the cessation of depreciation on the Florida Plants and Plant Mankato that were classified as held for sale in May and November 2018, respectively. In 2017, depreciation and amortization increased $151 million, or 43%, compared to 2016, primarily due to additional depreciation related to new solar, wind, and natural gas facilities placed in service.losses. See Note 51 to the financial statements under "~~Depreciation and Amortization~~ – ~~Southern Power~~""General" for additional information on the HLBV methodology and Note 151 to the financial statements under ~~"Southern Power"~~"Income Taxes" and ~~"Assets Held for Sale" for additional information.~~

~~Taxes Other Than Income Taxes~~

In 2018, taxes other than income taxes decreased $2 million, or 4%, compared to 2017. In 2017, taxes other than income taxes were $48 million compared to $23 million in 2016, primarily due to additional property taxes on new facilities.

~~Asset Impairment~~

In 2018, asset impairment charges were $156 million. In the second quarter 2018, a $119 million asset impairment charge was recorded in contemplation of the sale of the Florida Plants. In addition, in the third quarter 2018, a $36 million asset impairment charge was recorded on wind turbine equipment held for development projects. There were no asset impairment charges recorded in 2017 or 2016. See Note ~~15 to the financial statements under "Southern Power –~~ ~~Sales of Natural Gas Plants" and " – Development Projects" for additional information.~~

~~Interest Expense, Net of Amounts Capitalized~~

In 2018, interest expense, net of amounts capitalized decreased $8 million, or 4%, compared to 2017. The decrease was primarily due to an increase in capitalized interest associated with construction projects. In 2017, interest expense, net of amounts capitalized increased $74 million, or 63%, compared to 2016. The increase was primarily due to an increase of $44 million in interest expense related to an increase in average outstanding long-term debt, primarily to fund Southern Power's growth strategy and continuous construction program, as well as a $30 million decrease in capitalized interest associated with completing construction of and placing in service solar facilities.

~~Other Income (Expense), Net~~

In 2018, other income (expense), net increased $22 million compared to 2017 primarily due to a $14 million gain from a joint-development wind project, which is attributable to Southern Power's partner in the project and fully offset within noncontrolling interests. In ~~2017, other income (expense), net decreased $5 million compared to 2016.~~

~~Income Taxes (Benefit)~~

In 2018, income tax benefit was $164 million compared to $939 million for 2017, a decrease of $775 million, primarily attributable to a $743 million tax benefit in 2017 and a $79 million tax expense in 2018, both related to the remeasurement of accumulated deferred income taxes in accordance with the Tax Reform Legislation. In addition, income tax benefits associated with solar ITCs decreased by $58 million as a result of fewer solar facilities being placed in service in 2018 as compared to 2017. These decreases were partially offset by $65 million of income tax benefits related to certain changes in state apportionment rates arising from reorganizations of Southern Power's legal entities that own and operate certain of its solar and wind facilities and a decrease of $47 million of income tax expense as a result of lower pre-tax earnings and the lower federal tax rate.

In 2017, income tax benefit was $939 million compared to $195 million for 2016 of which $743 million of the increase was related to the Tax Reform Legislation. The remaining increase in tax benefit was primarily due to an increase of $89 million in PTCs from wind generation in 2017 and other state income taxes, significantly offset by a decrease in tax benefits associated with lower ITCs from solar facilities placed in service.

~~See FUTURE EARNINGS POTENTIAL – "Income Tax Matters~~ – ~~Federal Tax Reform Legislation" herein and Notes 1 and~~ 10 to the financial statements under ~~"Income~~"Deferred Tax Assets and ~~Other Taxes"~~Liabilities – Tax Credit Carryforwards" and "Effective Tax ~~Rate," respectively,~~Rate" for additional ~~information.~~information regarding utilization and amortization of credits and the tax benefit related to associated basis differences.

Alabama State Tax Reform Legislation

~~Net Income Attributable to Noncontrolling Interests~~

~~In 2018, net income attributable to noncontrolling interests increased $13 million, or 28%, compared to 2017. The increase was primarily due to $20 million~~On February 12, 2021, the State of ~~net income allocations due to~~Alabama enacted tax legislation that changes the sale of a noncontrolling 33% equity interest in SP Solar and $14 million of other income allocations attributable to a joint-development wind project, partially offset by a reduction of $19 million due to HLBV income allocations between Southern Power and tax equity partners for partnerships entered into during 2018. In

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

~~2017, noncontrolling interests increased $10 million, or 28%, compared to 2016 primarily due to additional net income allocations from new solar partnerships.~~

~~Effects of Inflation~~

Southern Power is party to long-term contracts reflecting market-based rates, including inflation expectations. Any adverse effect of inflation on Southern Power's results of operations has not been substantial in recent years.

~~FUTURE EARNINGS POTENTIAL~~

~~General~~

~~The results of operations~~apportionment methodology effective for the ~~past three years are not necessarily indicative~~2021 tax year. This legislation is expected to reduce the amount of Southern Power's future earnings ~~potential. Southern Power completed multiple sales~~apportioned to the State of ~~noncontrolling interests~~Alabama and, ~~assets in 2018 as described below. These sales will materially decrease future earnings and cash flows to Southern Power. See below for a summary of the 2018 disposition activity. The level of~~thus, reduce Southern Power's ~~future earnings also depends~~existing state accumulated deferred tax liabilities, which would have a favorable impact on ~~numerous factors that affect the opportunities, challenges, and risks of~~ Southern Power's competitive wholesale business. These factors include: Southern Power's ability to achieve sales growth while containing costs; regulatory matters; creditworthiness of customers; total generating capacity available in Southern Power's market areas; the successful remarketing of capacity as current contracts expire; and Southern Power's ability to execute its growth strategy through the development or acquisition of renewable facilities and other energy projects.

On May 22, 2018, Southern Power completed the sale of a noncontrolling 33% equity interest in SP Solar, a limited partnership indirectly owning substantially all of Southern Power's solar facilities, to Global Atlantic Financial Group Limited (Global Atlantic) for an aggregate purchase price of approximately $1.2 billion. Accordingly, Global Atlantic will receive 33% of all cash distributions paid by SP Solar. Southern Power continues to consolidate the assets and liabilities of SP Solar with Global Atlantic's share of partnership earnings included in net ~~income attributable to noncontrolling interests in the consolidated statements of income, which was $20 million for the period from May 22, 2018 to December 31, 2018.~~

Southern Power completed the sale of all of its equity interests in the Florida Plants to NextEra Energy on December 4, 2018, for an aggregate purchase price of $203 million. Pre-tax net income for the Florida Plants was $49 million and $37 million for the period from January 1, 2018 to December 4, 2018 and for the year ended December 31, 2017, respectively.

On December 11, 2018, Southern Power completed the sale of a noncontrolling tax equity interest in SP Wind, which owns a portfolio of eight operating wind facilities, to three financial investors, for approximately $1.2 billion. The tax equity investors together will generally receive 40% of the cash distributions from available cash and will receive a 99% allocation of tax attributes, including PTCs. Southern Power continues to consolidate the assets and liabilities of SP Wind with the investors' shares of partnership earnings reflected in net income attributable to noncontrolling interests in the consolidated statements of income.

On November 5, 2018, Southern Power entered into an agreement with Northern States Power to sell all of its equity interests in Plant Mankato (including the 385-MW expansion currently under construction) for an aggregate purchase price of approximately $650 million. The completion of the disposition is subject to the expansion unit reaching commercial operation as well as various other customary conditions to closing, including working capital and timing adjustments. Pre-tax net income for Plant Mankato was immaterial for the years ended December 31, 2018 and 2017. This transaction is subject to FERC and state commission approvals and is expected to close mid-2019. The ultimate outcome of this matter cannot be determined at this time.

~~Demand~~

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 ~~electricity is primarily driven by~~current proceedings and/or matters not specifically reported herein or in Notes 2 and 3 to the ~~pace~~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 ~~economic growth that may be affected by changes in regional~~various contingencies, including matters being litigated, regulatory matters, and ~~global economic conditions, as well as renewable portfolio standards,~~other matters which may ~~impact future earnings. Other factors that could influence~~affect future earnings ~~include weather, transmission constraints, cost of generation from units within the power pool, and operational limitations.~~

~~Power Sales Agreements~~

~~General~~

Southern Power has PPAs with some of Southern Company's 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 in the event that S&P or Moody's downgrades the credit ratings of the respective company to an unacceptable credit rating or if the counterparty is not rated or fails to maintain a minimum coverage ratio.potential.

II-47

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power~~ Company and Subsidiary Companies ~~2018~~2020 Annual Report

ACCOUNTING POLICIES

~~On January 29, 2019, Pacific Gas & Electric Company (PG&E) filed petitions to reorganize under Chapter 11~~Application of Critical Accounting Policies and Estimates

The Registrants prepare their financial statements in accordance with GAAP. Significant accounting policies are described in the U.S. Bankruptcy Code. Southern Power, together with its noncontrolling partners, owns four solar facilities where PG&E is the energy off-taker for approximately 207 MWs of capacity under long-term PPAs. PG&E is also the transmission provider for these facilities and two of Southern Power's other solar facilities. Southern Power has evaluated the recoverability of its investments in these solar facilities under various scenarios, including selling the related energy into the competitive markets, and has concluded they are not impaired. At December 31, 2018, Southern Power had outstanding accounts receivables due from PG&E of $1 million relatednotes to the ~~PPAs and $36 million related to~~financial statements. In the ~~transmission interconnections (of which $17 million is classified in other deferred charges and assets). Southern Power does not expect~~application of these policies, certain estimates are made that may have a material impact on the results of operations and related disclosures of the applicable Registrants (as indicated in the section descriptions herein). Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Senior management has reviewed and discussed the following critical accounting policies and estimates with the Audit Committee of Southern Company's Board of Directors.

Utility Regulation (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)

The traditional electric operating companies and the natural gas distribution utilities are subject to ~~its~~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 ~~if,~~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 ~~bankruptcy~~estimates of allowable costs used in the ratemaking process. These estimates may differ from those actually incurred by the traditional electric operating companies and the natural gas distribution utilities; therefore, the accounting estimates inherent in specific costs such as depreciation, AROs, and pension and other postretirement benefits have less of a direct impact on the results of operations and financial condition of the applicable Registrants than they would on a non-regulated company.

Revenues related to regulated utility operations as a percentage of total operating revenues in 2020 for the applicable Registrants were as follows: 89% for Southern Company, 99% for Alabama Power, 96% for Georgia Power, 99% for Mississippi Power, and 86% for Southern Company Gas.

As reflected in Note 2 to the financial statements, significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability of these regulatory assets and any requirement to refund these regulatory liabilities based on applicable regulatory guidelines and GAAP. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact the financial statements of the applicable Registrants.

Estimated Cost, Schedule, and Rate Recovery for the Construction of Plant Vogtle Units 3 and 4

(Southern Company and Georgia Power)

In 2016, the Georgia PSC approved the Vogtle Cost Settlement Agreement, which resolved certain prudency matters in connection with Georgia Power's fifteenth VCM report. In 2017, the Georgia PSC approved Georgia Power's seventeenth VCM report, which included a recommendation to continue construction of Plant Vogtle Units 3 and 4, with Southern Nuclear serving as project manager and Bechtel serving as the primary construction contractor, as well as a modification of the Vogtle Cost Settlement Agreement. The Georgia PSC's related order stated that under the modified Vogtle Cost Settlement Agreement, (i) none of the $3.3 billion of costs incurred through December 31, 2015 should be disallowed as imprudent; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the $0.3 billion paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs; (iv) Georgia Power would have the burden of proof to show that any capital costs above $5.68 billion were prudent; (v) Georgia Power's total project capital cost forecast of $7.3 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds) was found reasonable and did not represent a cost cap; and (vi) prudence decisions would be made subsequent to achieving fuel load for Unit 4.

As of December 31, 2020, Georgia Power revised its total project capital cost forecast to $8.7 billion (net of $1.7 billion received under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds). This forecast includes

II-48

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

construction contingency of $171 million and is based on the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4. Since 2018, construction contingency totaling $0.5 billion has been assigned to the base capital cost forecast. Although Georgia Power believes these incremental costs are reasonable and necessary to complete the project and the Georgia PSC's order in the seventeenth VCM proceeding specifically states that the construction of Plant Vogtle Units 3 and 4 is not subject to a cost cap, Georgia Power did not seek rate recovery for a $0.7 billion increase in the base capital cost forecast in 2018 and has not sought rate recovery for the construction contingency costs. After considering the significant level of uncertainty that exists regarding the future recoverability of these costs since the ultimate outcome of these matters is subject to the outcome of future assessments by management, as well as Georgia PSC decisions in these future regulatory proceedings, ~~PG&E does~~Georgia Power recorded total pre-tax charges to income of $1.1 billion ($0.8 billion after tax) in the second quarter 2018 and $149 million ($111 million after tax) and $176 million ($131 million after tax) as of June 30, 2020 and December 31, 2020, respectively.

As part of its ongoing processes, Southern Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of engineering support, commodity installation, system turnovers and related test results, and workforce statistics. The project continues to face challenges including, but not ~~perform~~limited to, higher than expected absenteeism; overall construction and subcontractor labor productivity; system turnover and testing activities; and electrical equipment and commodity installation. In addition, Georgia Power estimates the productivity impacts of the COVID-19 pandemic have consumed approximately three to four months of embedded schedule margin. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays from the challenges described below, could impact the ability to achieve the November 2021 in-service date.

As construction, including subcontract work, continues and testing and system turnover activities increase, challenges with management of contractors and vendors; subcontractor performance; supervision of craft labor and related productivity, particularly in the installation of electrical, mechanical, and instrumentation and controls commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues could arise and change the projected schedule and estimated cost. In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction and testing activities at Plant Vogtle Units 3 and 4.

There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. Findings resulting from such inspections could require additional remediation and/or further NRC oversight. In addition, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs, are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.

The ultimate outcome of these matters cannot be determined at this time. However, any schedule extension beyond the regulatory-approved in-service dates is currently estimated to result in additional base capital costs for Georgia Power of approximately $25 million per month for Unit 3 and approximately $15 million per month for Unit 4, as well as the related AFUDC. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.

Given the significant complexity involved in estimating the future costs to complete construction and start-up of Plant Vogtle Units 3 and 4 and the significant management judgment necessary to assess the related uncertainties surrounding future rate recovery of any projected cost increases, as well as the potential impact on results of operations and cash flows, Southern Company and Georgia Power consider these items to be critical accounting estimates. See Note 2 to the financial statements under "Georgia Power – Nuclear Construction" for additional information.

II-49

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Accounting for Income Taxes (Southern Company, Mississippi Power, Southern Power, and Southern Company Gas)

The consolidated income tax provision and deferred income tax assets and liabilities, as well as any unrecognized tax benefits and valuation allowances, require significant judgment and estimates. These estimates are supported by historical tax return data, reasonable projections of taxable income, the ability and intent to implement tax planning strategies if necessary, and interpretations of applicable tax laws and regulations across multiple taxing jurisdictions. The effective tax rate reflects the statutory tax rates and calculated apportionments for the various states in which the Southern Company system operates.

Southern Company files a consolidated federal income tax return and the Registrants file various state income tax returns, some of which are combined or unitary. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and each subsidiary is allocated an amount of tax similar to that which would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the ~~PPAs~~federal tax liability. Certain deductions and credits can be limited or utilized at the ~~terms~~consolidated or combined level resulting in tax credit and/or state NOL carryforwards that would not otherwise result on a stand-alone basis. Utilization of these carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of Southern Company's and its subsidiaries' current financial position and results of operations, including currently available information about future years, to estimate when future taxable income will be realized.

Current and deferred state income tax liabilities and assets are estimated based on laws of multiple states that determine the income to be apportioned to their jurisdictions. States have various filing methodologies and utilize specific formulas to calculate the apportionment of taxable income. The calculation of deferred state taxes considers apportionment factors and filing methodologies that are expected to apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on the financial statements of the ~~PPAs~~applicable Registrants.

Given the significant judgment involved in estimating tax credit and/or state NOL carryforwards and multi-state apportionments for all subsidiaries, the applicable Registrants consider deferred income tax liabilities and assets to be critical accounting estimates.

Asset Retirement Obligations (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)

AROs are ~~renegotiated; however,~~computed as the present value of the estimated costs for an asset's future retirement and are recorded in the period in which the liability is incurred. The estimated costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.

The ARO liabilities for the traditional electric operating companies primarily relate to facilities that are subject to the CCR Rule and the related state rules, principally ash ponds. In addition, Alabama Power and Georgia Power have retirement obligations related to the decommissioning of nuclear facilities (Alabama Power's Plant Farley and Georgia Power's ownership interests in Plant Hatch and Plant Vogtle Units 1 and 2). Other significant AROs include various landfill sites and asbestos removal for Alabama Power, Georgia Power, and Mississippi Power and gypsum cells and mine reclamation for Mississippi Power.

The traditional electric operating companies and Southern Company Gas also have identified other retirement obligations, such as obligations related to certain electric transmission and distribution facilities, certain asbestos-containing material within long-term assets not subject to ongoing repair and maintenance activities, certain wireless communication towers, the disposal of polychlorinated biphenyls in certain transformers, leasehold improvements, equipment on customer property, and property associated with the Southern Company system's rail lines and natural gas pipelines. However, liabilities for the removal of these assets have not been recorded because the settlement timing for certain retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these retirement obligations will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.

The cost estimates for AROs related to the disposal of CCR are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule and the related state rules. The traditional electric operating companies have periodically updated, and expect to continue periodically updating, their related cost estimates and ARO liabilities for each CCR unit as additional information related to these assumptions becomes available. Some of these updates have been, and future updates may be, material. See Note 6 to the financial statements for additional information, including increases to AROs related to ash ponds recorded during 2020 by certain Registrants.

II-50

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Given the significant judgment involved in estimating AROs, the applicable Registrants consider the liabilities for AROs to be critical accounting estimates.

Pension and Other Postretirement Benefits (Southern Company, Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas)

The applicable Registrants' calculations of pension and other postretirement benefits expense are dependent on a number of assumptions. These assumptions include discount rates, healthcare cost trend rates, expected long-term rate of return (LRR) on plan assets, mortality rates, expected salary and wage increases, and other factors. Components of pension and other postretirement benefits expense include interest and service cost on the pension and other postretirement benefit plans, expected return on plan assets, and amortization of certain unrecognized costs and obligations. Actual results that differ from the assumptions utilized are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While the applicable Registrants believe the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect their pension and other postretirement benefit costs and obligations.

Key elements in determining the applicable Registrants' pension and other postretirement benefit expense are the LRR and the discount rate used to measure the benefit plan obligations and the periodic benefit plan expense for future periods. For purposes of determining the applicable Registrants' liabilities related to the pension and other postretirement benefit plans, Southern Company discounts the future related cash flows using a single-point discount rate for each plan developed from the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to expected benefit payments. The discount rate assumption impacts both the service cost and non-service costs components of net periodic benefit costs as well as the projected benefit obligations.

The LRR on pension and other postretirement benefit plan assets is based on Southern Company's investment strategy, 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 ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The following table illustrates the sensitivity to changes in the applicable Registrants' long-term assumptions with respect to the discount rate, salary increases, and the long-term rate of return on plan assets:

Increase/(Decrease) in

25 Basis Point Change in:

Total Benefit Expense for 2021

Projected Obligation for Pension Plan at December 31, 2020

Projected Obligation for

Other Postretirement

Benefit Plans at December 31, 2020

(in millions)

Discount rate:

Southern Company

$42/$(40)

$628/$(592)

$57/$(54)

Alabama Power

$11/$(10)

$151/$(142)

$14/$(14)

Georgia Power

$12/$(11)

$187/$(177)

$20/$(19)

Mississippi Power

$2/$(2)

$28/$(27)

$2/$(2)

Southern Company Gas

$–/$–

$43/$(40)

$6/$(6)

Salaries:

Southern Company

$25/$(24)

$136/$(132)

$–/$–

Alabama Power

$7/$(7)

$38/$(37)

$–/$–

Georgia Power

$7/$(7)

$39/$(38)

$–/$–

Mississippi Power

$1/$(1)

$6/$(6)

$–/$–

Southern Company Gas

$1/$(1)

$3/$(3)

$–/$–

Long-term return on plan assets:

Southern Company

$38/$(38)

N/A

Alabama Power

$10/$(10)

N/A

Georgia Power

$12/$(12)

N/A

Mississippi Power

$2/$(2)

N/A

Southern Company Gas

$3/$(3)

N/A

See Note 11 to the financial statements for additional information regarding pension and other postretirement benefits.

Asset Impairment (Southern Company, Southern Power, and Southern Company Gas)

Goodwill (Southern Company and Southern Company Gas)

II-52

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact the applicable Registrant's results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. As the determination of an asset's fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, the applicable Registrants consider these estimates to be critical accounting estimates.

See Note 1 to the financial statements under "Goodwill and Other Intangible Assets and Liabilities" for additional information regarding the applicable Registrants' goodwill.

Long-Lived Assets (Southern Company, Southern Power, and Southern Company Gas)

Southern Power's ~~revenue recognition depends~~investments in long-lived assets are primarily generation assets. Excluding the natural gas distribution utilities, Southern Company Gas' investments in long-lived assets are primarily natural gas transportation and storage facility assets, whether in service or under construction. In addition, exclusive of the traditional electric operating companies and natural gas distribution utilities, Southern Company's investments in long-lived assets also include investments in leveraged leases. During 2020, Southern Company recorded impairment charges totaling $206 million ($105 million after tax) related to two of its leveraged lease investments.

II-53

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Derivatives and Hedging Activities (Southern Company and Southern Company Gas)

Determining whether a contract meets the definition of a derivative instrument, contains an embedded derivative requiring bifurcation, or qualifies for hedge accounting treatment is complex. The treatment of a single contract may vary from period to period depending upon accounting elections, changes in the applicable Registrant's assessment of the likelihood of future hedged transactions, or new interpretations of accounting guidance. As a result, judgment is required in determining the appropriate ~~classification~~accounting treatment. In addition, the estimated fair value of derivative instruments may change significantly from period to period depending upon market conditions, and ~~documentation~~changes in hedge effectiveness may impact the accounting treatment.

Southern Company Gas uses derivative instruments primarily to reduce the impact to its results of operations due to the risk of changes in ~~accordance with GAAP. In general,~~ the price of natural gas and, to a lesser extent, Southern Company Gas hedges against warmer-than-normal weather and interest rates. The majority of these contracts are over-the-counter wholesale contracts for the purchase or sale of natural gas or consist of contracts which do not include asset management agreements, financial optionality, or potential embedded derivatives. The fair value of natural gas derivative instruments used to manage exposure to changing natural gas prices reflects the estimated amounts that Southern Company Gas would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. For derivatives utilized at gas marketing services and wholesale gas services that are not designated as accounting hedges, changes in fair value are reported as gains or losses in results of operations in the period of change. Gas marketing services records derivative gains or losses arising from cash flow hedges in OCI and reclassifies them into earnings in the same period that the underlying hedged item is recognized in earnings.

•the creditworthiness of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit);

•events specific to a given counterparty; and

•the impact of nonperformance risk on liabilities.

A significant change in the underlying market prices or pricing assumptions used in pricing derivative assets or liabilities may result in a significant financial statement impact.

Revenue Recognition (Southern Power)

Southern Power's power sale transactions, which include PPAs, ~~can be~~are classified in one of four general categories: leases, non-derivatives or normal sale derivatives, derivatives designated as cash flow hedges, and derivatives not designated as hedges. ~~For more information on derivative transactions, see FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" herein and Notes 1 and 14 to~~The two categories with the ~~financial statements.~~most judgment required for Southern Power are described further below. 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.

Lease Transactions

Southern Power considers the ~~following factors~~terms of a sales contract to determine whether ~~the sales~~it should be accounted for as a lease. A contract is or contains a ~~lease:~~

~~Assessing whether specific property is explicitly or implicitly identified in~~lease if the ~~agreement;~~

~~Table of ContentsIndex~~contract conveys the right to ~~Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

~~Determining whether the fulfillment of the arrangement is dependent on~~control the use of ~~the~~ identified ~~property; and~~

~~Assessing whether the arrangement conveys to the purchaser the right to use the identified property.~~

property, plant, or equipment for a period of time in exchange for consideration. If the contract meets the ~~above~~ criteria for a lease, Southern Power performs further analysis as to determine

II-54

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

whether the lease is classified as operating, financing, or sales-type. ~~All~~Generally, all of 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. See Note 9 to the financial statements for additional information.

Non-Derivative and Normal Sale Derivative Transactions

If the power sales contract is not classified as a lease, Southern Power further considers ~~the following factors to determine proper classification:~~

~~Assessing~~ whether the contract meets the definition of a ~~derivative;~~

~~Assessing whether~~derivative. If the contract ~~meets~~does meet the definition of a ~~capacity contract;~~

~~Assessing~~derivative, Southern Power will assess whether it can be designated as a normal sale contract. The determination of whether a contract can be designated as a normal sale contract requires judgment, including whether the ~~probability at inception and throughout the term~~sale of ~~the individual contract that the contract will result~~electricity involves physical delivery in ~~physical delivery; and~~

~~Ensuring that the contract~~ quantities ~~do not exceed~~within Southern Power's available generating capacity ~~(including purchased 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 ~~(i.e. capacity contracts which provide for the sale of electricity that involve physical delivery in quantities within Southern Power's available generating capacity)~~ are accounted for as executory contracts. For contracts that have a capacity charge, the revenue is generally recognized in the period that it becomes billable. Revenues related to energy and ancillary services are recognized in the period the energy is delivered or the service is rendered. See Note 4 to the financial statements for additional information.

~~Cash Flow Hedge Transactions~~

~~Southern Power further considers the following in designating other derivative contracts for the sale of electricity as cash flow hedges of anticipated sale transactions:~~

~~Identifying the hedging instrument, the forecasted hedged transaction, and the nature of the risk being hedged; and~~

~~Assessing hedge effectiveness at inception and throughout the contract term.~~

~~These contracts are accounted for on a fair value basis and are recorded in AOCI over the life of the contract. Realized gains and losses are then recognized in operating revenues as incurred.~~

~~Derivative (Non-Hedge) Transactions~~

Contracts for sales of electricity, which meet the definition of a derivative and that either do not qualify or are not designated as normal sales or as cash flow hedges, are accounted for on a fair value basis and are recorded in operating revenues.

~~Impairment of Long-Lived Assets and Intangibles~~

Southern Power's investments in long-lived assets are primarily generation assets, whether in service or under construction. Southern Power's intangible assets arise from certain acquisitions and consist of acquired PPAs, which are amortized to revenue over the term of the respective PPAs. Southern Power evaluates the carrying value of these assets whenever indicators of potential impairment exist. Examples of impairment indicators could include significant changes in construction schedules, current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in market prices, the inability to remarket generating capacity for an extended period, the unplanned termination of a customer contract or inability of a customer to perform under the terms of the contract, or the inability to deploy wind turbine equipment to a development project. If an indicator exists, the asset is tested for recoverability by comparing the asset carrying value to the sum of the undiscounted expected future cash flows directly attributable to the asset. If the estimate of undiscounted future cash flows is less than the carrying value of the asset, the fair value of the asset is determined and a loss is recorded. A high degree of judgment is required in developing estimates related to these evaluations, which are based on projections of various factors, including the following:

~~Future demand for electricity based on projections of economic growth and estimates of available generating capacity;~~

~~Future power and natural gas prices, which have been quite volatile in recent years; and~~

~~Future operating costs.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

In addition, when assets are identified as held for sale, an impairment loss is recognized to the extent that the carrying value of the assets or asset group exceeds the asset fair value less cost to sell. In 2018, an impairment charge of $119 million was recorded for the Florida Plants concurrent with the assets being identified as held for sale as a result of a signed purchase and sale agreement. Also in 2018, an impairment charge of $36 million was recorded for wind turbine equipment that is no longer likely to be deployed to a wind generation project.

Acquisition Accounting (Southern Power)

Southern Power may acquire generation assets as part of its overall growth strategy. At the time of an acquisition, Southern Power will assess if these assets and activities meet the definition of a business. For acquisitions that meet the definition of a business, ~~Southern Power includes operating results from~~ the ~~date of acquisition in its consolidated financial statements. The~~ purchase price, including any contingent consideration, is allocated based on the fair value of the identifiable assets acquired and liabilities assumed (including any intangible ~~assets)~~assets, primarily related to acquired PPAs). Assets acquired that do not meet the definition of a business are accounted for as an asset acquisition.

The purchase price of each asset acquisition is allocated based on the relative fair value of assets acquired.

Contingent consideration primarily relates to fixed amounts due to the seller once the facility is placed in service. For contingent consideration with variable payments, Southern Power fair values the arrangement with any changes recorded in the consolidated statements of income. 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.

~~Accounting for Income Taxes~~

~~The consolidated income tax provision~~Variable Interest Entities (Southern Power)

Southern Power enters into partnerships with varying ownership structures. Upon entering into these arrangements, membership interests and ~~deferred income tax assets~~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 ~~liabilities, as well as any unrecognized tax~~the obligation to absorb losses or the right to receive benefits ~~and valuation allowances,~~from the VIE that could potentially be significant to the VIE, making it the primary beneficiary. Making this determination may require significant judgment and estimates. These estimates are supported by historical tax return data, reasonable projections of taxable income, 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 whichmanagement judgment.

If Southern Power ~~operates.~~

~~On behalf of Southern Power, Southern Company files~~is the primary beneficiary and is considered to have a consolidated federal income tax return and 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 no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. Certain deductions and credits can be limited atcontrolling ownership, the consolidated or combined level resulting in NOL and tax credit carryforwards that would not otherwise result on a stand-alone basis. Utilization of NOL and tax credit carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of Southern Power's, as well as Southern Company's, current financial positionassets, liabilities, and results of operations ~~including currently available information about future years,~~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 ~~estimate when future taxable income will be realized.~~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.

~~Current~~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 ~~deferred state income~~ tax ~~liabilities and assets~~benefits are ~~estimated~~not based on ~~laws~~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 ~~multiple states that determine~~income based on the ~~income to be apportioned to their jurisdictions. States utilize various formulas to calculate~~change in net equity the ~~apportionment~~partner can legally claim in a HLBV at the end of ~~taxable income, primarily using sales, assets, or payroll within~~ the ~~jurisdiction~~period compared to the ~~consolidated totals. In addition, each state varies as~~beginning of the period.

Contingent Obligations (All Registrants)

The Registrants are subject to ~~whether~~ a ~~stand-alone, combined, or unitary filing methodology is required. The calculation~~number of deferred state taxes considers apportionment factors and filing methodologies that are expected to apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on Southern Power's financial statements.

~~Given the significant judgment involved in estimating NOL and tax credit carryforwards and multi-state apportionments for all subsidiaries, Southern Power considers~~ federal and state ~~deferred income tax liabilities~~laws and ~~assets~~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

II-55

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

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 ~~critical accounting estimates.~~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~~"Recently Adopted Accounting ~~Standards~~"Standards" for additional information.

~~In 2016,~~On March 12, 2020, the FASB issued ASU ~~No. 2016-02,~~ ~~Leases~~2020-04, Reference Rate Reform (Topic ~~842)~~ ~~(ASU 2016-02). ASU 2016-02 requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement,~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and Southern Power adopted the new standard effective January 1, 2019.

~~Southern Power elected the transition methodology provided by ASU No. 2018-11,~~ ~~Leases (Topic 842)~~848): ~~Targeted Improvements, whereby the requirements of ASU 2016-02 are applied on a prospective basis as~~Facilitation of the ~~adoption date~~Effects of ~~January 1, 2019, without restating prior periods. Southern Power elected~~Reference Rate Reform on Financial Reporting (ASU 2020-04) providing temporary guidance to ease the ~~package~~potential burden in accounting for reference rate reform primarily resulting from the discontinuation of ~~practical expedients provided~~LIBOR, which is currently expected to begin phasing out on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The new guidance provides the following optional expedients: (i) simplifies accounting analyses under current GAAP for contract modifications; (ii) simplifies the assessment of hedge effectiveness and allows hedging relationships affected by ~~ASU 2016-02~~reference rate reform to continue; and (iii) allows a one-time election to sell or transfer debt securities classified as held to maturity that ~~allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. Additionally, Southern Power expects~~reference a rate affected by reference rate reform. An entity may elect to apply the ~~use-of-hindsight practical expedient~~amendments prospectively from March 12, 2020 through December 31, 2022 by accounting topic.

The Registrants currently reference LIBOR for certain debt and hedging arrangements. Contract language has been, or is expected to be, incorporated into each of these agreements to address the transition to an alternative rate for agreements that will be in ~~determining lease terms as~~place at the transition date. While existing effective hedging relationships are expected to continue, the Registrants will continue to evaluate the provisions of ASU 2020–04 and the impacts of transitioning to an alternative rate. The ultimate outcome of the ~~date of adoption. Southern Power also made accounting policy elections~~transition cannot be determined at this time, but is not expected to account for short-term leases in all asset classes as off-balance sheet leases and combined lessee lease and non-lease components in the computations of lease obligations and right-of-use assets for most asset classes, while lessor lease and non-lease components are accounted for separately.

~~Southern Power completed the implementation of~~have a new application to track and account for its leases and updated its internal controls and accounting policies to support the accounting for leases under ASU 2016-02. Southern Power completed its lease inventory and determined its most significant leases as a lessee involve real estate. In the first quarter 2019, the adoption of ASU 2016-02 resulted in recording lease liabilities and right-of-use assets on Southern Power's balance sheet each totaling approximately $0.4 billion, with nomaterial impact on ~~Southern Power's statement of income.~~the Registrants' financial statements. See FINANCIAL CONDITION AND LIQUIDITY – "Financing Activities" herein and Note 14 to the financial statements under "Interest Rate Derivatives" herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

~~Southern Power's~~The financial condition of each Registrant remained stable at December 31, ~~2018.~~2020. The Registrants maintained adequate access to capital throughout 2020, including through a period of volatility in the short-term financial markets during the first quarter 2020 primarily related to the COVID-19 pandemic. As a precautionary measure, in the first quarter 2020, Southern ~~Power's~~Company, Georgia Power, Mississippi Power, and Southern Company Gas increased their outstanding short-term debt and cash and cash equivalents by entering into new bank term loans, entering into and funding new committed and uncommitted credit facilities, and funding existing uncommitted credit facilities. During the second half of 2020, most of these additional borrowings were repaid. No material changes occurred in the terms of the applicable Registrants' bank credit arrangements or their interest expense on short-term debt as a result of these actions. The Registrants experienced no material counterparty credit losses during 2020 as a result of the volatility in the financial markets during the first half of 2020.

The Registrants' cash requirements primarily consist of funding ongoing ~~business~~ operations, including unconsolidated subsidiaries, as well as common stock dividends, ~~distributions to noncontrolling interests,~~ 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 meet projected long-term demand requirements, including to build new generation facilities, 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 ~~investments in~~ acquisitions or new construction associated with ~~Southern Power's~~its overall growth strategy and to maintain ~~the~~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 ~~which may include~~provide a substantial portion of the ~~utilization of~~Registrants' cash needs. During 2020, Southern Power utilized tax credits, ~~will only provide a portion of Southern Power's~~which provided $340 million in operating cash ~~needs.~~flows. For the three-year period from ~~2019~~2021 through ~~2021, Southern Power's~~2023, each Registrant's projected ~~common~~ stock dividends, ~~distributions to noncontrolling interests,~~ capital expenditures, and debt maturities, as well as distributions to noncontrolling interests for Southern Power, are expected to exceed its operating cash flows. Southern ~~Power~~Company plans to finance future cash needs in excess of its operating cash flows primarily by accessing borrowings from financial institutions and issuing debt and hybrid securities in the capital markets. Each Subsidiary Registrant plans to finance its future cash needs in excess of its operating cash flows

II-56

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

primarily through external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Georgia Power plans to utilize borrowings through the FFB and Southern Power ~~intends~~plans to utilize tax equity partnership contributions. The Registrants plan to use commercial paper to manage seasonal variations in operating cash flows and for other working capital needs and continue to monitor ~~its~~their access to short-term and long-term capital markets as well as ~~its~~their bank credit ~~agreements~~arrangements to meet future capital and liquidity needs. See "Sources of ~~Capital,"~~Capital" and "Financing ~~Activities," and "Contractual Obligations"~~Activities" herein for additional information.

Cash Requirements

Capital Expenditures

Total estimated capital expenditures, including LTSA and nuclear fuel commitments, for the Registrants through 2025 based on their current construction programs are as follows:


	2021		2022		2023		2024		2025
	(in billions)
Southern Company(a)(b)(c)	$	8.2	$	7.0	$	7.0	$	6.8	$	6.7
Alabama Power(a)	1.9		1.8		1.7		1.6		1.6
Georgia Power(b)	3.8		3.0		3.1		3.1		3.1
Mississippi Power	0.3		0.2		0.3		0.3		0.3
Southern Power(c)	0.7		0.2		0.2		0.1		0.1
Southern Company Gas	1.5		1.7		1.7		1.7		1.6

(a)Includes amounts related to Plant Barry Unit 8. See Note 2 to the financial statements under "Alabama Power" for additional information.

(b)Includes expenditures of approximately $1.3 billion and $0.4 billion for the construction of Plant Vogtle Units 3 and 4 in 2021 and 2022, respectively.

II-57

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report


	2021		2022		2023		2024		2025
	(in millions)
Southern Company	$	585	$	759	$	957	$	903	$	931
Alabama Power	254		338		412		354		299
Georgia Power	287		354		467		498		601
Mississippi Power	28		23		23		20		14

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental laws and regulations; the outcome of any legal challenges to environmental rules; changes in electric generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; abnormal weather; delays in construction due to judicial or regulatory action; storm impacts; and the cost of capital. The continued COVID-19 pandemic could also impair the ability to develop, construct, and operate facilities, as discussed further in Item 1A herein. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, expenditures associated with Southern Power's planned acquisitions may vary due to market opportunities and the execution of its growth strategy. See Note 15 to the financial statements under "Southern Power" for additional information regarding Southern Power's plant acquisitions and construction projects.

See FUTURE EARNINGS POTENTIAL – "Construction Programs" herein for additional information.

Other Significant Cash Requirements

II-58

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Fuel and purchased power costs represent a significant component of funding ongoing operations for the traditional electric operating companies and Southern Power. See Note 3 to the financial statements under "Commitments" for information on ~~lines~~Southern Company Gas' commitments for pipeline charges, storage capacity, and gas supply. Total estimated costs for fuel and purchased power commitments at December 31, 2020 for the applicable Registrants are provided in the table below. Fuel costs include purchases of ~~credit.~~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, 2020. As discussed under "Capital Expenditures" herein, estimated expenditures for nuclear fuel are included in the applicable Registrants' construction programs for the years 2021 through 2025. Nuclear fuel commitments at December 31, 2020 that extend beyond 2025 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.


	2021		2022		2023		2024		2025		Thereafter
	(in millions)
Southern Company(*)	$	2,818	$	1,831	$	883	$	705	$	659	$	5,607
Alabama Power	888		643		289		183		171		1,205
Georgia Power(*)	1,037		656		339		302		299		3,894
Mississippi Power	342		210		115		102		82		502
Southern Power	551		322		140		118		107		5

(*)Excludes capacity payments related to Plant Vogtle Units 1 and 2, which are discussed in Note 3 to the financial statements under "Commitments."


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Power
	(in millions)
LTSA commitments (after 2025)	$	1,871	$	206	$	191	$	178	$	1,296

In addition, Southern Power has certain other operations and maintenance agreements. Total estimated costs for these commitments at December 31, 2020 are provided in the table below.


	2021		2022		2023		2024		2025		Thereafter
	(in millions)
Southern Power's operations and maintenance agreements	$	65	$	48	$	41	$	36	$	25	$	194

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 and equity issuances in the capital markets. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. Southern Company does not expect to issue any equity in the capital markets through 2025. See Note 8 to the financial statements under "Equity Units" for information on stock purchase contracts associated with Southern Company's equity units.

The Subsidiary Registrants plan to obtain the funds to meet their future capital needs from sources similar to those they used in the past, which were primarily from operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Georgia Power plans to utilize borrowings from the FFB (as

II-59

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

discussed further in Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings") and Southern Power plans to utilize tax equity partnership contributions (as discussed further herein).

At certain periods during 2020, the traditional electric operating companies and the natural gas distribution utilities experienced a reduction in operating cash flows as a result of the temporary suspension of disconnections for non-payment by customers resulting from the COVID-19 pandemic and the related overall economic contraction. To date, this reduction of operating cash flows has not had a material impact on the liquidity of any of the Registrants, and, during the third quarter 2020, most of the temporary measures in place expired. The ultimate extent of the negative impact on the Registrants' liquidity depends on the duration of the COVID-19 pandemic and any federal, state, or local response and cannot be determined at this time. See Note 2 to the financial statements for information regarding suspended disconnections for non-payment by the traditional electric operating companies and the natural gas distribution utilities.

The amount, type, and timing of any financings in 2021, 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 ~~also~~ 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 a HLBV methodology to allocate partnership gains and losses. During ~~2018,~~2020, Southern Power obtained tax equity funding for the ~~Gaskell West 1 solar project, the Cactus Flats~~Reading and Skookumchuck wind ~~project, and the SP Wind portfolio~~projects and received proceeds ~~of approximately $26 million, $122 million, and $1.2 billion, respectively.~~

~~On May 22, 2018,~~totaling $277 million. In addition, Southern Power ~~completed the sale of a noncontrolling 33%~~received tax equity interest in SP Solar, a limited partnership indirectly owning substantially all of Southern Power's solar facilities, to Global Atlantic for approximately $1.2 billion. Accordingly, Global Atlantic will receive 33% of all cash distributions paid by SP Solar.

On December 4, 2018, Southern Power completed the sale of all of its equity interests in the Florida Plants to NextEra Energy for $203 million. On November 5, 2018, Southern Power entered into an agreement with Northern States Power to sell all of its equity interests in Plant Mankato (including the 385-MW expansion currently under construction) for an aggregate purchase price of approximately $650 million. The completion of the disposition is subject to the expansion unit reaching commercial operation as well as various other customary conditions to closing,funding totaling $16 million from existing partnerships. See Notes 1 and ~~is expected to close mid-2019. The ultimate outcome of this matter cannot be determined at this time.~~

Net cash provided from operating activities totaled $631 million in 2018, a decrease of $524 million compared to 2017. The decrease was primarily due to lower income tax refunds as a result of taxable gains arising from the sales of noncontrolling interests in SP Solar and SP Wind, as well as the sale of the Florida Plants.At December 31, 2018, Southern Power had $2.1 billion of unutilized ITCs and PTCs which are expected to be fully utilized by 2022. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Tax Credits" herein for additional information. Net cash provided from operating activities totaled $1.2 billion in 2017, an increase of $816 million compared to 2016 primarily due to income tax refunds received and an increase in energy sales from new solar and wind facilities, partially offset by an increase in interest paid.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

Net cash used for investing activities totaled $227 million, $1.6 billion, and $4.8 billion in 2018, 2017, and 2016, respectively, and decreased in 2018 primarily due to fewer acquisitions and completion of construction of renewable facilities during 2017 and 2018. See FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" herein and Note 15 to the financial statements under "General" and "Southern Power," respectively, for additional information.

~~Net cash used for financing activities totaled $363 million in 2018 primarily due to returns~~

The issuance of ~~capital to Southern Company, payments of common stock dividends,~~securities by the traditional electric operating companies and distributions to noncontrolling interests, partially offset by capital contributions from noncontrolling interests. Net cash used for financing activities totaled $502 million in 2017 primarily due to payments of common stock dividends and distributions to noncontrolling interests. Net cash provided from financing activities totaled $4.7 billion in 2016 primarily dueNicor Gas is generally subject to the approval of the applicable state PSC or other applicable state regulatory agency. The issuance of ~~additional senior notes~~all securities by Mississippi Power and ~~capital contributions from Southern Company and noncontrolling interests.~~

~~Significant balance sheet changes include a $745 million decrease in plant in service and a $576 million increase in assets held for sale primarily due~~short-term securities by Georgia Power is generally subject to completed and planned plant divestitures and a $355 million increase in deferred income taxes primarily due to $551 million related to the sales of noncontrolling interests in SP Solar and SP Wind and $129 million in additional unutilized PTCs, partially offset by a $333 million decrease in the federal NOL carryforward.

~~Sources of Capital~~

Southern Power plans to obtain the funds required for acquisitions, construction, development, debt maturities, and other purposes from operating cash flows, external securities issuances, borrowings from financial institutions, tax equity partnership contributions, divestitures, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval ~~and other factors. With~~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) ~~issues~~, Southern Company Gas Capital, and ~~offers debt registered on~~Southern Company Gas (excluding its other subsidiaries) file registration statements ~~filed~~ with the SEC under the Securities Act of 1933, as ~~amended.~~

~~Southern Power's current liabilities sometimes exceed current assets due to~~amended (1933 Act). The amounts of securities authorized by the ~~use of short-term debt as a funding source and construction payables,~~appropriate regulatory authorities, as well as ~~fluctuations~~the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in ~~cash needs due to seasonality. Southern Power believes~~ the ~~need for working~~ capital can be adequately met by utilizing the commercial paper program, the Facility (as defined below), borrowings from financial institutions, equity contributions from Southern Company, external securities issuances, and operating cash flows.markets.

~~Southern Power obtains its own~~The Registrants generally obtain financing separately without ~~any~~ credit support from ~~Southern Company or~~ any ~~other~~ 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 ~~Southern Power~~each company are not commingled with funds of any other company in the Southern Company ~~system. To meet liquidity~~system, except in the case of Southern Company Gas, as described below.

The traditional electric operating companies and ~~capital resource requirements,~~SEGCO may utilize a Southern Company subsidiary organized to issue and sell commercial paper at their request and for their benefit. Proceeds from such issuances for the benefit of an individual company are loaned directly to that company. The obligations of each traditional electric operating company and SEGCO under these arrangements are several and there is no cross-affiliate credit support. Alabama Power ~~had cash and cash equivalents of approximately $181 million at December 31, 2018.~~also maintains its own separate commercial paper program.

Southern ~~Power's~~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 ~~used~~not permitted to ~~finance acquisition and construction costs related~~make money pool loans to ~~electric generating facilities and for general corporate purposes, including maturing debt.~~affiliates. All of the other Southern ~~Power's~~Company Gas subsidiaries ~~are not issuers under the~~benefit from Southern Company Gas Capital's commercial paper program. ~~Short-term borrowings are included~~

By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in ~~notes payable on~~ the ~~consolidated balance sheets.~~amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At December 31, 2020, the amount of subsidiary retained earnings restricted to dividend totaled $1.1 billion. This restriction did not impact Southern Company Gas' ability to meet its cash obligations, nor does management expect such restriction to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.

II-60

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power~~ Company and Subsidiary Companies ~~2018~~2020 Annual Report

~~Details~~Certain Registrants' current liabilities frequently exceed their current assets because of long-term debt maturities and the periodic use of short-term ~~borrowings were~~debt as ~~follows:~~

Short-term Borrowings at the
End of the Period

Short-term Borrowings During the Period ^(*)
Amount Outstanding Weighted Average Interest Rate Average Amount Outstanding Weighted Average Interest Rate Maximum Amount Outstanding
(in millions) (in millions) (in millions)
December 31, 2018
Commercial paper $ —
—% $ 77
2.2% $ 304
Short-term bank debt 100
3.1% 111
2.7% 200
Total $ 100
3.1% $ 188
2.5%
December 31, 2017
Commercial paper $ 105
2.0% $ 215
1.4% $ 419
Short-term bank debt —
—% 17
2.1% 209
Total $ 105
2.0% $ 232
1.4%
December 31, 2016
Commercial paper $ —
—% $ 56
0.8% $ 310
Total $ —
—% $ 56
0.8%


~~(*)~~	~~Average and maximum amounts are based upon daily balances during the twelve-month periods ended December 31, 2018, 2017, and 2016.~~

In addition to the short-term borrowings of Southern Power included in the table above, at December 31, 2016, Southern Power subsidiaries assumed credit agreements (Project Credit Facilities) with the acquisition of certain solar facilities, which were non-recourse to the Southern Power parent company, the proceeds of which were used to finance project costs related to such solar facilities. The Project Credit Facilities were fully repaid in January 2017. For the year ended December 31, 2016, the Project Credit Facilities had a maximum amount outstanding of $828 million and an average amount outstanding of $566 million at a weighted average interest rate of 2.1% and had total amounts outstanding of $209 million at a weighted average interest rate of 2.1% at December 31, 2016.

~~Company Credit Facilities~~

At December 31, 2018, Southern Power had a committed credit facility (Facility) of $750 million expiring in 2022, of which $23 million has been used for letters of credit and $727 million remains unused. Southern Power's subsidiaries are not borrowers under the Facility. Proceeds from the Facility may be used for working capital and general corporate purposesfunding source, as well as ~~liquidity support for Southern Power's commercial paper program. A portion of the unused credit under the Facility is allocated~~significant seasonal fluctuations in cash needs. The Registrants generally plan to ~~provide liquidity support for Southern Power's commercial paper program. Subject to applicable market conditions, Southern Power expects to renew or replace the Facility,~~refinance long-term debt as ~~needed, prior to expiration. In connection therewith, Southern Power may extend the maturity date and/or increase or decrease the lending commitment thereunder.~~it matures. See Note 8 to the financial statements ~~under "Bank Credit Arrangements~~" for additional information. Also see "Financing Activities" herein for information on financing activities that occurred subsequent to December 31, 2020. The following table shows the amount by which current liabilities exceeded current assets at December 31, 2020 for the applicable Registrants:


At December 31, 2020	Southern Company		Georgia Power		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
Current liabilities in excess of current assets	$	3,462	$	1,343	$	572	$	250	$	303

The ~~Facility,~~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 ~~Power's term loan agreements, contains a covenant that limits~~Company.

Bank Credit Arrangements

At December 31, 2020, the ratio of debt to capitalization (as defined in the Facility) to a maximum of 65% and contains a cross-default provision that is restricted only to indebtedness of Southern Power. For the purposes of this definition, debt would exclude any project debt incurred by certain subsidiaries of Southern Power to the extent such debt is non-recourse to Southern Power, and capitalization would exclude the capital stock or other equity attributable to such subsidiary. Southern Power is currently in complianceRegistrants' unused committed credit arrangements with ~~all of these covenants.~~banks were as follows:


At December 31, 2020	Southern Company parent		Alabama Power		Georgia Power		Mississippi Power		Southern Power(a)		Southern Company Gas(b)		SEGCO		Southern Company
	(in millions)
Unused committed credit	$	1,999	$	1,328	$	1,728	$	250	$	591	$	1,745	$	30	$	7,671

(a)At December 31, 2020, Southern Power also ~~has a $120 million~~had two continuing ~~letter~~letters of credit ~~facility~~facilities for standby letters of ~~credit. In December 2018, Southern Power amended the letter~~credit, of ~~credit facility,~~ which ~~among other things, extended the expiration date from 2019 to 2021. At December 31, 2018, $103 million has been used for letters of credit, primarily as credit support for PPA requirements, and $17~~$16 million was unused. Southern Power's subsidiaries are not parties to ~~this~~its bank credit arrangements or letter of credit ~~facility.~~facilities.

(b)Includes $1.245 billion and $500 million at Southern Company Gas Capital and Nicor Gas, respectively.

Subject to applicable market conditions, the Registrants, Nicor Gas, and SEGCO expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, the Registrants, Nicor Gas, and SEGCO may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of the unused credit with banks is allocated to provide liquidity support to the revenue bonds of the traditional electric operating companies and the commercial paper programs of the Registrants, Nicor Gas, and SEGCO. The amount of variable rate revenue bonds of the traditional electric operating companies outstanding requiring liquidity support at December 31, 2020 was approximately $1.4 billion (comprised of approximately $854 million at Alabama Power, $550 million at Georgia Power, and $34 million at Mississippi Power). In addition, at December 31, ~~2018~~2020, Georgia Power and ~~2017, Southern~~Mississippi Power had ~~$103~~approximately $174 million and ~~$113~~$50 million, respectively, of ~~cash collateral posted related~~fixed rate revenue bonds outstanding that are required to ~~PPA requirements.~~be remarketed within the next 12 months. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information.

II-61

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power~~ Company and Subsidiary Companies ~~2018~~2020 Annual Report

Short-term Borrowings

The Registrants, Nicor Gas, and SEGCO make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Southern Power's subsidiaries are not issuers or obligors under its commercial paper program. Commercial paper and short-term bank term loans are included in notes payable in the balance sheets. Details of the Registrants' short-term borrowings were as follows:


	Short-term Debt at the End of the Period
	Amount Outstanding						Weighted Average Interest Rate
	December 31,						December 31,
	2020		2019		2018		2020		2019		2018
	(in millions)
Southern Company	$	609	$	2,055	$	2,915	0.3	%	2.1	%	3.1	%

Georgia Power	60		365		294		0.3		2.2		3.1
Mississippi Power	25		—		—		0.4		—		—
Southern Power	175		549		100		0.3		2.2		3.1
Southern Company Gas:
Southern Company Gas Capital	$	220	$	372	$	403	0.3	%	2.1	%	3.1	%
Nicor Gas	104		278		247		0.2		1.8		3.0
Southern Company Gas Total	$	324	$	650	$	650	0.2	%	2.0	%	3.0	%


	Short-term Debt During the Period(*)
	Average Amount Outstanding						Weighted Average Interest Rate						Maximum Amount Outstanding
	2020		2019		2018		2020		2019		2018		2020		2019		2018
	(in millions)												(in millions)
Southern Company	$	1,017	$	1,240	$	3,377	1.6	%	2.6	%	2.6	%	$	2,113	$	2,914	$	5,447
Alabama Power	20		17		27		1.1		2.6		2.3		155		190		258
Georgia Power	264		371		139		1.7		2.7		2.5		478		935		710
Mississippi Power	9		—		68		1.6		—		2.0		40		—		300
Southern Power	64		76		188		1.5		2.7		2.5		550		578		385
Southern Company Gas:
Southern Company Gas Capital	$	316	$	302	$	520	1.4	%	2.6	%	2.3	%	$	641	$	490	$	1,361
Nicor Gas	49		91		123		1.4		2.3		2.2		278		278		275
Southern Company Gas Total	$	365	$	393	$	643	1.4	%	2.5	%	2.3	%

(*) Average and maximum amounts are based upon daily balances during the 12-month periods ended December 31, 2020, 2019, and 2018.

II-62

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Analysis of Cash Flows

Net cash flows provided from (used for) operating, investing, and financing activities in 2020 and 2019 are presented in the following table:


Net cash provided from (used for):	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
2020
Operating activities	$	6,696	$	1,742	$	2,784	$	298	$	901	$	1,207
Investing activities	(7,030)		(2,122)		(3,503)		(323)		374		(1,417)
Financing activities	(576)		16		676		(222)		(1,372)		180

2019
Operating activities	$	5,781	$	1,779	$	2,907	$	339	$	1,385	$	1,067
Investing activities	(3,392)		(1,963)		(3,885)		(263)		(167)		(1,386)
Financing activities	(1,930)		765		918		(83)		(1,120)		298

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 $0.9 billion in 2020 as compared to 2019 primarily due to a $1.1 billion voluntary contribution to the qualified pension plan in 2019 and the timing of vendor payments, partially offset by the timing of receivable collections and customer bill credits issued in 2020 by Alabama Power and Georgia Power. See Note 2 to the financial statements under "Alabama Power" and "Georgia Power" and Note 11 to the financial statements for additional information.

The net cash used for investing activities in 2020 and 2019 was primarily related to the Subsidiary Registrants' construction programs, partially offset by proceeds from the sale transactions described in Note 15 to the financial statements, which totaled $1.0 billion and $5.1 billion in 2020 and 2019, respectively.

The net cash used for financing activities in 2020 and 2019 was primarily related to common stock dividend payments and net repayments of short-term bank debt and commercial paper, partially offset by net issuances of long-term debt and issuances of common stock.

Alabama Power

Net cash provided from operating activities decreased $37 million in 2020 as compared to 2019primarily due to approximately $136 million in customer refunds, payments related to ARO settlements, timing of Rate CNP Compliance cost recovery, and purchases of materials and supplies, partially offset by a $362 million voluntary contribution to the qualified pension plan in 2019. See Note 2 to the financial statements under "Alabama Power – Rate RSE" and " – Rate ECR" and Notes 6 and 11 to the financial statements for additional information.

The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions.

The net cash provided from financing activities in 2020 and 2019 was primarily related to capital contributions from Southern Company and net long-term debt issuances, partially offset by common stock dividend payments.

Georgia Power

Net cash provided from operating activities decreased $123 million in 2020 as compared to 2019 primarily due to approximately $220 million in customer bill credits issued in 2020 associated with the Georgia Power Tax Reform Settlement Agreement and 2018 and 2019 earnings in excess of the allowed retail ROE range, lower retail revenues, and higher income tax payments, partially offset by a $200 million voluntary contribution to the qualified pension plan in 2019, higher recovery of storm damage costs, and the timing of vendor payments. See Note 2 to the financial statements under "Georgia Power" and Note 11to the financial statements for additional information.

II-63

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions, including a total of $2.7 billion 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.

The net cash provided from financing activities in 2020 and 2019 was primarily related to capital contributions from Southern Company, borrowings from the FFB for construction of Plant Vogtle Units 3 and 4, and net issuances and reofferings of other debt, partially offset by common stock dividend payments.

Mississippi Power

Net cash provided from operating activities decreased $41 million in 2020 as compared to 2019 primarily due to the closeout of the DOE contract related to the Kemper County energy facility, $13 million of storm damage costs primarily associated with Hurricane Zeta, $11 million primarily related to decreased fuel cost recovery, and higher income tax payments, partially offset by a $54 million voluntary contribution to the qualified pension plan in 2019. See Note 3 to the financial statements under "Mississippi Power" and Note 11 to the financial statements for additional information.

The net cash used for investing activities in 2020 and 2019 was primarily related to gross property additions.

The net cash used for financing activities in 2020 was primarily related to the repayment of senior notes at maturity, a return of capital and common stock dividends paid to Southern Company, redemption of pollution control revenue bonds, and repayment of short-term borrowings, partially offset by debt issuances and capital contributions from Southern Company. The net cash used for financing activities in 2019 was primarily related to a return of capital to Southern Company and the redemption of senior notes, partially offset by capital contributions from Southern Company and pollution control revenue bonds reoffered to the public.

Southern Power

Net cash provided from operating activities decreased $484 million in 2020 as compared to 2019 primarily due to a reduction in the utilization of tax credits in 2020. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Tax Credits" herein and Note 10 to the financial statements for additional information.

The net cash provided from investing activities in 2020 was primarily related to proceeds from the disposition of Plant Mankato, partially offset by ongoing construction activities and the acquisition of the Beech Ridge II wind facility. The net cash used for investing activities in 2019 was primarily related to Southern Power's investment in DSGP and ongoing construction activities, largely offset by proceeds from the sales of Plant Nacogdoches and certain wind turbine equipment. See Note 15 to the financial statements under "Southern Power" for additional information.

The net cash used for financing activities in 2020 was primarily related to the repayment of senior notes at maturity, common stock dividend payments, and net repayments of short-term bank debt and commercial paper, partially offset by net contributions from noncontrolling interests. The net cash used for financing activities in 2019 was primarily related to returns of capital and common stock dividends paid to Southern Company, the repayment at maturity of senior notes, and distributions to noncontrolling interests, partially offset by proceeds from net issuances of commercial paper.

Southern Company Gas

Net cash provided from operating activities increased $140 million in 2020 as compared to 2019 primarily due to a $145 million voluntary contribution to the qualified pension plan in 2019, as well as the timing of vendor payments, energy marketing payables, and income tax payments, partially offset by the timing of customer receivable collections and energy marketing receivables. The timing of energy marketing payables and receivables was due to increased volumes of natural gas purchased and sold and higher natural gas prices. See Note 11 to the financial statements for additional information.

The net cash used for investing activities in 2020 was primarily related to construction of transportation and distribution assets recovered through base rates and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments, partially offset by proceeds from the sales of Jefferson Island and interests in Pivotal LNG and Atlantic Coast Pipeline. The net cash used for investing activities in 2019 was primarily related to gross property additions related to utility capital expenditures and infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method pipeline investments, partially offset by proceeds from the sale of Triton and capital distributions in excess of earnings from equity method pipeline investments. See Notes 7 and 15 to the financial statements for additional information.

II-64

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The net cash provided from financing activities in 2020 was primarily related to proceeds from issuances of senior notes and first mortgage bonds, as well as capital contributions from Southern Company, partially offset by common stock dividend payments and net repayments of short-term borrowings. The net cash provided from financing activities in 2019 was primarily related to capital contributions from Southern Company and net proceeds from the issuance of long-term debt, partially offset by payments of common stock dividends.

Significant Balance Sheet Changes

Southern Company

Significant balance sheet changes in 2020 for Southern Company included:

•an increase of $4.6 billion in total property, plant, and equipment primarily related to the Subsidiary Registrants' construction programs;

•an increase of $3.8 billion in long-term debt (including amounts due within one year) related to new issuances;

•a decrease of $1.4 billion in notes payable related to net repayments of short-term bank debt and commercial paper;

•increases of $0.9 billion and $0.8 billion in AROs and regulatory assets associated with AROs, respectively, primarily related to cost estimate updates at Alabama Power and Georgia Power for ash pond facilities;

•a decrease of $0.9 billion in cash and cash equivalents, as discussed further under "Analysis of Cash Flows – Southern Company" herein;

•a decrease of $0.7 billion in assets held for sale related to the completion of Southern Power's sale of Plant Mankato and Southern Company Gas' sale of its interests in Pivotal LNG and Atlantic Coast Pipeline; and

•an increase of $0.5 billion in total common stockholders' equity related to net income, partially offset by common stock dividend payments.

See "Financing Activities" herein and Notes 5, 6, 8, and 15 to the financial statements for additional information.

Alabama Power

Significant balance sheet changes in 2020 for Alabama Power included:

•an increase of $1.3 billion in total property, plant, and equipment primarily related to the acquisition of the Central Alabama Generating Station, construction of distribution and transmission facilities, and the installation of equipment to comply with environmental standards;

•an increase of $855 million in total common stockholder's equity primarily due to capital contributions from Southern Company;

•increases of $422 million and $375 million in regulatory assets associated with AROs and ARO deferred liabilities, respectively, primarily related to cost estimate updates for certain ash pond facilities;

•a decrease of $364 million in cash and cash equivalents primarily due to the acquisition of the Central Alabama Generation Station; and

•an increase of $348 million in long-term debt (including securities due within one year) primarily due to an increase in outstanding senior notes.

See "Financing Activities – Alabama Power" herein and Notes 5, 6, and 15 to the financial statements for additional information.

II-65

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Georgia Power

Significant balance sheet changes in 2020 for Georgia Power included:

•an increase of $2.2 billion in total property, plant, and equipment primarily related to the construction of generation, transmission, and distribution facilities, including $1.1 billion for Plant Vogtle Units 3 and 4 (net of pre-tax charges totaling $325 million for estimated probable losses);

•an increase of $1.4 billion in common stockholder's equity primarily due to capital contributions from Southern Company;

•an increase of $1.2 billion in long-term debt (including securities due within one year) primarily due to a net increase in outstanding senior notes and borrowings from the FFB for construction of Plant Vogtle Units 3 and 4, partially offset by pollution control revenue bond repurchases; and

•increases of $0.5 billion and $0.3 billion in AROs and regulatory assets associated with AROs, respectively, primarily due to cost estimate updates for ash pond closures.

See "Financing Activities – Georgia Power" herein and Notes 2, 5, 6, and 8 to the financial statements for additional information.

Mississippi Power

Significant balance sheet changes in 2020 for Mississippi Power included:

•a decrease of $247 million in cash and cash equivalents and a decrease of $170 million in outstanding long-term debt (including amounts due within one year) primarily related to the repayment of senior notes at maturity;

•an increase of $92 million in total property, plant, and equipment primarily related to the installation of equipment to comply with environmental standards and the construction of transmission and distribution facilities;

•an increase of $90 million in common stockholder's equity primarily from net income and capital contributions from Southern Company, partially offset by dividends paid and a return of capital to Southern Company;

•a decrease of $65 million in deferred credits related to income taxes due to amortization and reclassification of certain amounts to other regulatory liabilities, current for the expected flowback of excess deferred income taxes; and

•a decrease of $61 million in other regulatory liabilities, deferred primarily due to a reduction in the property damage reserve primarily associated with Hurricane Zeta.

See "Financing Activities – Mississippi Power" herein and Notes 2 and 10 to the financial statements for additional information.

Southern Power

Significant balance sheet changes in 2020 for Southern Power included:

•an increase of $634 million in property, plant, and equipment in service and a decrease of $388 million in CWIP primarily due to the Skookumchuck and Reading wind facilities being placed in service and the acquisition of the Beech Ridge II wind facility;

•a decrease of $618 million in assets held for sale (of which $17 million related to current assets) due to completion of the sale of Plant Mankato;

•a decrease of $525 million in securities due within one year primarily related to the maturity of senior notes;

•a decrease of $374 million in notes payable due to net repayments of short-term bank debt and commercial paper; and

•a decrease of $289 million in accumulated deferred income tax assets primarily related to the utilization of tax credits in 2020.

See "Financing Activities – Southern Power" herein and Notes 5, 10, and 15 to the financial statements for additional information.

II-66

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Company Gas

Significant balance sheet changes in 2020 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 recovered through base rates and infrastructure investments recovered through replacement programs;

•an increase of $781 million in long-term debt (including securities due within one year) due to the issuance of senior notes and mortgage bonds;

•a decrease of $326 million in notes payable due to net repayments of short-term borrowings;

•an increase of $261 million in common stockholder's equity primarily from net income and capital contributions from Southern Company, partially offset by dividends paid to Southern Company;

•a decrease of $171 million in assets held for sale due to the completed sale of interests in Pivotal LNG and Atlantic Coast Pipeline; and

•increases of $88 million and $52 million in energy marketing receivables and payables, respectively, due to increased volumes of natural gas purchased and sold and higher natural gas prices.

See "Financing Activities – Southern Company Gas" herein and Notes 5 and 15 to the financial statements for additional information.

Financing Activities

~~Senior Notes~~The following table outlines the Registrants' long-term debt financing activities for the year ended December 31, 2020:

~~In June 2018,~~


Company	Senior Note Issuances		Senior Note Maturities, Redemptions, and Repurchases		Revenue Bond Issuances and Reofferings of Purchased Bonds		Revenue Bond Maturities, Redemptions, and Repurchases		Other Long-Term Debt Issuances		Other Long-Term Debt Redemptions and Maturities(a)
	(in millions)
Southern Company parent	$	1,000	$	600	$	—	$	—	$	3,000	$	1,000
Alabama Power	600		250		87		87		—		—
Georgia Power	1,500		950		53		336		848		84
Mississippi Power	—		275		34		41		100		—
Southern Power	—		825		—		—		—		—
Southern Company Gas	500		—		—		—		325		—
Other	—		—		—		—		—		16
Elimination(b)	—		—		—		—		—		(6)
Southern Company	$	3,600	$	2,900	$	174	$	464	$	4,273	$	1,094

(a)Includes reductions in finance lease obligations resulting from cash payments under finance leases and, for Georgia Power, principal amortization payments for FFB borrowings.

(b)Represents reductions in affiliate finance lease obligations at Georgia Power, which are eliminated in Southern ~~Power repaid $350 million aggregate principal amount~~Company's consolidated financial statements.

Except as otherwise described herein, the Registrants used the proceeds of ~~Series 2015A 1.50% Senior Notes due June 1, 2018.~~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, ~~Southern Power plans~~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.

~~Other Debt~~

Southern Company

During 2020, Southern Company issued approximately 3.3 million shares of common stock through employee equity compensation plans and received proceeds of approximately $74 million.

In January 2020, Southern Company issued $1.0 billion aggregate principal amount of Series 2020A 4.95% Junior Subordinated Notes due January 30, 2080.

II-67

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

In March 2020, Southern Company borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement. In April 2020 and September 2020, Southern Company repaid $50 million and $200 million, respectively.

Also in March 2020, Southern Company entered into a $75 million short-term floating rate bank loan bearing interest based on one-month LIBOR, which it repaid in September 2020.

In April 2020, Southern Company issued $1.0 billion aggregate principal amount of Series 2020A 3.70% Senior Notes due April 30, 2030.

In May ~~2018,~~2020, Southern ~~Power repaid $420~~Company redeemed all $600 million aggregate principal amount of ~~long-term floating~~its Series 2015A 2.750% Senior Notes due June 15, 2020.

In September 2020, Southern Company issued $1.25 billion aggregate principal amount of Series 2020B 4.00% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due January 15, 2051 and $750 million aggregate principal amount of Series 2020C 4.20% Junior Subordinated Notes due October 15, 2060.

In October 2020, Southern Company redeemed all of its $1.0 billion aggregate principal amount outstanding of Series 2015A 6.25% Junior Subordinated Notes due October 15, 2075.

Subsequent to December 31, 2020, Southern Company borrowed $25 million pursuant to a short-term uncommitted bank credit arrangement, bearing interest at a rate agreed upon by Southern Company and the bank ~~loans.~~from time to time.

Alabama Power

In March 2020, Alabama Power purchased and held approximately $87 million aggregate principal amount of The Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Plant Barry Project), Series 2007-A, which were remarketed to the public in June 2020.

In August 2020, Alabama Power issued $600 million aggregate principal amount of Series 2020A 1.45% Senior Notes due September 15, 2030.

In October 2020, Alabama Power repaid at maturity $250 million aggregate principal amount of its Series 2010A 3.375% Senior Notes.

Subsequent to December 31, 2020, Alabama Power received a capital contribution totaling $600 million from Southern Company.

Georgia Power

In January 2020, Georgia Power issued $700 million aggregate principal amount of Series 2020A 2.10% Senior Notes due July 30, 2023, $500 million aggregate principal amount of Series 2020B 3.70% Senior Notes due January 30, 2050, and an additional $300 million aggregate principal amount of Series 2019B 2.65% Senior Notes due September 15, 2029.

In February 2020, Georgia Power redeemed all $500 million aggregate principal amount of its Series 2017C 2.00% Senior Notes due September 8, 2020.

Also in ~~May 2018, Southern~~February 2020, Georgia Power ~~entered into two~~purchased and held approximately $28 million, $49 million, and $18 million aggregate principal amounts of Development Authority of Monroe County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Scherer Project), Second Series 2006, First Series 2012, and First Series 2013, respectively, which may be remarketed to the public at a later date.

In March 2020, Georgia Power repaid at maturity $450 million aggregate principal amount of its Series 2017A 2.00% Senior Notes.

Also in March 2020, Georgia Power purchased and subsequently remarketed to the public approximately $53 million of pollution control revenue bonds.

Also in March 2020, Georgia Power borrowed $200 million pursuant to a $250 million short-term uncommitted bank credit arrangement. In April 2020, Georgia Power borrowed the remaining $50 million pursuant to this bank credit arrangement. In September 2020, Georgia Power repaid the full $250 million.

Also in March 2020, Georgia Power extended one of its $125 million short-term floating rate bank loans ~~each for~~to a long-term term loan, which matures in June 2021.

In June 2020, Georgia Power extended its other $125 million short-term floating rate bank loan to mature in December 2020. In September 2020, Georgia Power repaid this $125 million bank loan.

II-68

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

In June and December 2020, Georgia Power made additional borrowings under the FFB Credit Facilities in an aggregate principal amount of ~~$100~~$519 million and $329 million, respectively, at an interest rate of 1.652% and 1.737%, respectively, through the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. During 2020, Georgia Power made principal amortization payments of $73 million under the FFB Credit Facilities. See Note 8 to the financial statements under "Long-term Debt – DOE Loan Guarantee Borrowings" for additional information.

In December 2020, Georgia Power purchased and held 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, $53 million aggregate principal amount of Development Authority of Floyd County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Hammond Project), First Series 2010, and $46 million aggregate principal amounts of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 1996, which ~~bear~~may be remarketed to the public at a later date.

Subsequent to December 31, 2020, Georgia Power received a capital contribution totaling $330 million from Southern Company and called for redemption all $325 million aggregate principal amount of its Series 2016B 2.40% Senior Notes due April 1, 2021.

Mississippi Power

In February 2020, Mississippi Power entered into $60 million and $15 million floating rate bank term loans, which mature in December 2021 and January 2022, respectively, each bearing interest based on one-month ~~LIBOR,~~LIBOR.

In March 2020, Mississippi Power entered into a $125 million revolving credit arrangement that matures in March 2023 and ~~proceeds being used for general corporate purposes.~~borrowed $40 million (short term) and $25 million (long term) pursuant to the arrangement, each bearing interest based on one-month LIBOR. In ~~November 2018,~~May 2020, Mississippi Power repaid the $40 million short-term portion.

In March 2020, Mississippi Power repaid at maturity the remaining $275 million aggregate principal amount of its Series 2018A Floating Rate Senior Notes.

In April 2020, Mississippi Power purchased and held approximately $11 million, $14 million, and $9 million aggregate principal amount of Mississippi Business Finance Corporation Solid Waste Disposal Facilities Revenue Bonds, Series 1995 (Mississippi Power Company Project), Solid Waste Disposal Facilities Revenue Refunding Bonds, Series 1998 (Mississippi Power Company Project), and Revenue Bonds, Series 1999 (Mississippi Power Company Project), respectively, which were remarketed to the public in May 2020.

Also in April 2020, Mississippi Power redeemed approximately $7 million aggregate principal amount of The Industrial Development Board of the City of Eutaw, Alabama Pollution Control Revenue Refunding Bonds, Series 1992 (Mississippi Power Greene County Plant Project) due December 1, 2020.

Subsequent to December 31, 2020, Mississippi Power received capital contributions totaling $100 million from Southern Company.

Southern Power

In February 2020, Southern Power repaid its $100 million short-term floating rate bank loan entered into in December 2019.

In June 2020, Southern Power repaid at maturity $300 million aggregate principal amount of its Series 2015B 2.375% Senior Notes.

In December 2020, Southern Power repaid at maturity $525 million aggregate principal amount of its Series 2017A Floating Rate Senior Notes.

Subsequent to December 31, 2020, Southern Power issued $400 million aggregate principal amount of Series 2021A 0.90% Senior Notes due January 15, 2026. An amount equal to the net proceeds of the senior notes is being allocated to finance or refinance, in whole or in part, one or more renewable energy projects.

Also subsequent to December 31, 2020, Southern Power made a return of ~~these~~capital to Southern Company totaling $271 million.

Southern Company Gas

In March 2020, Southern Company Gas Capital, as borrower, and Southern Company Gas, as guarantor, entered into a $150 million short-term ~~loans.~~floating rate bank loan bearing interest based on one-month LIBOR. In December 2020, Southern Company Gas Capital repaid the outstanding balance.

II-69

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Also in March 2020, Southern Company Gas Capital borrowed approximately $95 million pursuant to a short-term uncommitted bank credit arrangement, guaranteed by Southern Company Gas. In August 2020, Southern Company Gas Capital repaid the outstanding balance.

In August 2020, Southern Company Gas Capital, as borrower, and Southern Company Gas, as guarantor, issued $500 million aggregate principal amount of Series 2020A 1.75% Senior Notes due January 15, 2031.

In August 2020 and November 2020, Nicor Gas issued $150 million and $175 million, respectively, aggregate principal amount of first mortgage bonds in a private placement.

Subsequent to December 31, 2020, Atlanta Gas Light repaid at maturity $30 million aggregate principal amount of 9.1% medium-term notes.

Credit Rating Risk

~~Southern Power does~~At December 31, 2020, 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, ~~transmission.~~for Georgia Power, construction of new generation at Plant Vogtle Units 3 and 4.

The maximum potential collateral requirements under these contracts at December 31, ~~2018~~2020 were as follows:


Credit Ratings	Southern Company(*)		Alabama Power		Georgia Power		Mississippi Power		Southern Power(*)		Southern Company Gas
	(in millions)
At BBB and/or Baa2	$	36	$	1	$	—	$	—	$	35	$	—
At BBB- and/or Baa3	416		2		61		1		355		—
At BB+ and/or Ba1 or below	1,929		366		958		313		1,201		12

Credit Ratings Maximum Potential Collateral Requirements
(in millions)
At BBB and/or Baa2 $ 29
At BBB- and/or Baa3 $ 338
At BB+ and/or Ba1^(*)
$ 980


~~(*)~~	~~Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million~~.

~~Included~~(*)Southern Power has PPAs that could require collateral, but not accelerated payment, in ~~these~~the event of a downgrade of Southern Power's credit. The PPAs require credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade. Southern Power had $105 million of cash collateral posted related to PPA requirements at December 31, 2020.

The amounts ~~are~~in the previous table for the traditional electric operating companies and Southern Power include certain agreements that could require collateral ~~in the event that~~if either Alabama Power or Georgia Power ~~(affiliate companies of Southern Power)~~ has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of ~~Southern Power~~the Registrants to access capital markets and would be likely to impact the cost at which ~~it does~~they do so.

~~In addition, Southern~~Mississippi Power ~~has~~and its largest retail customer, Chevron, have agreements under which Mississippi Power continues to provide retail service to the Chevron refinery in Pascagoula, Mississippi through 2038. The agreements grant Chevron a ~~PPA that could require collateral, but not accelerated payment,~~security interest in the ~~event~~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 ~~Southern~~Mississippi Power's ~~credit. The PPA requires~~ credit ~~assurances without stating a specific credit rating. The amount~~rating to below investment grade by two of ~~collateral required would depend upon actual losses resulting~~the three rating agencies.

On August 27, 2020, Moody's upgraded Mississippi Power's senior unsecured long-term debt rating to Baa1 from ~~a credit downgrade.~~Baa2 and revised its rating outlook to stable from positive.

On September ~~28, 2018,~~25, 2020, Fitch ~~assigned a negative~~upgraded Mississippi Power's senior unsecured long-term debt rating to A- from BBB+ and revised its rating outlook to stable from positive.

Also on September 25, 2020, Fitch revised the ratings outlook of Southern Company and ~~certain of~~ its subsidiaries ~~(including Southern~~(excluding Georgia Power and Mississippi Power). to stable from negative.

Market Price Risk

~~Southern Power is exposed to~~The Registrants had no material change in market ~~risks, primarily commodity price~~ risk interest rate risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, Southern Power nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactionsexposure for the ~~remaining exposures pursuant~~year ended December 31, 2020 when compared to ~~Southern Power's policies in areas such~~the year ended December 31, 2019. See Note 14 to the financial statements for an in-depth discussion of the Registrants' derivatives, as ~~counterparty exposure and risk management practices. Southern Power's policy is that derivatives are~~well as Note 1 to ~~be used primarily~~the financial statements under "Financial Instruments" for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the consolidated balance sheets as either assets or liabilities and are presented on a gross basis. In the statements of cash flows, the cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities.additional information.

II-70

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power~~ Company and Subsidiary Companies ~~2018~~2020 Annual Report

~~At December 31, 2018, Southern Power had $525 million of long-term variable~~Due to cost-based rate ~~notes outstanding. If Southern Power sustained a 100 basis point change~~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, for its variable interest rate exposure, the change would affect annualized interest expense by approximately $5 million at December 31, 2018. Since a significant portion of outstanding indebtedness bears interest at fixed rates, Southern Power is not aware of any facts or circumstances that would significantly affect exposure on existing indebtedness in the near term. However, the impact on future financing costs cannot be determined at this time.

~~Southern Power had foreign currency denominated debt of €1.1 billion at December 31, 2018. Southern Power has mitigated its exposure to~~ foreign currency exchange ~~rate risk through~~rates, commodity fuel prices, and prices of electricity. The traditional electric operating companies and certain of the ~~use~~natural gas distribution utilities manage fuel-hedging programs implemented per the guidelines of ~~foreign currency swaps converting all interest and principal payments~~their respective state PSCs or other applicable state regulatory agencies to ~~fixed-rate U.S. dollars.~~

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.

~~For~~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 and wholesale gas services businesses also actively manage 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 operating margins. 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, 2020 for the applicable Registrants:


At December 31, 2020	Southern Company(*)			Alabama Power			Georgia Power			Mississippi Power
	(in millions, except percentages)
Long-term variable interest rate exposure	$	3,428		$	1,079		$	675		$	74
Weighted average interest rate on long-term variable interest rate exposure	0.77		%	0.76		%	0.23		%	0.70		%
Impact on annualized interest expense of 100 basis point change in interest rates	$	34		$	11		$	7		$	1

(*)Includes $1.5 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 Power had foreign currency denominated debt of €1.1 billion at December 31, 2020. Southern Power has mitigated its exposure to foreign currency exchange rate risk through the use of foreign currency swaps converting all interest and principal payments to fixed-rate U.S. dollars. See Note 14 to the financial statements under "Foreign Currency Derivatives" for additional information.

II-71

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Changes in fair value of energy-related derivative contracts for Southern Company and Southern Company Gas for the years ended December 31, 2020 and 2019 are provided in the table below. The fair value of energy-related derivative contracts was not material for the other Registrants. At December 31, 2020 and 2019, 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.


	Southern Company(a)		Southern Company Gas(a)
	(in millions)
Contracts outstanding at December 31, 2018, assets (liabilities), net	$	(201)	$	(167)
Contracts realized or settled	69		26
Current period changes(b)	105		213
Disposition	6		—
Contracts outstanding at December 31, 2019, assets (liabilities), net	$	(21)	$	72
Contracts realized or settled	(14)		(98)
Current period changes(b)	142		127
Contracts outstanding at December 31, 2020, assets (liabilities), net	$	107	$	101

(a)Excludes cash collateral held on deposit in broker margin accounts of $28 million, $99 million, and $277 million at December 31, 2020, 2019, and 2018, respectively, and ~~2017, the~~premium and intrinsic value associated with weather derivatives of $6 million, $4 million, and $8 million at December 31, 2020, 2019, and 2018, respectively.

(b)The changes in fair value of energy-related derivative contracts ~~associated with both power and natural gas positions were as follows:~~

2018 2017
(in millions)
Contracts outstanding at the beginning of period, assets (liabilities), net $ (10 ) $ 16
Contracts realized or settled 10
(17 )
Current period changes^(*)
(4 ) (9 )
Contracts outstanding at the end of period, assets (liabilities), net $ (4 ) $ (10 )


~~(*)~~	~~Current period changes also include changes in the fair value of new contracts entered into during the period, if any.~~

~~For the years ending December 31, 2018 and 2017, the changes in contracts outstanding were~~are substantially attributable to both the volume and the ~~prices~~price of ~~power and~~ natural ~~gas as follows:~~

gas. Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

2018 2017
Power – net sold
MWH (in millions) 2.5
3.0
Weighted average contract cost per MWH above (below) market prices (in dollars) $ (0.23 ) $ (2.67 )
Natural Gas – net purchased
Commodity - mmBtu (in millions) 15.0
14.4
Commodity - weighted average contract cost per mmBtu above (below) market prices (in dollars) $ 0.22
$ 0.12

~~Gains and losses on energy-related derivatives designated as cash flow hedges which are used by Southern Power to~~The net hedge ~~anticipated purchases and sales are initially deferred in OCI before being recognized in income in the same period as the hedged transactions are reflected in earnings. Gains and losses on~~volumes of energy-related derivative contracts ~~that~~for natural gas purchased (sold) at December 31, 2020 and 2019 for Southern Company and Southern Company Gas were as follows:


	Southern Company	Southern Company Gas
	mmBtu Volume (in millions)
At December 31, 2020:
Commodity – Natural gas swaps	262	—
Commodity – Natural gas options	574	523
Total hedge volume	836	523

At December 31, 2019:
Commodity – Natural gas swaps	327	—
Commodity – Natural gas options	262	218
Total hedge volume	589	218

Southern Company Gas' derivative contracts are ~~not designated or fail~~comprised of both long and short natural gas positions. A long position is a contract to ~~qualify as hedges are recognized~~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 4.42 billion mmBtu and short natural gas positions of 3.90 billion mmBtu at December 31, 2020 and the net of long natural gas positions of 4.10 billion mmBtu and short natural gas positions of 3.88 billion mmBtu at December 31, 2019.

For the Southern Company system, the weighted average swap contract cost per mmBtu was equal to market prices at December 31, 2020 and was approximately $0.28 per mmBtu above market prices at December 31, 2019. The change in option fair value is primarily attributable to the volatility of the market and the underlying change in the ~~consolidated statements~~natural gas price. Substantially all of ~~income as incurred.~~the traditional electric operating companies' natural gas hedge gains and losses are recovered through their respective fuel cost recovery clauses.

II-72

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern ~~Power uses~~Company and Subsidiary Companies 2020 Annual Report

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, and contracts that include a combination of observable and unobservable components, which are categorized as Level 3. See Note 13 to the financial statements for further discussion of fair value measurements. The maturities of the energy-related derivative contracts ~~outstanding~~for Southern Company and Southern Company Gas at December 31, ~~2018 mature~~2020 were as follows:


	Fair Value Measurements of Contracts at
	December 31, 2020
	Total Fair Value		Maturity
			2021		2022 – 2023		2024 – 2025
	(in millions)
Southern Company
Level 1(a)	$	13	$	10	$	(11)	$	14
Level 2(b)	66		49		5		12
Level 3	28		9		8		11
Southern Company total(c)	$	107	$	68	$	2	$	37









Southern Company Gas
Level 1(a)	$	13	$	10	$	(11)	$	14
Level 2(b)	60		43		5		12
Level 3	28		9		8		11
Southern Company Gas total(c)	$	101	$	62	$	2	$	37

(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 ~~2020.~~electronic trading platforms or directly from brokers.

~~Southern Power is~~(c)Excludes cash collateral of $28 million as well as premium and associated intrinsic value associated with weather derivatives of $6 million at December 31, 2020.

The Registrants are exposed to ~~losses related to financial instruments~~risk in the event of ~~counterparties' nonperformance. Southern Power~~nonperformance by counterparties to energy-related and interest rate derivative contracts, as applicable. The Registrants only ~~enters~~enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P, ~~and Moody's~~ or with counterparties who have posted collateral to cover potential credit exposure. ~~Southern Power has also established risk management policies and controls to determine and monitor~~Therefore, the ~~creditworthiness of counterparties in order to mitigate Southern Power's exposure to counterparty credit risk. Therefore, Southern Power does~~Registrants do not anticipate ~~a material adverse effect on~~market risk exposure from nonperformance by the ~~financial statements as a result of counterparty nonperformance. See~~counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments" and Note 14 to the financial statements.

Southern Company Gas Value at Risk (VaR)

VaR is the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability. Southern Company Gas' VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR. Southern Company Gas' VaR is determined on a 95% confidence interval and a one-day holding period, which means that 95% of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. The open exposure of Southern Company Gas is managed in accordance with established policies that limit market risk and require daily reporting of potential financial exposure to senior management. Because Southern Company Gas generally manages physical gas assets and economically protects its positions by hedging in the

II-73

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

futures markets, Southern Company Gas' open exposure is generally mitigated. Southern Company Gas employs daily risk testing, using both VaR and stress testing, to evaluate the risk of its positions.

Southern Company Gas actively monitors open commodity positions and the resulting VaR and maintains a relatively small risk exposure as total buy volume is close to sell volume, with minimal open natural gas price risk. Based on a 95% confidence interval and employing a one-day holding period, SouthStar's portfolio of positions for all periods presented was immaterial.

Southern Company Gas' wholesale gas services segment had the following VaRs at December 31:


	2020		2019		2018
	(in millions)
Period end(*)	$	1.3	$	2.6	$	6.4
Average	2.5		3.4		3.7
High(*)	4.6		7.0		11.7
Low	1.2		2.1		1.2

(*)The VaR at December 31, 2018 reflects significant natural gas price increases in Sequent's key markets driven by an industry-wide lower-than-normal natural gas storage inventory position and colder-than-normal weather in the middle of fourth quarter 2018. As weather and natural gas prices moderated subsequent to December 31, 2018, VaR declined.

Credit Risk

Southern Company (except as discussed herein), the traditional electric operating companies, and Southern Power are not exposed to any concentrations of credit risk. Southern Company Gas' exposure to concentrations of credit risk is discussed herein.

Southern Company Gas

Gas Distribution Operations

Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of the 16 Marketers in Georgia. The credit risk exposure to the Marketers varies seasonally, with the lowest exposure in the non-peak summer months and the highest exposure in the peak winter months. Marketers are responsible for the retail sale of natural gas to end-use customers in Georgia. The provisions of Atlanta Gas Light's tariff allow Atlanta Gas Light to obtain credit security support in an amount equal to a minimum of two times a Marketer's highest month's estimated bill from Atlanta Gas Light. For 2020, the four largest Marketers based on customer count, which includes SouthStar, accounted for 21% of Southern Company Gas' adjusted operating margin and 25% of adjusted operating margin for Southern Company Gas' gas distribution operations segment.

Several factors are designed to mitigate Southern Company Gas' risks from the increased concentration of credit that has resulted from deregulation. In addition to the security support described above, Atlanta Gas Light bills intrastate delivery service to Marketers in advance rather than in arrears. Atlanta Gas Light accepts credit support in the form of cash deposits, letters of credit/surety bonds from acceptable issuers, and corporate guarantees from investment-grade entities. Southern Company Gas reviews the adequacy of credit support coverage, credit rating profiles of credit support providers, and payment status of each Marketer. Southern Company Gas believes that adequate policies and procedures are in place to properly quantify, manage, and report on Atlanta Gas Light's credit risk exposure to Marketers.

Atlanta Gas Light also faces potential credit risk in connection with assignments of interstate pipeline transportation and storage capacity to Marketers. Although Atlanta Gas Light assigns this capacity to Marketers, in the event that a Marketer fails to pay the interstate pipelines for the capacity, the interstate pipelines would likely seek repayment from Atlanta Gas Light.

Wholesale Gas Services

Southern Company Gas has established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Southern Company Gas also utilizes netting agreements whenever possible to mitigate exposure to counterparty credit risk. When more than one derivative transaction with the same counterparty is outstanding and a legally enforceable netting agreement exists with that counterparty, the "net" mark-to-market exposure represents a reasonable measure of Southern Company Gas' credit risk with that counterparty. Netting agreements also enable Southern Company Gas to net certain assets and liabilities by counterparty across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, or owed to, counterparties are settled net, they are recorded on a gross basis on the balance sheet as energy marketing receivables and energy marketing payables.

II-74

Table of ContentsIndex to Financial Statements

COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary. Collateral or credit security is most often in the form of cash or letters of credit from an investment-grade financial institution but may also include cash or U.S. government securities held by a trustee. Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for a counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.

Certain of Southern Company Gas' derivative instruments contain credit-risk-related or other contingent features that could increase the payments for collateral it posts in the normal course of business when its financial instruments are in net liability positions. At December 31, 2020, for agreements with such features, Southern Company Gas' derivative instruments with liability fair values were immaterial and Southern Company Gas had no collateral posted with derivatives counterparties to satisfy these arrangements.

Southern Company Gas has a concentration of credit risk as measured by its 30-day receivable exposure plus forward exposure. At December 31, 2020, the top 20 counterparties of Southern Company Gas' wholesale gas services segment represented approximately 58%, or $234 million, of its total counterparty exposure and had a weighted average S&P equivalent credit rating of A-, all of which is consistent with the prior year. The S&P equivalent credit rating is determined by a process of converting the lower of the S&P or Moody's ratings to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being D / Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of the financial ratios of that counterparty. To arrive at the weighted average credit rating, each counterparty is assigned an internal ratio, which is multiplied by their credit exposure and summed for all counterparties. The sum is divided by the aggregate total counterparties' exposures, and this numeric value is then converted to a S&P equivalent.

The following table provides credit risk information related to Southern Company Gas' third-party natural gas contracts receivable and payable positions at December 31:


	Gross Receivables				Gross Payables
	2020		2019		2020		2019
	(in millions)				(in millions)
Netting agreements in place:
Counterparty is investment grade	$	265	$	238	$	104	$	127
Counterparty is non-investment grade	3		1		46		43
Counterparty has no external rating	235		175		342		272
No netting agreements in place:
Counterparty is investment grade	13		14		2		—

Amount recorded in balance sheets	$	516	$	428	$	494	$	442

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-75

Table of ContentsIndex to Financial Statements

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


			Page
The Southern Company and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm			II-77
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-81
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-82
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-83
Consolidated Balance Sheets at December 31, 2020 and 2019			II-84
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019, and 2018			II-86

Alabama Power:
Report of Independent Registered Public Accounting Firm			II-87
Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-89
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-90
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-91
Balance Sheets at December 31, 2020 and 2019			II-92
Statements of Common Stockholder's Equity for the Years Ended December 31, 2020, 2019, and 2018			II-94

Georgia Power:
Report of Independent Registered Public Accounting Firm			II-95
Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-98
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-99
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-100
Balance Sheets at December 31, 2020 and 2019			II-101
Statements of Common Stockholder's Equity for the Years Ended December 31, 2020, 2019, and 2018			II-103

Mississippi Power:
Report of Independent Registered Public Accounting Firm			II-104
Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-106
Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-107
Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-108
Balance Sheets at December 31, 2020 and 2019			II-109
Statements of Common Stockholder's Equity for the Years Ended December 31, 2020, 2019, and 2018			II-111

Southern Power and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm			II-112
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-114
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-115
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-116
Consolidated Balance Sheets at December 31, 2020 and 2019			II-117
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019, and 2018			II-119

Southern Company Gas and Subsidiary Companies:
Report of Independent Registered Public Accounting Firm			II-120
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018			II-125
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018			II-126
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018			II-127
Consolidated Balance Sheets at December 31, 2020 and 2019			II-128
Consolidated Statements of Common Stockholder's Equity for the Years Ended December 31, 2020, 2019, and 2018			II-130

Combined Notes to Financial Statements			II-131

II-76

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of The Southern Company and Subsidiary Companies

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of The Southern Company and subsidiary companies (Southern Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited Southern Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Southern Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinions

Southern Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on Southern Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Southern Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

II-77

Table of ContentsIndex to Financial Statements

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Audit Committee of Southern Company's Board of Directors and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impact of Rate Regulation on the Financial Statements – Refer to Note 1 (Summary of Significant Accounting Policies – Regulatory Assets and Liabilities) and Note 2 (Regulatory Matters) to the financial statements

Critical Audit Matter Description

Southern Company's traditional electric operating companies and natural gas distribution utilities (the "regulated utility subsidiaries"), which represent approximately 89% of Southern Company's consolidated operating revenues for the year ended December 31, 2020 and 85% of its consolidated total assets at December 31, 2020, are subject to rate regulation by their respective state Public Service Commissions or other applicable state regulatory agencies and wholesale regulation by the Federal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that the regulated utility subsidiaries meet the requirements under accounting principles generally accepted in the United States of America to utilize specialized rules to account for the effects of rate regulation in the preparation of its financial statements. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to, property, plant, and equipment; other regulatory assets; other regulatory liabilities; other cost of removal obligations; deferred charges and credits related to income taxes; under and over recovered regulatory clause revenues; operating revenues; operations and maintenance expenses; and depreciation and amortization.

The Commissions set the rates the regulated utility subsidiaries are permitted to charge customers. Rates are determined and approved in regulatory proceedings based on an analysis of the applicable regulated utility subsidiary's costs to provide utility service and a return on, and recovery of, its investment in the utility business. Current and future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be recovered by rates. The Commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. While Southern Company's regulated utility subsidiaries expect to recover costs from customers through regulated rates, there is a risk that the Commissions will not approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.

We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures (e.g., asset retirement costs, property damage reserves, and net book value of retired assets) and the high degree of subjectivity involved in assessing the potential impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and/or (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and significant auditor judgment to evaluate management estimates and the subjectivity of audit evidence.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We tested the effectiveness of management's controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We also tested the effectiveness of management's controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.

•We read relevant regulatory orders issued by the Commissions for the regulated utility subsidiaries, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances. We evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.

II-78

Table of ContentsIndex to Financial Statements

•For regulatory matters in process, we inspected filings with the Commissions by Southern Company's regulated utility subsidiaries and other interested parties that may impact the regulated utility subsidiaries' future rates for any evidence that might contradict management's assertions.

•We evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. We tested selected costs included in the capitalized project costs for completeness and accuracy.

•We obtained representation from management regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities to assess management's assertion that amounts are probable of recovery, refund, or a future reduction in rates.

•We evaluated Southern Company's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

Disclosure of Uncertainties – Plant Vogtle Units 3 and 4 Construction – Refer to Note 2 (Regulatory Matters – Georgia Power – Nuclear Construction) to the financial statements

Critical Audit Matter Description

As discussed in Note 2 to the financial statements, the ultimate recovery of Georgia Power Company's (Georgia Power) investment in the construction of Plant Vogtle Units 3 and 4 is subject to multiple uncertainties. Such uncertainties include the potential impact of future decisions by Georgia Power's regulators (particularly the Georgia Public Service Commission), actions by the co-owners of the Vogtle project, and litigation or other legal proceedings involving the project. In addition, Georgia Power's ability to meet its cost and schedule forecasts could impact its capacity to fully recover its investment in the project. While the project is not subject to a cost cap, Georgia Power's cost and schedule forecasts are subject to numerous uncertainties which could impact cost recovery, including challenges with management of contractors and vendors; subcontractor performance; supervision of craft labor and related craft labor productivity, particularly in the installation of electrical, mechanical, and instrumentation and controls commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues that could arise and change the projected schedule and estimated cost. In addition, the continuing effects of the COVID-19 pandemic could further disrupt or delay construction, testing, supervisory, and support activities at Plant Vogtle Units 3 and 4. The ultimate recovery of Georgia Power's investment in Plant Vogtle Units 3 and 4 is subject to the outcome of future assessments by management as well as Georgia Public Service Commission decisions in future regulatory proceedings.

Management has recorded charges to income, including a total of $325 million in 2020, when it has determined that it is likely to incur costs for which it will not seek recovery or which it has concluded are probable of disallowance for ratemaking purposes. In addition, management has disclosed the status, risks, and uncertainties associated with Plant Vogtle Units 3 and 4, including (1) the status of construction; (2) the status of regulatory proceedings; (3) the status of legal actions or issues involving the co-owners of the project; and (4) other matters which could impact the ultimate recoverability of Georgia Power's investment in the project. We identified as a critical audit matter the evaluation of Georgia Power's identification and disclosure of events and uncertainties that could impact the ultimate cost recovery of its investment in the construction of Plant Vogtle Units 3 and 4. This critical audit matter involved significant audit effort requiring specialized industry and construction expertise, extensive knowledge of rate regulation, and difficult and subjective judgments.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to Georgia Power's identification and disclosure of events and uncertainties that could impact the ultimate cost recovery of its investment in the construction of Plant Vogtle Units 3 and 4 included the following, among others:

•We tested the effectiveness of internal controls over the on-going evaluation, monitoring, and disclosure of matters related to the construction and ultimate cost recovery of Plant Vogtle Units 3 and 4.

•We involved construction specialists to assist in our evaluation of Georgia Power's processes for on-going evaluation and monitoring of the construction schedule and to assess the disclosures of the uncertainties impacting the ultimate cost recovery of its investment in the construction of Plant Vogtle Units 3 and 4.

•We attended meetings with Georgia Power and Southern Company officials, project managers (including contractors), independent regulatory monitors, and co-owners of the project to evaluate and monitor construction status and identify cost and schedule challenges.

II-79

Table of ContentsIndex to Financial Statements

•We read reports of external independent monitors employed by the Georgia Public Service Commission to monitor the status of construction at Plant Vogtle Units 3 and 4 to evaluate the completeness of Georgia Power's disclosure of the uncertainties impacting the ultimate cost recovery of its investment in the construction of Plant Vogtle Units 3 and 4.

•We inquired of Georgia Power and Southern Company officials and project managers regarding the status of construction, the construction schedule, and cost forecasts to assess the financial statement disclosures with respect to project status and potential risks and uncertainties to the achievement of such forecasts.

•We inspected regulatory filings and transcripts of Georgia Public Service Commission hearings regarding the construction of Plant Vogtle Units 3 and 4 to identify potential challenges to the recovery of Georgia Power's construction costs and to evaluate the disclosures with respect to such uncertainties.

•We inquired of Georgia Power and Southern Company management and internal and external legal counsel regarding any potential legal actions or issues arising from project construction or issues involving the co-owners of the project.

•We monitored the status of reviews by the Nuclear Regulatory Commission to identify potential impediments to the licensing and commercial operation of the project.

•We compared the financial statement disclosures relating to this matter to the information gathered through the conduct of all our procedures to evaluate whether there were omissions relating to significant facts or uncertainties regarding the status of construction or other factors which could impact the ultimate cost recovery of Plant Vogtle Units 3 and 4.

•We obtained representation from management regarding disclosure of all matters related to the cost and/or status of the construction of Plant Vogtle Units 3 and 4, including matters related to a co-owner or regulatory development, that could impact the recovery of the related costs.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 17, 2021

We have served as Southern Company's auditor since 2002.

II-80

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Retail electric revenues	$	13,643	$	14,084	$	15,222
Wholesale electric revenues	1,945		2,152		2,516
Other electric revenues	672		636		664
Natural gas revenues	3,434		3,792		3,854
Other revenues	681		755		1,239
Total operating revenues	20,375		21,419		23,495
Operating Expenses:
Fuel	2,967		3,622		4,637
Purchased power	799		816		971
Cost of natural gas	972		1,319		1,539
Cost of other sales	327		435		806
Other operations and maintenance	5,413		5,624		5,926
Depreciation and amortization	3,518		3,038		3,131
Taxes other than income taxes	1,234		1,230		1,315
Estimated loss on Plant Vogtle Units 3 and 4	325		0		1,060
Impairment charges	0		168		210
(Gain) loss on dispositions, net	(65)		(2,569)		(291)
Total operating expenses	15,490		13,683		19,304
Operating Income	4,885		7,736		4,191
Other Income and (Expense):
Allowance for equity funds used during construction	149		128		138

Earnings from equity method investments	153		162		148
Interest expense, net of amounts capitalized	(1,821)		(1,736)		(1,842)
Impairment of leveraged leases	(206)		0		0
Other income (expense), net	336		252		114
Total other income and (expense)	(1,389)		(1,194)		(1,442)
Earnings Before Income Taxes	3,496		6,542		2,749
Income taxes	393		1,798		449
Consolidated Net Income	3,103		4,744		2,300
Dividends on preferred stock of subsidiaries	15		15		16
Net income (loss) attributable to noncontrolling interests	(31)		(10)		58
Consolidated Net Income Attributable to Southern Company	$	3,119	$	4,739	$	2,226
Common Stock Data:
Earnings per share —
Basic	$	2.95	$	4.53	$	2.18
Diluted	2.93		4.50		2.17
Average number of shares of common stock outstanding — (in millions)
Basic	1,058		1,046		1,020
Diluted	1,065		1,054		1,025

The accompanying notes are an integral part of these consolidated financial statements.

II-81

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Consolidated Net Income	$	3,103	$	4,744	$	2,300
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $3, $(39), and $(16), respectively	10		(115)		(47)
Reclassification adjustment for amounts included in net income, net of tax of $(13), $19, and $24, respectively	(40)		57		72


Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of $(17), $(31), and $(2), respectively	(55)		(64)		(5)
Reclassification adjustment for amounts included in net income, net of tax of $3, $1, and $5, respectively	10		4		6
Total other comprehensive income (loss)	(75)		(118)		26
Dividends on preferred stock of subsidiaries	15		15		16
Comprehensive income (loss) attributable to noncontrolling interests	(31)		(10)		58
Consolidated Comprehensive Income Attributable to Southern Company	$	3,044	$	4,621	$	2,252

The accompanying notes are an integral part of these consolidated financial statements.

II-82

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Consolidated net income	$	3,103	$	4,744	$	2,300
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization, total	3,905		3,331		3,549
Deferred income taxes	(241)		611		89
Utilization of federal investment tax credits	341		757		5

Allowance for equity funds used during construction	(149)		(128)		(138)
Pension, postretirement, and other employee benefits	(259)		(204)		(103)
Pension and postretirement funding	(2)		(1,136)		(4)
Settlement of asset retirement obligations	(442)		(328)		(244)
Storm damage accruals	325		168		74
Stock based compensation expense	113		107		125

Estimated loss on Plant Vogtle Units 3 and 4	325		0		1,060


Impairment charges	206		168		210
(Gain) loss on dispositions, net	(66)		(2,588)		(301)
Other, net	(74)		115		47
Changes in certain current assets and liabilities —
-Receivables	(222)		630		(426)
-Fossil fuel for generation	(29)		(120)		123

-Materials and supplies	(157)		(17)		(176)
-Other current assets	(132)		132		98
-Accounts payable	(27)		(693)		291
-Accrued taxes	242		117		267

-Retail fuel cost over recovery	96		62		36

-Customer refunds	(236)		126		67
-Other current liabilities	76		(73)		(4)
Net cash provided from operating activities	6,696		5,781		6,945
Investing Activities:
Business acquisitions, net of cash acquired	(81)		(50)		(65)
Property additions	(7,441)		(7,555)		(8,001)



Nuclear decommissioning trust fund purchases	(877)		(888)		(1,117)
Nuclear decommissioning trust fund sales	871		882		1,111
Proceeds from dispositions and asset sales	1,049		5,122		2,956
Cost of removal, net of salvage	(361)		(393)		(388)
Change in construction payables, net	37		(169)		50
Investments in unconsolidated subsidiaries	(80)		(148)		(114)
Payments pursuant to LTSAs	(211)		(234)		(186)
Other investing activities	64		41		(6)
Net cash used for investing activities	(7,030)		(3,392)		(5,760)
Financing Activities:
Increase (decrease) in notes payable, net	(1,096)		640		(774)
Proceeds —
Long-term debt	8,047		5,220		2,478


Common stock	74		844		1,090

Short-term borrowings	615		350		3,150
Redemptions and repurchases —
Long-term debt	(4,458)		(4,347)		(5,533)


Preferred and preference stock	0		0		(33)
Short-term borrowings	(840)		(1,850)		(1,900)
Distributions to noncontrolling interests	(271)		(256)		(153)
Capital contributions from noncontrolling interests	363		196		2,551

Payment of common stock dividends	(2,685)		(2,570)		(2,425)

Other financing activities	(325)		(157)		(264)
Net cash used for financing activities	(576)		(1,930)		(1,813)
Net Change in Cash, Cash Equivalents, and Restricted Cash	(910)		459		(628)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	1,978		1,519		2,147
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	1,068	$	1,978	$	1,519
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $81, $74, and $72 capitalized, respectively)	$	1,683	$	1,651	$	1,794
Income taxes (net of refunds)	64		276		172

Noncash transactions — Accrued property additions at year-end	989		932		1,103

The accompanying notes are an integral part of these consolidated financial statements.

II-83

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Company and Subsidiary Companies 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	1,065	$	1,975
Receivables —
Customer accounts	1,753		1,614
Energy marketing	516		428
Unbilled revenues	672		599


Other accounts and notes	512		817
Accumulated provision for uncollectible accounts	(118)		(49)
Materials and supplies	1,478		1,388
Fossil fuel for generation	550		521
Natural gas for sale	460		479

Prepaid expenses	276		314

Assets from risk management activities, net of collateral	147		183
Regulatory assets – asset retirement obligations	214		287
Other regulatory assets	810		885
Assets held for sale	60		188
Other current assets	222		188
Total current assets	8,617		9,817
Property, Plant, and Equipment:
In service	110,516		105,114
Less: Accumulated depreciation	32,397		30,765
Plant in service, net of depreciation	78,119		74,349

Nuclear fuel, at amortized cost	818		851
Construction work in progress	8,697		7,880
Total property, plant, and equipment	87,634		83,080
Other Property and Investments:
Goodwill	5,280		5,280
Nuclear decommissioning trusts, at fair value	2,303		2,036
Equity investments in unconsolidated subsidiaries	1,362		1,303
Other intangible assets, net of amortization of $328 and $280, respectively	487		536
Leveraged leases	556		788
Miscellaneous property and investments	398		391
Total other property and investments	10,386		10,334
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization	1,802		1,800
Deferred charges related to income taxes	796		798


Unamortized loss on reacquired debt	280		300
Regulatory assets – asset retirement obligations, deferred	4,934		4,094
Other regulatory assets, deferred	7,198		6,805

Assets held for sale, deferred	0		601
Other deferred charges and assets	1,288		1,071
Total deferred charges and other assets	16,298		15,469
Total Assets	$	122,935	$	118,700

The accompanying notes are an integral part of these consolidated financial statements.

II-84

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Company and Subsidiary Companies 2020 Annual Report


Liabilities and Stockholders' Equity	2020		2019
	(in millions)
Current Liabilities:
Securities due within one year	$	3,507	$	2,989

Notes payable	609		2,055
Energy marketing trade payables	494		442
Accounts payable	2,312		2,115
Customer deposits	487		496
Accrued taxes —
Accrued income taxes	130		0

Other accrued taxes	699		659
Accrued interest	513		474

Accrued compensation	1,025		992
Asset retirement obligations	585		504


Other regulatory liabilities	509		756



Liabilities held for sale	0		5
Operating lease obligations	241		229
Other current liabilities	968		830
Total current liabilities	12,079		12,546
Long-Term Debt	45,073		41,798
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	8,175		7,888
Deferred credits related to income taxes	5,767		6,078
Accumulated deferred ITCs	2,235		2,291
Employee benefit obligations	2,213		1,814
Operating lease obligations, deferred	1,611		1,615
Asset retirement obligations, deferred	10,099		9,282

Accrued environmental remediation	216		234
Other cost of removal obligations	2,211		2,239
Other regulatory liabilities, deferred	251		256

Other deferred credits and liabilities	480		609
Total deferred credits and other liabilities	33,258		32,306
Total Liabilities	90,410		86,650
Redeemable Preferred Stock of Subsidiaries:
Cumulative preferred stock
$100 par or stated value - 4.20% to 4.92% (Authorized - 10 million shares; Outstanding - 0.5 million shares)	48		48
$1 par value - 5.00% (Authorized - 28 million shares; Outstanding - 10 million shares)	243		243
Total redeemable preferred stock of subsidiaries (annual dividend requirement - $15 million)	291		291
Common Stockholders' Equity:
Common stock, par value $5 per share (Authorized - 1.5 billion shares)	5,268		5,257
(Issued - 1.1 billion shares; Treasury - 1.0 million shares)

Paid-in capital	11,834		11,734
Treasury, at cost	(46)		(42)
Retained earnings	11,311		10,877
Accumulated other comprehensive loss	(395)		(321)
Total common stockholders' equity	27,972		27,505
Noncontrolling interests	4,262		4,254
Total Stockholders' Equity (See accompanying statements)	32,234		31,759
Total Liabilities and Stockholders' Equity	$	122,935	$	118,700
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these consolidated financial statements.

II-85

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company and Subsidiary Companies 2020 Annual Report


	Southern Company Common Stockholders' Equity
	Number of Common Shares		Common Stock								Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests
	Issued	Treasury	Par Value		Paid-In Capital		Treasury		Retained Earnings						Total
	(in millions)
Balance at December 31, 2017	1,009	(1)	$	5,038	$	10,469	$	(36)	$	8,885	$	(189)	$	1,361		$	25,528
Consolidated net income	—	—	—		—		—		2,226		—		58			2,284
Other comprehensive income	—	—	—		—		—		—		26		—			26
Stock issued	26	—	126		964		—		—		—		—			1,090
Stock-based compensation	—	—	—		84		—		—		—		—			84

Cash dividends of $2.3800 per share	—	—	—		—		—		(2,425)		—		—			(2,425)

Contributions from noncontrolling interests	—	—	—		—		—		—		—		1,372			1,372
Distributions to noncontrolling interests	—	—	—		—		—		—		—		(164)			(164)



Sale of noncontrolling interests	—	—	—		(417)		—		—		—		1,690			1,273
Other	—	—	—		(6)		(2)		20		(40)		(1)			(29)
Balance at December 31, 2018	1,035	(1)	5,164		11,094		(38)		8,706		(203)		4,316			29,039
Consolidated net income (loss)	—	—	—		—		—		4,739		—		(10)			4,729
Other comprehensive income (loss)	—	—	—		—		—		—		(118)		—			(118)
Issuance of equity units(*)	—	—	—		(198)		—		—		—		—			(198)
Stock issued	19	—	93		751		—		—		—		—			844
Stock-based compensation	—	—	—		66		—		—		—		—			66

Cash dividends of $2.4600 per share	—	—	—		—		—		(2,570)		—		—			(2,570)

Contributions from noncontrolling interests	—	—	—		—		—		—		—		276			276
Distributions to noncontrolling interests	—	—	—		—		—		—		—		(327)			(327)




Other	—	—	—		21		(4)		2		—		(1)			18
Balance at December 31, 2019	1,054	(1)	5,257		11,734		(42)		10,877		(321)		4,254			31,759
Consolidated net income (loss)	—	—	—		—		—		3,119		—		(31)			3,088
Other comprehensive income (loss)	—	—	—		—		—		—		(75)		—			(75)

Stock issued	4	—	11		63		—		—		—		—			74
Stock-based compensation	—	—	—		44		—		—		—		—			44

Cash dividends of $2.5400 per share	—	—	—		—		—		(2,685)		—		—			(2,685)

Contributions from noncontrolling interests	—	—	—		—		—		—		—		307			307
Distributions to noncontrolling interests	—	—	—		—		—		—		—		(271)			(271)
Purchase of membership interests from noncontrolling interests	—	—	—		5		—		—		—		(65)			(60)


Sale of noncontrolling interests	—	—	—		(2)		—		—		—		67			65
Other	—	—	—		(10)		(4)		—		1		1			(12)
Balance at December 31, 2020	1,058	(1)	$	5,268	$	11,834	$	(46)	$	11,311	$	(395)	$	4,262		$	32,234

(*)See Note 8 under "Equity Units" for additional information.

~~Capital Requirements and Contractual Obligations~~

The ~~capital program~~accompanying notes are an integral part of these consolidated financial statements.

II-86

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Alabama Power Company

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Alabama Power Company (Alabama Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2020 and 2019, the related statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Alabama Power as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of Alabama Power's management. Our responsibility is to express an opinion on Alabama Power's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Alabama Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Alabama Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Alabama Power's internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the Audit Committee of Southern Company's Board of Directors and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matter Description

Alabama Power is subject to ~~periodic review~~retail rate regulation by the Alabama Public Service Commission and ~~revision~~wholesale regulation by the Federal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that it meets the requirements under accounting principles generally accepted in the United States of America to utilize specialized rules to account for the effects of rate regulation in the preparation of its financial statements. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to, property, plant, and equipment; other regulatory assets; other regulatory liabilities; other cost of removal obligations; deferred charges and credits related to income taxes; under and over recovered regulatory clause revenues; operating revenues; operations and maintenance expenses; and depreciation and amortization.

The Commissions set the rates Alabama Power is ~~currently estimated~~permitted to ~~total $0.9 billion over~~charge customers. Rates are determined and approved in regulatory proceedings based on an analysis of Alabama Power's costs to provide utility service and a return on, and recovery of, its investment in the ~~next five years through 2023. This includes committed construction, capital improvements,~~utility business. Current and ~~work~~future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be ~~performed~~recovered by rates. The Commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. While Alabama Power expects to recover costs from customers through regulated rates, there is a risk that the Commissions will not approve: (1)

II-87

Table of ContentsIndex to Financial Statements

full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures (e.g., asset retirement costs and the net book value of retired assets) and the high degree of subjectivity involved in assessing the potential impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and/or (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and significant auditor judgment to evaluate management estimates and the subjectivity of audit evidence.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We read relevant regulatory orders issued by the Commissions for Alabama Power, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances. We evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.

•For regulatory matters in process, we inspected filings with the Commissions by Alabama Power and other interested parties that may impact Alabama Power's future rates for any evidence that might contradict management's assertions.

•We evaluated Alabama Power's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

/s/ Deloitte & Touche LLP

Birmingham, Alabama

February 17, 2021

We have served as Alabama Power's auditor since 2002.

II-88

Table of ContentsIndex to Financial Statements

STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Alabama Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Retail revenues	$	5,213	$	5,501	$	5,367
Wholesale revenues, non-affiliates	269		258		279
Wholesale revenues, affiliates	46		81		119
Other revenues	302		285		267
Total operating revenues	5,830		6,125		6,032
Operating Expenses:
Fuel	970		1,112		1,301
Purchased power, non-affiliates	191		203		216
Purchased power, affiliates	128		200		216
Other operations and maintenance	1,619		1,821		1,669
Depreciation and amortization	812		793		764
Taxes other than income taxes	416		403		389
Total operating expenses	4,136		4,532		4,555
Operating Income	1,694		1,593		1,477
Other Income and (Expense):
Allowance for equity funds used during construction	46		52		62

Interest expense, net of amounts capitalized	(338)		(336)		(323)
Other income (expense), net	100		46		20
Total other income and (expense)	(192)		(238)		(241)
Earnings Before Income Taxes	1,502		1,355		1,236
Income taxes	337		270		291
Net Income	1,165		1,085		945
Dividends on Preferred Stock	15		15		15
Net Income After Dividends on Preferred Stock	$	1,150	$	1,070	$	930

The accompanying notes are an integral part of these financial statements.

II-89

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Alabama Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Net Income	$	1,165	$	1,085	$	945
Other comprehensive income (loss):
Qualifying hedges:

Reclassification adjustment for amounts included in net income, net of tax of $2, $2, and $2, respectively	4		4		4
Total other comprehensive income (loss)	4		4		4
Comprehensive Income	$	1,169	$	1,089	$	949

The accompanying notes are an integral part of these financial statements.

II-90

Table of ContentsIndex to Financial Statements

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Alabama Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Net income	$	1,165	$	1,085	$	945
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	963		951		917
Deferred income taxes	78		197		174
Allowance for equity funds used during construction	(46)		(52)		(62)

Pension and postretirement funding	(2)		(362)		(4)

Settlement of asset retirement obligations	(219)		(127)		(55)
Natural disaster reserve accruals	112		138		16
Other deferred charges – affiliated	0		(42)		0
Other, net	(38)		(91)		(17)
Changes in certain current assets and liabilities —
-Receivables	(49)		9		(149)




-Materials and supplies	(47)		23		(82)
-Other current assets	(66)		(89)		28
-Accounts payable	(90)		(41)		24
-Accrued taxes	84		49		10
-Accrued compensation	(32)		(14)		8
-Retail fuel cost over recovery	(31)		47		0
-Customer refunds	(12)		30		114
-Other current liabilities	(28)		68		14
Net cash provided from operating activities	1,742		1,779		1,881
Investing Activities:
Property additions	(1,970)		(1,757)		(2,158)
Nuclear decommissioning trust fund purchases	(268)		(261)		(279)
Nuclear decommissioning trust fund sales	267		260		278
Cost of removal net of salvage	(98)		(103)		(130)
Change in construction payables	(34)		(71)		26
Other investing activities	(19)		(31)		(26)
Net cash used for investing activities	(2,122)		(1,963)		(2,289)
Financing Activities:

Proceeds —
Senior notes	600		600		500

Pollution control revenue bonds	87		0		120

Capital contributions from parent company	653		1,240		511
Redemptions and repurchases —
Senior notes	(250)		(200)		0

Pollution control revenue bonds	(87)		0		(120)

Payment of common stock dividends	(957)		(844)		(801)
Other financing activities	(30)		(31)		(33)
Net cash provided from financing activities	16		765		177
Net Change in Cash, Cash Equivalents, and Restricted Cash	(364)		581		(231)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	894		313		544
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	530	$	894	$	313
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $15, $19, and $22 capitalized, respectively)	$	321	$	311	$	284
Income taxes (net of refunds)	187		26		106
Noncash transactions — Accrued property additions at year-end	166		200		272

The accompanying notes are an integral part of these financial statements.

II-91

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Alabama Power Company 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	530	$	894
Receivables —
Customer accounts	429		425
Unbilled revenues	152		134


Affiliated	31		37
Other accounts and notes	66		72
Accumulated provision for uncollectible accounts	(43)		(22)
Fossil fuel stock	235		212
Materials and supplies	546		512

Prepaid expenses	42		50
Other regulatory assets	226		242
Other current assets	33		30
Total current assets	2,247		2,586
Property, Plant, and Equipment:
In service	31,816		30,023
Less: Accumulated provision for depreciation	10,009		9,540
Plant in service, net of depreciation	21,807		20,483
Nuclear fuel, at amortized cost	270		296
Construction work in progress	866		890
Total property, plant, and equipment	22,943		21,669
Other Property and Investments:
Nuclear decommissioning trusts, at fair value	1,157		1,023
Equity investments in unconsolidated subsidiaries	63		66
Miscellaneous property and investments	131		128
Total other property and investments	1,351		1,217
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization	151		132
Deferred charges related to income taxes	235		244


Regulatory assets – asset retirement obligations	1,441		1,019
Other regulatory assets, deferred	2,162		2,016

Other deferred charges and assets	273		269
Total deferred charges and other assets	4,262		3,680
Total Assets	$	30,803	$	29,152

The accompanying notes are an integral part of these financial statements.

II-92

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Alabama Power Company 2020 Annual Report


Liabilities and Stockholder's Equity	2020		2019
	(in millions)
Current Liabilities:
Securities due within one year	$	311	$	251
Accounts payable —
Affiliated	316		316
Other	545		514
Customer deposits	104		100


Accrued taxes	152		78
Accrued interest	90		92

Accrued compensation	212		216

Asset retirement obligations	254		195
Other regulatory liabilities	108		193
Other current liabilities	107		105
Total current liabilities	2,199		2,060
Long-Term Debt	8,558		8,270
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	3,273		3,260
Deferred credits related to income taxes	2,016		1,960
Accumulated deferred ITCs	94		100
Employee benefit obligations	214		206
Operating lease obligations	119		107
Asset retirement obligations, deferred	3,720		3,345
Other cost of removal obligations	335		412
Other regulatory liabilities, deferred	124		146

Other deferred credits and liabilities	50		40
Total deferred credits and other liabilities	9,945		9,576
Total Liabilities	20,702		19,906
Redeemable Preferred Stock:
Cumulative redeemable preferred stock
$100 par or stated value - 4.20% to 4.92% (Authorized - 3.9 million shares; Outstanding - 0.5 million shares)	48		48
$1 par value - 5.00% (Authorized - 27.5 million shares; Outstanding - 10 million shares: $25 stated value)	243		243
Total redeemable preferred stock (annual dividend requirement - $15 million)	291		291
Common Stockholder's Equity:
Common stock, par value $40 per share (Authorized - 40 million shares; Outstanding - 31 million shares)	1,222		1,222
Paid-in capital	5,413		4,755
Retained earnings	3,194		3,001
Accumulated other comprehensive loss	(19)		(23)
Total common stockholder's equity (See accompanying statements)	9,810		8,955
Total Liabilities and Stockholder's Equity	$	30,803	$	29,152
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these financial statements.

II-93

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Alabama Power Company 2020 Annual Report


	Number of Common Shares Issued	Common Stock		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	(in millions)
Balance at December 31, 2017	31	$	1,222	$	2,986	$	2,647	$	(26)	$	6,829
Net income after dividends on preferred stock	—	—		—		930		—		930
Capital contributions from parent company	—	—		522		—		—		522
Other comprehensive income	—	—		—		—		4		4
Cash dividends on common stock	—	—		—		(801)		—		(801)
Other	—	—		—		(1)		(6)		(7)
Balance at December 31, 2018	31	1,222		3,508		2,775		(28)		7,477
Net income after dividends on preferred stock	—	—		—		1,070		—		1,070
Capital contributions from parent company	—	—		1,247		—		—		1,247
Other comprehensive income	—	—		—		—		4		4
Cash dividends on common stock	—	—		—		(844)		—		(844)
Other	—	—		—		—		1		1
Balance at December 31, 2019	31	1,222		4,755		3,001		(23)		8,955
Net income after dividends on preferred stock	—	—		—		1,150		—		1,150
Capital contributions from parent company	—	—		658		—		—		658
Other comprehensive income	—	—		—		—		4		4
Cash dividends on common stock	—	—		—		(957)		—		(957)

Balance at December 31, 2020	31	$	1,222	$	5,413	$	3,194	$	(19)	$	9,810

The accompanying notes are an integral part of these financial statements.

II-94

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Georgia Power Company

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Georgia Power Company (Georgia Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2020 and 2019, the related statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Georgia Power as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of Georgia Power's management. Our responsibility is to express an opinion on Georgia Power's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Georgia Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Georgia Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Georgia Power's internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matters

Critical Audit Matter Description

Georgia Power is subject to retail rate regulation by the Georgia Public Service Commission and wholesale regulation by the Federal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that it meets the requirements under accounting principles generally accepted in the United States of America to utilize specialized rules to account for the effects of rate regulation in the preparation of its financial statements. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to, property, plant, and equipment; other regulatory assets; other regulatory liabilities; other cost of removal obligations; deferred charges and credits related to income taxes; under and over recovered regulatory clause revenues; operating revenues; operations and maintenance expenses; and depreciation and amortization.

The Commissions set the rates Georgia Power is permitted to charge customers. Rates are determined and approved in regulatory proceedings based on an analysis of Georgia Power's costs to provide utility service and a return on, and recovery of, its investment in the utility business. Current and future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be recovered by rates. The Commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. While Georgia Power expects to recover costs from customers through regulated rates, there is a risk that the Commissions will not approve: (1)

II-95

Table of ContentsIndex to Financial Statements

full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We read relevant regulatory orders issued by the Commissions for Georgia Power, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances. We evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.

•For regulatory matters in process, we inspected filings with the Commissions by Georgia Power and other interested parties that may impact Georgia Power's future rates for any evidence that might contradict management's assertions.

•We evaluated Georgia Power's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

Disclosure of Uncertainties – Plant Vogtle Units 3 and 4 Construction – Refer to Note 2 (Regulatory Matters – Georgia Power – Nuclear Construction) to the financial statements

Critical Audit Matter Description

II-96

Table of ContentsIndex to Financial Statements

Vogtle Units 3 and 4 is subject to the outcome of future assessments by management as well as Georgia Public Service Commission decisions in future regulatory proceedings.

Management has recorded charges to income, including a total of $325 million in 2020, when it has determined that it is likely to incur costs for which it will not seek recovery or which it cannot conclude are probable of recovery through the ratemaking process. In addition, management has disclosed the status, risks, and uncertainties associated with Plant Vogtle Units 3 and 4, including (1) the status of construction; (2) the status of regulatory proceedings; (3) the status of legal actions or issues involving the co-owners of the project; and (4) other matters which could impact the ultimate recoverability of Georgia Power's investment in the project. We identified as a critical audit matter the evaluation of Georgia Power's identification and disclosure of events and uncertainties that could impact the ultimate cost recovery of its investment in the construction of Plant Vogtle Units 3 and 4. This critical audit matter involved significant audit effort requiring specialized industry and construction expertise, extensive knowledge of rate regulation, and difficult and subjective judgments.

How the Critical Audit Matter Was Addressed in the Audit

•We monitored the status of reviews by the Nuclear Regulatory Commission to identify potential impediments to the licensing and commercial operation of the project.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 17, 2021

We have served as Georgia Power's auditor since 2002.

II-97

Table of ContentsIndex to Financial Statements

STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Georgia Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Retail revenues	$	7,609	$	7,707	$	7,752
Wholesale revenues	115		140		187

Other revenues	585		561		481
Total operating revenues	8,309		8,408		8,420
Operating Expenses:
Fuel	1,141		1,444		1,698
Purchased power, non-affiliates	540		521		430
Purchased power, affiliates	509		575		723
Other operations and maintenance	1,953		1,972		1,860
Depreciation and amortization	1,425		981		923
Taxes other than income taxes	444		454		437
Estimated loss on Plant Vogtle Units 3 and 4	325		0		1,060
Total operating expenses	6,337		5,947		7,131
Operating Income	1,972		2,461		1,289
Other Income and (Expense):

Interest expense, net of amounts capitalized	(425)		(409)		(397)
Other income (expense), net	180		140		115
Total other income and (expense)	(245)		(269)		(282)
Earnings Before Income Taxes	1,727		2,192		1,007
Income taxes	152		472		214
Net Income	$	1,575	$	1,720	$	793

The accompanying notes are an integral part of these financial statements.

II-98

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Georgia Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Net Income	$	1,575	$	1,720	$	793
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(1), $(15), and $0, respectively	(2)		(44)		0
Reclassification adjustment for amounts included in net income, net of tax of $2, $1, and $1, respectively	6		2		3
Total other comprehensive income (loss)	4		(42)		3
Comprehensive Income	$	1,579	$	1,678	$	796

The accompanying notes are an integral part of these financial statements.

II-99

Table of ContentsIndex to Financial Statements

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Georgia Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Net income	$	1,575	$	1,720	$	793
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	1,607		1,193		1,142
Deferred income taxes	(273)		179		(260)

Allowance for equity funds used during construction	(91)		(68)		(69)

Pension, postretirement, and other employee benefits	(137)		(146)		(75)
Pension and postretirement funding	0		(200)		0
Settlement of asset retirement obligations	(185)		(151)		(116)
Storm damage accruals	213		30		30
Retail fuel cost over recovery – long-term	(73)		73		0
Other deferred charges – affiliated	0		(108)		0
Estimated loss on Plant Vogtle Units 3 and 4	325		0		1,060
Other, net	14		50		18
Changes in certain current assets and liabilities —
-Receivables	(114)		177		8
-Fossil fuel stock	(6)		(41)		83
-Materials and supplies	(91)		(4)		(19)
-Prepaid income taxes	0		102		152
-Other current assets	(48)		(15)		(24)
-Accounts payable	59		(92)		95
-Accrued taxes	55		58		58

-Retail fuel cost over recovery	113		0		0
-Customer refunds	(223)		116		(69)
-Other current liabilities	64		34		(38)
Net cash provided from operating activities	2,784		2,907		2,769
Investing Activities:
Property additions	(3,445)		(3,510)		(3,116)



Nuclear decommissioning trust fund purchases	(609)		(628)		(839)
Nuclear decommissioning trust fund sales	604		622		833
Cost of removal, net of salvage	(143)		(186)		(107)
Change in construction payables, net of joint owner portion	16		(122)		68
Payments pursuant to LTSAs	(86)		(81)		(54)
Proceeds from dispositions and asset sales	153		14		138
Other investing activities	7		6		(32)
Net cash used for investing activities	(3,503)		(3,885)		(3,109)
Financing Activities:
Increase (decrease) in notes payable, net	(55)		(179)		294
Proceeds —
FFB loan	848		1,218		0
Senior notes	1,500		750		0
Pollution control revenue bonds issuances and remarketings	53		584		108
Capital contributions from parent company	1,392		634		2,985
Short-term borrowings	250		250		0

Redemptions and repurchases —
Senior notes	(950)		(500)		(1,500)
Pollution control revenue bonds	(336)		(223)		(469)
Short-term borrowings	(375)		0		(150)

FFB loan	(73)		0		0
Other long-term debt	0		0		(100)

Payment of common stock dividends	(1,542)		(1,576)		(1,396)

Premiums on redemption and repurchases of senior notes	0		0		(152)
Other financing activities	(36)		(40)		(20)
Net cash provided from (used for) financing activities	676		918		(400)
Net Change in Cash, Cash Equivalents, and Restricted Cash	(43)		(60)		(740)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	52		112		852
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	9	$	52	$	112
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $47, $35, and $26 capitalized, respectively)	$	380	$	373	$	408
Income taxes (net of refunds)	373		110		300

Noncash transactions — Accrued property additions at year-end	553		560		683

The accompanying notes are an integral part of these financial statements.

II-100

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Georgia Power Company 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	9	$	52

Receivables —
Customer accounts	621		533
Unbilled revenues	233		203

Joint owner accounts	123		136

Affiliated	21		21
Other accounts and notes	67		209
Accumulated provision for uncollectible accounts	(26)		(2)
Fossil fuel stock	278		272
Materials and supplies	592		501

Prepaid expenses	54		63
Regulatory assets – storm damage	213		213
Regulatory assets – asset retirement obligations	166		254
Other regulatory assets	248		263
Other current assets	89		77
Total current assets	2,688		2,795
Property, Plant, and Equipment:
In service	39,682		38,137
Less: Accumulated provision for depreciation	12,251		11,753
Plant in service, net of depreciation	27,431		26,384

Nuclear fuel, at amortized cost	548		555
Construction work in progress	6,857		5,650
Total property, plant, and equipment	34,836		32,589
Other Property and Investments:
Nuclear decommissioning trusts, at fair value	1,145		1,013
Equity investments in unconsolidated subsidiaries	51		52
Miscellaneous property and investments	63		64
Total other property and investments	1,259		1,129
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization	1,308		1,428
Deferred charges related to income taxes	527		519


Regulatory assets – asset retirement obligations, deferred	3,291		2,865
Other regulatory assets, deferred	2,692		2,716

Other deferred charges and assets	479		500
Total deferred charges and other assets	8,297		8,028
Total Assets	$	47,080	$	44,541

The accompanying notes are an integral part of these financial statements.

II-101

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Georgia Power Company 2020 Annual Report


Liabilities and Stockholder's Equity	2020		2019
	(in millions)
Current Liabilities:
Securities due within one year	$	542	$	1,025
Notes payable	60		365
Accounts payable —
Affiliated	597		512
Other	753		711
Customer deposits	276		283


Accrued taxes	407		407
Accrued interest	130		118

Accrued compensation	233		233
Operating lease obligations	151		144
Asset retirement obligations	287		265

Over recovered fuel clause revenues	113		0
Other regulatory liabilities	228		447
Other current liabilities	254		187
Total current liabilities	4,031		4,697
Long-Term Debt	12,428		10,791
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	3,272		3,257
Deferred credits related to income taxes	2,588		2,862
Accumulated deferred ITCs	273		255
Employee benefit obligations	586		540
Operating lease obligations, deferred	1,156		1,282
Asset retirement obligations, deferred	5,978		5,519

Other deferred credits and liabilities	267		273
Total deferred credits and other liabilities	14,120		13,988
Total Liabilities	30,579		29,476
Common Stockholder's Equity:
Common stock, without par value (Authorized - 20 million shares; Outstanding - 9 million shares)	398		398
Paid-in capital	12,361		10,962
Retained earnings	3,789		3,756
Accumulated other comprehensive loss	(47)		(51)
Total common stockholder's equity (See accompanying statements)	16,501		15,065
Total Liabilities and Stockholder's Equity	$	47,080	$	44,541
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these financial statements.

II-102

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Georgia Power Company 2020 Annual Report


	Number of Common Shares Issued	Common Stock		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	(in millions)
Balance at December 31, 2017	9	$	398	$	7,328	$	4,215	$	(10)	$	11,931
Net income	—	—		—		793		—		793
Capital contributions from parent company	—	—		2,994		—		—		2,994
Other comprehensive income	—	—		—		—		3		3
Cash dividends on common stock	—	—		—		(1,396)		—		(1,396)
Other	—	—		—		—		(2)		(2)
Balance at December 31, 2018	9	398		10,322		3,612		(9)		14,323
Net income	—	—		—		1,720		—		1,720
Capital contributions from parent company	—	—		640		—		—		640
Other comprehensive income (loss)	—	—		—		—		(42)		(42)
Cash dividends on common stock	—	—		—		(1,576)		—		(1,576)

Balance at December 31, 2019	9	398		10,962		3,756		(51)		15,065
Net income	—	—		—		1,575		—		1,575
Capital contributions from parent company	—	—		1,399		—		—		1,399
Other comprehensive income	—	—		—		—		4		4
Cash dividends on common stock	—	—		—		(1,542)		—		(1,542)

Balance at December 31, 2020	9	$	398	$	12,361	$	3,789	$	(47)	$	16,501

The accompanying notes are an integral part of these financial statements.

II-103

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Mississippi Power Company

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Mississippi Power Company (Mississippi Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2020 and 2019, the related statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Mississippi Power as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of Mississippi Power's management. Our responsibility is to express an opinion on Mississippi Power's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Mississippi Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Mississippi Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Mississippi Power's internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matter

Critical Audit Matter Description

Mississippi Power is subject to retail rate regulation by the Mississippi Public Service Commission and wholesale regulation by the Federal Energy Regulatory Commission (collectively, the "Commissions"). Management has determined that it meets the requirements under accounting principles generally accepted in the United States of America to utilize specialized rules to account for the effects of rate regulation in the preparation of its financial statements. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to, property, plant, and equipment; other regulatory assets; other regulatory liabilities; regulatory assets – asset retirement obligations; other cost of removal obligations; deferred charges and credits related to income taxes; under and over recovered regulatory clause revenues; operating revenues; operations and maintenance expenses; and depreciation and amortization.

The Commissions set the rates Mississippi Power is permitted to charge customers. Rates are determined and approved in regulatory proceedings based on an analysis of Mississippi Power's costs to provide utility service and a return on, and recovery of, its investment in the utility business. Current and future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be recovered by rates. The Commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. While Mississippi Power expects to recover costs from customers through regulated rates, there is a risk that the Commissions will not

II-104

Table of ContentsIndex to Financial Statements

approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.

We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures (e.g., asset retirement costs) and the high degree of subjectivity involved in assessing the potential impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant, and/or (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and significant auditor judgment to evaluate management estimates and the subjectivity of audit evidence.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We read relevant regulatory orders issued by the Commissions for Mississippi Power, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances. We evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.

•For regulatory matters in process, we inspected filings with the Commissions by Mississippi Power and other interested parties that may impact Mississippi Power's future rates for any evidence that might contradict management's assertions.

•We evaluated Mississippi Power's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 17, 2021

We have served as Mississippi Power's auditor since 2002.

II-105

Table of Contents�� Index to Financial Statements

STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Mississippi Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Retail revenues	$	821	$	877	$	889
Wholesale revenues, non-affiliates	215		237		263
Wholesale revenues, affiliates	111		132		91
Other revenues	25		18		22
Total operating revenues	1,172		1,264		1,265
Operating Expenses:
Fuel	350		407		405

Purchased power	22		20		41
Other operations and maintenance	284		307		350
Depreciation and amortization	183		192		169
Taxes other than income taxes	124		113		107

Total operating expenses	963		1,039		1,072
Operating Income	209		225		193
Other Income and (Expense):

Interest expense, net of amounts capitalized	(60)		(69)		(76)
Other income (expense), net	17		13		17
Total other income and (expense)	(43)		(56)		(59)
Earnings Before Income Taxes	166		169		134
Income taxes (benefit)	14		30		(102)
Net Income	152		139		236
Dividends on Preferred Stock	0		0		1
Net Income After Dividends on Preferred Stock	$	152	$	139	$	235

The accompanying notes are an integral part of these financial statements.

II-106

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2020, 2019, and 2018

Mississippi Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Net Income	$	152	$	139	$	236
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $0, $0, and $(1), respectively	0		0		(1)
Reclassification adjustment for amounts included in net income, net of tax of $0, $0, and $0, respectively	1		1		1
Total other comprehensive income (loss)	1		1		0
Comprehensive Income	$	153	$	140	$	236

The accompanying notes are an integral part of these financial statements.

II-107

Table of ContentsIndex to Financial Statements

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Mississippi Power Company 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Net income	$	152	$	139	$	236
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	191		197		177
Deferred income taxes	(4)		37		475



Pension and postretirement funding	0		(54)		0



Settlement of asset retirement obligations	(22)		(35)		(35)




Other, net	(1)		35		51
Changes in certain current assets and liabilities —
-Receivables	(7)		6		(19)




-Prepaid income taxes	(3)		12		(12)
-Other current assets	(28)		(8)		(10)
-Accounts payable	20		3		15

-Accrued taxes	10		11		(46)

-Over recovered regulatory clause revenues	5		16		14


-Other current liabilities	(15)		(20)		(42)
Net cash provided from operating activities	298		339		804
Investing Activities:
Property additions	(274)		(202)		(188)






Payments pursuant to LTSAs	(28)		(23)		(29)
Other investing activities	(21)		(38)		(15)
Net cash used for investing activities	(323)		(263)		(232)
Financing Activities:
Increase (decrease) in notes payable, net	25		0		(4)
Proceeds —
Capital contributions from parent company	85		51		15

Senior notes	0		0		600


Short-term borrowings	40		0		300
Pollution control revenue bonds	34		43		0
Other long-term debt	100		0		0
Redemptions —
Preferred stock	0		0		(33)
Pollution control revenue bonds	(41)		0		(43)
Short-term borrowings	(40)		0		(300)



Senior notes	(275)		(25)		(155)
Other long-term debt	0		0		(900)
Return of capital to parent company	(74)		(150)		0

Payment of common stock dividends	(74)		0		0
Other financing activities	(2)		(2)		(7)
Net cash used for financing activities	(222)		(83)		(527)
Net Change in Cash, Cash Equivalents, and Restricted Cash	(247)		(7)		45
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	286		293		248
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	39	$	286	$	293
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $0, $(1), and $0 capitalized, respectively)	$	63	$	71	$	80
Income taxes (net of refunds)	28		(27)		(525)

Noncash transactions — Accrued property additions at year-end	34		35		35

The accompanying notes are an integral part of these financial statements.

II-108

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Mississippi Power Company 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	39	$	286
Receivables —
Customer accounts	34		35
Unbilled revenues	38		39


Affiliated	32		27
Other accounts and notes	32		26

Fossil fuel stock	24		26
Materials and supplies	65		61
Other regulatory assets	60		99

Other current assets	20		10
Total current assets	344		609
Property, Plant, and Equipment:
In service	5,011		4,857
Less: Accumulated provision for depreciation	1,545		1,463
Plant in service, net of depreciation	3,466		3,394
Construction work in progress	146		126
Total property, plant, and equipment	3,612		3,520
Other Property and Investments	151		131
Deferred Charges and Other Assets:
Deferred charges related to income taxes	32		32
Regulatory assets – asset retirement obligations	201		210
Other regulatory assets, deferred	388		360

Accumulated deferred income taxes	129		139

Other deferred charges and assets	55		34
Total deferred charges and other assets	805		775
Total Assets	$	4,912	$	5,035

The accompanying notes are an integral part of these financial statements.

II-109

Table of ContentsIndex to Financial Statements

BALANCE SHEETS

At December 31, 2020 and 2019

Mississippi Power Company 2020 Annual Report


Liabilities and Stockholder's Equity	2020		2019
	(in millions)
Current Liabilities:


Securities due within one year	$	406	$	281
Notes payable	25		0

Accounts payable —
Affiliated	63		76
Other	109		75


Accrued taxes	114		105


Accrued interest	15		15
Accrued compensation	34		35


Asset retirement obligations	27		33
Over recovered regulatory clause liabilities	34		29
Other regulatory liabilities	49		21


Other current liabilities	40		64
Total current liabilities	916		734
Long-Term Debt	1,013		1,308
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	447		424
Deferred credits related to income taxes	287		352

Employee benefit obligations	113		99
Asset retirement obligations, deferred	150		157

Other cost of removal obligations	194		189
Other regulatory liabilities, deferred	15		76
Other deferred credits and liabilities	35		44
Total deferred credits and other liabilities	1,241		1,341
Total Liabilities	3,170		3,383
Common Stockholder's Equity:
Common stock, without par value (Authorized and outstanding - 1 million shares)	38		38
Paid-in capital	4,460		4,449
Accumulated deficit	(2,754)		(2,832)
Accumulated other comprehensive loss	(2)		(3)
Total common stockholder's equity (See accompanying statements)	1,742		1,652
Total Liabilities and Stockholder's Equity	$	4,912	$	5,035
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these financial statements.

II-110

Table of ContentsIndex to Financial Statements

STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Mississippi Power Company 2020 Annual Report


	Number of Common Shares Issued	Common Stock		Paid-In Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Total
	(in millions)
Balance at December 31, 2017	1	$	38	$	4,529	$	(3,205)	$	(4)	$	1,358
Net income after dividends on preferred stock	—	—		—		235		—		235
Capital contributions from parent company	—	—		17		—		—		17


Other	—	—		—		(1)		—		(1)
Balance at December 31, 2018	1	38		4,546		(2,971)		(4)		1,609
Net income after dividends on preferred stock	—	—		—		139		—		139
Return of capital to parent company	—	—		(150)		—		—		(150)
Capital contributions from parent company	—	—		53		—		—		53
Other comprehensive income (loss)	—	—		—		—		1		1


Balance at December 31, 2019	1	38		4,449		(2,832)		(3)		1,652
Net income after dividends on preferred stock	—	—		—		152		—		152
Return of capital to parent company	—	—		(74)		—		—		(74)
Capital contributions from parent company	—	—		86		—		—		86
Other comprehensive income	—	—		—		—		1		1
Cash dividends on common stock	—	—		—		(74)		—		(74)
Other	—	—		(1)		—		—		(1)
Balance at December 31, 2020	1	$	38	$	4,460	$	(2,754)	$	(2)	$	1,742

The accompanying notes are an integral part of these financial statements.

II-111

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Southern Power Company and Subsidiary Companies

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Southern Power Company and subsidiary companies (Southern Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Southern Power as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of Southern Power's management. Our responsibility is to express an opinion on Southern Power's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Southern Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Southern Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Southern Power's internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matter

Income/Loss Allocation to Noncontrolling Interests – Refer to Notes 1 and 7 to the financial statements

Critical Audit Matter Description

Southern Power has entered into a number of tax equity partnership arrangements, wherein they agree to sell 100% of a class of membership interests (e.g. Class A) in an entity to a noncontrolling investor in exchange for cash contributions, while retaining control of the entity through a separate class of membership interests (e.g. Class B). The agreements for these partnerships give different rights and priorities to their owners in terms of cash distributions, tax attribute allocations, and partnership income or loss allocations. These provisions make the conventional equity method of accounting where an investor applies its "percentage ownership interest" to the investee's net income under generally accepted accounting principles to determine the investor's share of earnings or losses difficult to apply. Therefore, Southern Power uses the Hypothetical Liquidation at Book Value (HLBV) accounting method to account for these partnership arrangements. The HLBV accounting method calculates each partner's share of income or loss based on the change in net equity the partner can legally claim at the end of the reporting period compared to the beginning of the reporting period. The application of the HLBV accounting method by Southern Power required significant consideration of the allocations between Southern Power and the noncontrolling investors over the life of the agreement and the liquidation provisions of the agreement to determine the appropriate allocation of income or loss between the parties.

The determination of the appropriate amount of allocated partnership income or loss to noncontrolling interests using the HLBV accounting method required increased audit effort and specialized skill and knowledge, including evaluation of the terms of the agreement and consideration of the appropriateness of the HLBV model based on the provisions of the agreement.

II-112

Table of ContentsIndex to Financial Statements

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included the following, among others:

•For agreements that result in potentially material allocations of partnership income or loss, we read the agreements to understand the liquidation provisions and the provisions governing the allocation of benefits.

•With the assistance of our income tax and HLBV modeling specialists, we evaluated the HLBV models utilized by management to determine whether the models accurately reflect the allocation of income or loss and tax attributes in accordance with the liquidation provisions and allocation terms defined in the agreements, as well as whether the inputs in the models are accurate and complete.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 17, 2021

We have served as Southern Power's auditor since 2002.

II-113

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Power Company and Subsidiary Companies ~~2018~~2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Wholesale revenues, non-affiliates	$	1,355	$	1,528	$	1,757
Wholesale revenues, affiliates	364		398		435
Other revenues	14		12		13
Total operating revenues	1,733		1,938		2,205
Operating Expenses:
Fuel	470		577		699
Purchased power	74		108		176

Other operations and maintenance	353		359		395
Depreciation and amortization	494		479		493
Taxes other than income taxes	39		40		46
Asset impairment	0		3		156
(Gain) loss on dispositions, net	(39)		(23)		(2)
Total operating expenses	1,391		1,543		1,963
Operating Income	342		395		242
Other Income and (Expense):
Interest expense, net of amounts capitalized	(151)		(169)		(183)
Other income (expense), net	19		47		23
Total other income and (expense)	(132)		(122)		(160)
Earnings Before Income Taxes	210		273		82
Income taxes (benefit)	3		(56)		(164)
Net Income	207		329		246
Net income (loss) attributable to noncontrolling interests	(31)		(10)		59
Net Income Attributable to Southern Power	$	238	$	339	$	187

The accompanying notes are an integral part of these consolidated financial statements.

II-114

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Power Company and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Net Income	$	207	$	329	$	246
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $12, $(22), and $(17), respectively	33		(66)		(51)
Reclassification adjustment for amounts included in net income, net of tax of $(22), $14, and $19, respectively	(65)		41		58
Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of $(4), $(6), and $2, respectively	(12)		(17)		5
Reclassification adjustment for amounts included in net income, net of tax of $1, $0, and $0, respectively	2		0		2
Total other comprehensive income (loss)	(42)		(42)		14
Comprehensive income (loss) attributable to noncontrolling interests	(31)		(10)		59
Comprehensive Income Attributable to Southern Power	$	196	$	297	$	201

The accompanying notes are an integral part of these consolidated financial statements.

II-115

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Southern Power Company and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Net income	$	207	$	329	$	246
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	519		505		524
Deferred income taxes	(25)		(74)		(244)
Utilization of federal investment tax credits	340		734		5
Amortization of investment tax credits	(59)		(151)		(58)




Income taxes receivable, non-current	(20)		25		42

Pension and postretirement funding	0		(24)		0
Asset impairment	0		3		156
(Gain) loss on dispositions, net	(39)		(24)		(3)
Other, net	(5)		(9)		(4)
Changes in certain current assets and liabilities —
-Receivables	(4)		72		(20)



-Prepaid income taxes	20		39		25

-Other current assets	(30)		(8)		(26)

-Accrued taxes	11		6		7

-Other current liabilities	(14)		(38)		(19)
Net cash provided from operating activities	901		1,385		631
Investing Activities:
Business acquisitions, net of cash acquired	(81)		(50)		(65)
Property additions	(223)		(489)		(315)

Investment in unconsolidated subsidiaries	0		(116)		0


Proceeds from dispositions and asset sales	666		572		203
Payments pursuant to LTSAs	(76)		(104)		(75)
Other investing activities	88		20		25
Net cash provided from (used for) investing activities	374		(167)		(227)
Financing Activities:
Increase (decrease) in notes payable, net	(274)		449		(105)
Proceeds —
Short-term borrowings	0		100		200
Capital contributions from parent company	6		64		2


Redemptions —
Senior notes	(825)		(600)		(350)
Other long-term debt	0		0		(420)
Short-term borrowings	(100)		(100)		(100)
Return of capital to parent company	0		(755)		(1,650)
Distributions to noncontrolling interests	(271)		(256)		(153)
Capital contributions from noncontrolling interests	363		196		2,551
Purchase of membership interests from noncontrolling interests	(60)		0		0
Payment of common stock dividends	(201)		(206)		(312)
Other financing activities	(10)		(12)		(26)
Net cash used for financing activities	(1,372)		(1,120)		(363)
Net Change in Cash, Cash Equivalents, and Restricted Cash	(97)		98		41
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	279		181		140
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	182	$	279	$	181
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $11, $15, and $17 capitalized, respectively)	$	147	$	167	$	173
Income taxes (net of refunds and investment tax credits)	(283)		(664)		79

Noncash transactions — Accrued property additions at year-end	89		57		31

The accompanying notes are an integral part of these consolidated financial statements.

II-116

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Power Company and Subsidiary Companies 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	182	$	279
Receivables —
Customer accounts	125		107
Affiliated	37		30
Other	27		73

Materials and supplies	157		191
Prepaid income taxes	11		36




Other current assets	36		43
Total current assets	575		759
Property, Plant, and Equipment:
In service	13,904		13,270
Less: Accumulated provision for depreciation	2,842		2,464
Plant in service, net of depreciation	11,062		10,806
Construction work in progress	127		515
Total property, plant, and equipment	11,189		11,321
Other Property and Investments:

Intangible assets, net of amortization of $89 and $69, respectively	302		322
Equity investments in unconsolidated subsidiaries	19		28
Total other property and investments	321		350
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization	415		369
Prepaid LTSAs	155		128
Accumulated deferred income taxes	262		551



Income taxes receivable, non-current	25		5
Assets held for sale	0		601
Other deferred charges and assets	293		216
Total deferred charges and other assets	1,150		1,870
Total Assets	$	13,235	$	14,300

The accompanying notes are an integral part of these consolidated financial statements.

II-117

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Power Company and Subsidiary Companies 2020 Annual Report


Liabilities and Stockholders' Equity	2020		2019
	(in millions)
Current Liabilities:
Securities due within one year	$	299	$	824
Notes payable	175		549
Accounts payable —
Affiliated	65		56
Other	92		85


Accrued taxes	30		26
Accrued interest	32		32




Other current liabilities	132		132
Total current liabilities	825		1,704
















Long-Term Debt	3,393		3,574
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	123		115
Accumulated deferred ITCs	1,672		1,731
Operating lease obligations	426		376





Other deferred credits and liabilities	165		178
Total deferred credits and other liabilities	2,386		2,400
Total Liabilities	6,604		7,678

Common Stockholder's Equity:
Common stock, par value $0.01 per share (Authorized - 1.0 million shares; Outstanding - 1,000 shares)	0		0
Paid-in capital	914		909
Retained earnings	1,522		1,485
Accumulated other comprehensive income (loss)	(67)		(26)
Total common stockholder's equity	2,369		2,368
Noncontrolling Interests	4,262		4,254
Total Stockholders' Equity (See accompanying statements)	6,631		6,622
Total Liabilities and Stockholders' Equity	$	13,235	$	14,300
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these consolidated financial statements.

II-118

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Southern Power Company and Subsidiary Companies 2020 Annual Report


	Number of Common Shares Issued	Common Stock		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Common Stockholder's Equity		Noncontrolling Interests		Total
	(in millions)
Balance at December 31, 2017	—	$	—	$	3,662	$	1,478	$	(2)	$	5,138	$	1,360	$	6,498
Net income	—	—		—		187		—		187		59		246
Return of capital to parent company	—	—		(1,650)		—		—		(1,650)		—		(1,650)
Capital contributions from parent company	—	—		2		—		—		2		—		2
Other comprehensive income	—	—		—		—		14		14		—		14
Cash dividends on common stock	—	—		—		(312)		—		(312)		—		(312)

Capital contributions from noncontrolling interests	—	—		—		—		—		—		1,372		1,372
Distributions to noncontrolling interests	—	—		—		—		—		—		(164)		(164)



Sale of noncontrolling interests(*)	—	—		(417)		—		—		(417)		1,690		1,273
Other	—	—		3		(1)		4		6		(1)		5
Balance at December 31, 2018	—	—		1,600		1,352		16		2,968		4,316		7,284
Net income (loss)	—	—		—		339		—		339		(10)		329
Return of capital to parent company	—	—		(755)		—		—		(755)		—		(755)
Capital contributions from parent company	—	—		64		—		—		64		—		64
Other comprehensive income (loss)	—	—		—		—		(42)		(42)		—		(42)
Cash dividends on common stock	—	—		—		(206)		—		(206)		—		(206)

Capital contributions from noncontrolling interests	—	—		—		—		—		—		276		276
Distributions to noncontrolling interests	—	—		—		—		—		—		(327)		(327)




Other	—	—		—		—		—		—		(1)		(1)
Balance at December 31, 2019	—	—		909		1,485		(26)		2,368		4,254		6,622
Net income (loss)	—	—		—		238		—		238		(31)		207

Capital contributions from parent company	—	—		2		—		—		2		—		2
Other comprehensive income (loss)	—	—		—		—		(42)		(42)		—		(42)
Cash dividends on common stock	—	—		—		(201)		—		(201)		—		(201)

Capital contributions from noncontrolling interests	—	—		—		—		—		—		307		307
Distributions to noncontrolling interests	—	—		—		—		—		—		(271)		(271)
Purchase of membership interests from noncontrolling interests	—	—		5		—		—		5		(65)		(60)


Sale of noncontrolling interests(*)	—	—		(2)		—		—		(2)		67		65
Other	—	—		—		—		1		1		1		2
Balance at December 31, 2020	—	$	—	$	914	$	1,522	$	(67)	$	2,369	$	4,262	$	6,631

(*)See Note 15 under ~~LTSAs, totaling approximately $300 million~~"Southern Power" for additional information.

The accompanying notes are an integral part of these consolidated financial statements.

II-119

Table of ContentsIndex to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Southern Company Gas and Subsidiary Companies

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Southern Company Gas and subsidiary companies (Southern Company Gas) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Southern Company Gas as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We did not audit the financial statements of Southern Natural Gas Company, L.L.C. (SNG), Southern Company Gas' investment which is accounted for by the use of the equity method. The accompanying consolidated financial statements of Southern Company Gas include its equity investment in SNG of $1,167 million and $1,137 million as of December 31, 2020 and December 31, 2019, respectively, and its earnings from its equity method investment in SNG of $129 million, $141 million, and $131 million for the years ended December 31, 2020, 2019, and 2018, respectively. Those statements were audited by other auditors whose reports (which express unqualified opinions on SNG's financial statements and contain an ~~average~~emphasis of ~~approximately $100 million each year from 2021 through 2023. In addition,~~matter paragraph calling attention to SNG's significant transactions with related parties) have been furnished to us, and our opinion, insofar as it relates to the amounts included for SNG, is based solely on the reports of the other auditors.

Basis for Opinion

These financial statements are the responsibility of Southern ~~Power has~~Company Gas' management. Our responsibility is to express an opinion on Southern Company Gas' financial statements based on our audits. We are a ~~further $2.3 billion~~public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Southern Company Gas in ~~planned expenditures for plant acquisitions~~accordance with the U.S. federal securities laws and ~~placeholder growth, or approximately $0.5 billion per year on average for 2019 through 2023. Planned expenditures for plant acquisitions~~the applicable rules and ~~placeholder growth may vary materially~~regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to ~~market opportunities~~error or fraud. Southern Company Gas is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Southern Company Gas' internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and ~~Southern Power's ability~~performing procedures that respond to ~~execute its growth strategy. Actual construction costs may vary from these estimates because of numerous factors such as: changes in business conditions; changes~~those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the ~~expected environmental compliance program; changes in environmental laws~~financial statements. Our audits also included evaluating the accounting principles used and ~~regulations;~~significant estimates made by management, as well as evaluating the ~~outcome~~overall presentation of ~~any legal challenges to environmental rules; changes in FERC rules and regulations; changes in load projections; changes in legislation;~~ the ~~cost and efficiency of construction labor, equipment, and materials; project scope and design changes;~~financial statements. We believe that our audits and the ~~cost~~reports of ~~capital. See Note 15~~the other auditors provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Audit Committee of Southern Company's Board of Directors and that (1) relate to accounts or disclosures that are material to the financial statements ~~under "~~and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Southern Power forecasts contributions to the pension and other postretirement benefit plans over a three-year period. Southern Power anticipates no mandatory contributions to the qualified pension plan during the next three years. See Note 11Company Gas) to the financial statements ~~for additional information.~~

~~Funding~~Critical Audit Matter Description

Southern Company Gas' natural gas distribution utilities (the "regulated utility subsidiaries"), which represent approximately 86% of Southern Company Gas' consolidated revenues, are subject to rate regulation in Georgia, Illinois, Tennessee, and Virginia by their respective state Public Service Commission or other applicable state regulatory agencies (collectively, the "Commissions"). Management has determined it meets the requirements ~~related to obligations associated with scheduled maturities of long-term debt, as well as the related interest, leases, derivative obligations, and other purchase commitments are detailed~~under accounting principles generally accepted in the ~~contractual obligations table that follows. See Notes 1, 8, 9, and 14~~United States of America to ~~the~~prepare its financial statements applying the specialized rules to account for ~~additional information.~~

~~Contractual Obligations~~

~~Contractual obligations at December 31, 2018 were as follows:~~the effects of regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to,

II-120

2019
2020-
2021

2022-
2023

After
2023
Total
(in millions)
Long-term debt^(a) —

Principal $ 600
$ 1,125
$ 967
$ 2,339
$ 5,031
Interest 179
310
250
1,409
2,148
Financial derivative obligations^(b)
6
2
—
—
8
Operating leases^(c)
23
48
50
874
995
Purchase commitments —
Capital^(d)
252
461
144
—
857
Fuel^(e)
601
744
369
32
1,746
Purchased power^(f)
41
83
—
—
124
Other^(g)
168
309
221
1,471
2,169
Total $ 1,870
$ 3,082
$ 2,001
$ 6,125
$ 13,078

~~(a)~~

All amounts are reflected based on final maturity dates and include the effects of interest rate derivatives employed to manage interest rate risk and effects of foreign currency swaps employed to manage foreign currency exchange rate risk. Included in debt principal is an $18 million gain related to the foreign currency hedge of €1.1 billion. Southern Power plans to continue, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.


~~(b)~~	~~For additional information, see Notes 1 and 14 to the financial statements.~~


~~(c)~~	Operating lease commitments include certain land leases for solar and wind facilities that may be subject to annual price escalation based on indices. See Note 9 to the financial statements for additional information.

~~(d)~~

Southern Power provides estimated capital expenditures for a five-year period, including capital expenditures associated with environmental regulations. Excluded from these amounts are planned expenditures for plant acquisitions and placeholder growth of $2.3 billion. Also excluded from these amounts are capital expenditures covered under LTSAs which are reflected in "Other." See Note (g) below. At December 31, 2018, significant purchase commitments were outstanding in connection with the construction program. No ARO settlements are projected during the five-year period.


~~(e)~~	Primarily includes commitments to purchase, transport, and store natural gas. Amounts reflected are based on contracted cost and may contain provisions for price escalation. Amounts reflected for natural gas purchase commitments are based on various indices at the time of delivery and have been estimated based on the NYMEX future prices at December 31, 2018.


~~(f)~~	~~Purchased power commitments will be resold under a third party agreement at cost.~~


~~(g)~~	Includes commitments related to LTSAs, operation and maintenance agreements, and transmission. LTSAs include price escalation based on inflation indices. Transmission commitments are based on the Southern Company system's current tariff rate for point-to-point transmission.

Table of ContentsIndex to Financial Statements

property, plant, and equipment; other regulatory assets; other regulatory liabilities; other cost of removal obligations; deferred charges and credits related to income taxes; operating revenues; other operations and maintenance expenses; and depreciation and amortization.

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~The Commissions set the rates the regulated utility subsidiaries are permitted to charge customers. Rates are determined and approved in regulatory proceedings based on an analysis of the applicable regulated utility subsidiary's costs to provide utility service and a return on, and recovery of, its investment in the utility business. Current and future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be recovered by rates. The Commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. While Southern Company Gas' regulated utility subsidiaries expect to recover costs from customers through regulated rates, there is a risk that the Commissions will not approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.

We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and/or (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and significant auditor judgment to evaluate management estimates and the subjectivity of audit evidence.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We read relevant regulatory orders issued by the Commissions for Southern Company Gas' regulated utility subsidiaries in Georgia, Illinois, Tennessee, and Virginia, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances. We evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.

•For regulatory matters in process, we inspected filings with the Commissions by the regulated utility subsidiaries and other interested parties that may impact the regulated utility subsidiaries' future rates for any evidence that might contradict management's assertions.

•We evaluated Southern Company Gas' disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

Derivatives — Refer to Note 1 (Summary of Significant Accounting Policies) and Note 14 (Derivatives) to the financial statements

Critical Audit Matter Description

Southern Company Gas is exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency exchange rate risk and enters into contracts to manage the volatility attributable to these exposures. The majority of these contracts are over-the-counter wholesale contracts for the purchase or sale of natural gas or consist of contracts which do not include asset management agreements, financial optionality, or potential embedded derivatives. Typically, these physical and financial contracts are not complex in structure and the valuation inputs are directly obtained from an observable source. However, determining whether a contract meets the definition of a derivative instrument, contains an embedded derivative requiring bifurcation, or qualifies for hedge accounting treatment is complex and requires significant

II-121

Table of ContentsIndex to Financial Statements

judgment. In addition, the treatment of a single contract may vary from period to period depending upon accounting elections, changes in Southern Company Gas' assessment of the likelihood of future hedged transactions, or new interpretations of accounting guidance. As a result, judgment is required in determining the appropriate accounting each period. Accounting for derivatives impacts multiple financial statement line items and disclosures, such as assets and liabilities from risk management activities; other deferred charges and assets; other deferred credits and liabilities; natural gas revenues; and cost of natural gas.

We identified the evaluation and monitoring of contracts with more complex terms as a critical audit matter and specifically, whether these types of contracts meet the definition of a derivative instrument, contain an embedded derivative requiring bifurcation, or qualify for hedge accounting treatment. Auditing these contracts is especially challenging due to the complexity of the accounting requirements, requiring the specialized knowledge of such accounting.

How the Critical Audit Matter Was Addressed in the Audit

With the assistance of our energy transacting specialists, our audit procedures related to these contracts included the following, among others:

•We tested the effectiveness of management's controls over approval and assessment of contracts and contract amendments that require additional levels of management review to assess deals on a frequent basis and to evaluate contracts meeting Southern Company Gas' criteria by accounting and the appropriate level of management for proper classification between derivative or accrual accounting.

•We tested, on a sample basis, contracts and contract amendments (derivative and non-derivative) with a focus on those with more complex terms by independently evaluating the accounting treatment and comparing to the conclusions reached by management.

•We evaluated Southern Company Gas' disclosures related to derivatives for completeness and accuracy based on the results of our audit procedures and the accounting requirements for such instruments.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 17, 2021

We have served as Southern Company Gas' auditor since 2016.

II-122

Table of ContentsIndex to Financial Statements

Report of Independent Registered Public Accounting Firm

Board of Directors and Members

Southern Natural Gas Company, L.L.C.

Houston, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Southern Natural Gas Company, L.L.C. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, members' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Postretirement Benefit Obligation

At December 31, 2020, the Company's postretirement benefit obligation was $23 million and the Company's plan assets were $69 million, resulting in a net asset position of $46 million. As described in Note 5 of the consolidated financial statements, the postretirement benefit obligation is primarily based on actuarial calculations, which include various significant assumptions.

We identified the Company's estimate of the postretirement benefit obligation as a critical audit matter. Auditing the postretirement benefit obligation required complex auditor judgment due to the highly judgmental nature of the actuarial assumptions used in the calculation, which include the discount rate, the mortality rate, and the expected return on plan assets. These assumptions had a significant effect on the postretirement benefit obligation calculation.

II-123

Table of ContentsIndex to Financial Statements

The primary procedures we performed to address this critical audit matter included:

•Comparing the actuarial assumptions used by management with historical trends and evaluating the change in the postretirement benefit obligation from prior year due to the change in service cost, interest cost, contributions, benefit payments, and actuarial gains and losses.

•Evaluating the appropriateness of management's methodology for determining the discount rate that reflects the maturity and duration of the benefit payments.

•Evaluating the reasonableness of mortality rate by assessing whether the information was consistent with publicly available information, and whether any market data adjusted for entity-specific factors were applied.

•Evaluating the expected return on plan assets by assessing whether management's assumptions were consistent with a range of returns for a portfolio of comparative investments that was determined based on publicly available information.

Emphasis of Matter – Significant Transactions with Related Parties

As discussed in Note 6 to the consolidated financial statements, the Company has entered into significant transactions with related parties.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2018.

Houston, Texas

February 8, 2021

II-124

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF ~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company Gas and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Revenues:
Natural gas revenues (includes revenue taxes of $107, $117, and $114, respectively)	$	3,431	$	3,793	$	3,874
Alternative revenue programs	3		(1)		(20)
Other revenues	0		0		55
Total operating revenues	3,434		3,792		3,909
Operating Expenses:
Cost of natural gas	972		1,319		1,539
Cost of other sales	0		0		12
Other operations and maintenance	966		888		981
Depreciation and amortization	500		487		500
Taxes other than income taxes	206		213		211
Impairment charges	0		115		42
(Gain) loss on dispositions, net	(22)		0		(291)

Total operating expenses	2,622		3,022		2,994

Operating Income	812		770		915
Other Income and (Expense):

Earnings from equity method investments	141		157		148
Interest expense, net of amounts capitalized	(231)		(232)		(228)
Other income (expense), net	41		20		1
Total other income and (expense)	(49)		(55)		(79)
Earnings Before Income Taxes	763		715		836
Income taxes	173		130		464




Net Income	$	590	$	585	$	372

The accompanying notes are an integral part of these consolidated financial statements.

II-125

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company Gas and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Net Income	$	590	$	585	$	372
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(8), $(2), and $2, respectively	(21)		(5)		5
Reclassification adjustment for amounts included in net income, net of tax of $3, $0, and $(1), respectively	7		2		(1)
Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of $(3), $(14), and $0, respectively	(15)		(16)		0
Reclassification adjustment for amounts included in net income, net of tax of $0, $0, and $3, respectively	0		0		(2)
Total other comprehensive income (loss)	(29)		(19)		2

Comprehensive Income	$	561	$	566	$	374

The accompanying notes are an integral part of these consolidated financial statements.

II-126

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company Gas and Subsidiary Companies 2020 Annual Report


	2020		2019		2018
	(in millions)
Operating Activities:
Consolidated net income	$	590	$	585	$	372
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	500		487		500
Deferred income taxes	56		213		(1)

Pension and postretirement funding	0		(145)		0




Impairment charges	0		115		42
(Gain) loss on dispositions, net	(22)		0		(291)
Mark-to-market adjustments	61		(56)		(19)


Other, net	(29)		(55)		(24)
Changes in certain current assets and liabilities —
-Receivables	(93)		467		(218)
-Natural gas for sale	18		44		49


-Prepaid income taxes	19		40		(42)
-Other current assets	(10)		31		4
-Accounts payable	103		(520)		372
-Accrued taxes	13		(69)		10
-Accrued compensation	7		1		32
-Other current liabilities	(6)		(71)		(22)
Net cash provided from operating activities	1,207		1,067		764
Investing Activities:

Property additions	(1,471)		(1,408)		(1,388)


Cost of removal, net of salvage	(100)		(82)		(96)
Change in construction payables, net	20		24		(37)
Investments in unconsolidated subsidiaries	(79)		(31)		(110)
Returned investment in unconsolidated subsidiaries	13		67		20


Proceeds from dispositions and asset sales	211		32		2,609
Other investing activities	(11)		12		0
Net cash provided from (used for) investing activities	(1,417)		(1,386)		998
Financing Activities:
Increase (decrease) in notes payable, net	(326)		0		(868)
Proceeds —
First mortgage bonds	325		300		300
Capital contributions from parent company	216		821		24

Senior notes	500		0		0


Redemptions and repurchases —

Gas facility revenue bonds	0		0		(200)

First mortgage bonds	0		(50)		0
Senior notes	0		(300)		(155)




Return of capital to parent company	0		0		(400)



Payment of common stock dividends	(533)		(471)		(468)
Other financing activities	(2)		(2)		(3)
Net cash provided from (used for) financing activities	180		298		(1,770)
Net Change in Cash, Cash Equivalents, and Restricted Cash	(30)		(21)		(8)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year	49		70		78
Cash, Cash Equivalents, and Restricted Cash at End of Year	$	19	$	49	$	70
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $7, $6, and $7 capitalized, respectively)	$	232	$	251	$	249
Income taxes (net of refunds)	25		(41)		524
Noncash transactions — Accrued property additions at year-end	142		122		97

The accompanying notes are an integral part of these consolidated financial statements.

II-127

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Company Gas and Subsidiary Companies 2020 Annual Report


Assets	2020		2019
	(in millions)
Current Assets:
Cash and cash equivalents	$	17	$	46
Receivables —
Energy marketing	516		428
Customer accounts	353		323
Unbilled revenues	219		183


Affiliated	4		5
Other accounts and notes	51		114
Accumulated provision for uncollectible accounts	(40)		(18)

Natural gas for sale	460		479


Prepaid expenses	48		65
Assets from risk management activities, net of collateral	118		177
Other regulatory assets	102		92

Assets held for sale	0		171
Other current assets	38		41
Total current assets	1,886		2,106
Property, Plant, and Equipment:
In service	17,611		16,344
Less: Accumulated depreciation	4,821		4,650
Plant in service, net of depreciation	12,790		11,694
Construction work in progress	648		613
Total property, plant, and equipment	13,438		12,307
Other Property and Investments:
Goodwill	5,015		5,015
Equity investments in unconsolidated subsidiaries	1,290		1,251
Other intangible assets, net of amortization of $195 and $176, respectively	51		70
Miscellaneous property and investments	19		20
Total other property and investments	6,375		6,356
Deferred Charges and Other Assets:
Operating lease right-of-use assets, net of amortization	81		93


Other regulatory assets, deferred	615		618

Other deferred charges and assets	235		207
Total deferred charges and other assets	931		918
Total Assets	$	22,630	$	21,687

The accompanying notes are an integral part of these consolidated financial statements.

II-128

Table of ContentsIndex to Financial Statements

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

Southern Company Gas and Subsidiary Companies 2020 Annual Report


Liabilities and Stockholder's Equity	2020		2019
	(in millions)
Current Liabilities:
Securities due within one year	$	333	$	0
Notes payable	324		650
Energy marketing trade payables	494		442
Accounts payable —
Affiliated	56		41
Other	373		315
Customer deposits	90		96


Accrued taxes	83		71
Accrued interest	58		52

Accrued compensation	106		100


Other regulatory liabilities	122		94



Other current liabilities	150		149
Total current liabilities	2,189		2,010
Long-term Debt	6,293		5,845
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	1,265		1,219
Deferred credits related to income taxes	847		874

Employee benefit obligations	283		265


Operating lease obligations	67		78
Other cost of removal obligations	1,649		1,606
Accrued environmental remediation	216		233


Other deferred credits and liabilities	54		51
Total deferred credits and other liabilities	4,381		4,326
Total Liabilities	12,863		12,181
Common Stockholder’s Equity:
Common stock, par value $0.01 per share (Authorized - 100 million shares; Outstanding - 100 shares)
Paid-in capital	9,930		9,697
Accumulated deficit	(141)		(198)
Accumulated other comprehensive income (loss)	(22)		7
Total common stockholder's equity (See accompanying statements)	9,767		9,506
Total Liabilities and Stockholder's Equity	$	22,630	$	21,687
Commitments and Contingent Matters (See notes)	0		0

The accompanying notes are an integral part of these consolidated financial statements.

II-129

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

For the Years Ended December 31, 2020, 2019, and 2018

Southern Company Gas and Subsidiary Companies 2020 Annual Report




	Number of Common Shares Issued	Common Stock		Paid-In Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Total
	(in millions)
Balance at December 31, 2017	—	$	—	$	9,214	$	(212)	$	20	$	9,022
Net income	—	—		—		372		—		372
Return of capital to parent company	—	—		(400)		—		—		(400)
Capital contributions from parent company	—	—		42		—		—		42
Other comprehensive income	—	—		—		—		2		2


Cash dividends on common stock	—	—		—		(468)		—		(468)

Other	—	—		0		(4)		4		0
Balance at December 31, 2018	—	—		8,856		(312)		26		8,570
Net income	—	—		—		585		—		585

Capital contributions from parent company	—	—		841		—		—		841
Other comprehensive income (loss)	—	—		—		—		(19)		(19)

Cash dividends on common stock	—	—		—		(471)		—		(471)

Balance at December 31, 2019	—	—		9,697		(198)		7		9,506
Net income	—	—		—		590		—		590

Capital contributions from parent company	—	—		233		—		—		233
Other comprehensive income (loss)	—	—		—		—		(29)		(29)

Cash dividends on common stock	—	—		—		(533)		—		(533)

Balance at December 31, 2020	—	$	—	$	9,930	$	(141)	$	(22)	$	9,767

The accompanying notes are an integral part of these consolidated financial statements.

II-130

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS

Southern Company and Subsidiary Companies 2020 Annual Report

Notes to the Financial Statements

for

The Southern Company and Subsidiary Companies

Alabama Power Company

Georgia Power Company

Mississippi Power Company

Southern Power Company and Subsidiary Companies

Southern Company Gas and Subsidiary Companies

Index to the Combined Notes to Financial Statements


Note		Page
1	Summary of Significant Accounting Policies	II-132
2	Regulatory Matters	II-148
3	Contingencies, Commitments, and Guarantees	II-170
4	Revenue from Contracts with Customers	II-179
5	Property, Plant, and Equipment	II-183
6	Asset Retirement Obligations	II-187
7	Consolidated Entities and Equity Method Investments	II-190
8	Financing	II-193
9	Leases	II-201
10	Income Taxes	II-208
11	Retirement Benefits	II-216
12	Stock Compensation	II-243
13	Fair Value Measurements	II-246
14	Derivatives	II-255
15	Acquisitions and Dispositions	II-265
16	Segment and Related Information	II-270

Index to Applicable Notes to Financial Statements by Registrant

The following notes to the financial statements are a combined presentation; however, information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf and each Registrant makes no representation as to information related to the other Registrants. The list below indicates the Registrants to which each note applies.


Registrant			Applicable Notes
Southern Company			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16
Alabama Power			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Georgia Power			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14
Mississippi Power			1, 2, 3, 4, 5, 6, 8, 9, 10, 11, 12, 13, 14
Southern Power			1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Southern Company Gas			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

II-131

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

~~OVERVIEW~~

~~Business Activities~~

Southern Company is the parent company of 3 traditional electric operating companies, as well as Southern Power, Southern Company Gas, ~~is an~~SCS, Southern Linc, Southern Holdings, Southern Nuclear, PowerSecure, and other direct and indirect subsidiaries. The traditional electric operating companies – Alabama Power, Georgia Power, and Mississippi Power – are vertically integrated utilities providing electric service in 3 Southeastern states. In January 2019, Southern Company completed the sale of Gulf Power (another traditional electric operating company through December 31, 2018) to NextEra Energy. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy ~~services holding company whose primary business is~~and battery energy storage projects, and sells electricity at market-based rates in the ~~distribution of natural gas. Subsequent to the dispositions of Elizabethtown Gas, Elkton Gas, and Florida City Gas discussed herein under "Merger, Acquisition, and Disposition Activities~~,"wholesale market. Southern Company Gas ~~has~~distributes natural gas through natural gas distribution utilities, ~~in four states~~including Nicor Gas (Illinois), Atlanta Gas Light (Georgia), Virginia Natural Gas, and Chattanooga Gas (Tennessee). In 2018, Southern Company Gas sold its other natural gas utilities – ~~Illinois, Georgia, Virginia,~~Elizabethtown Gas (New Jersey), Florida City Gas, and ~~Tennessee.~~Elkton Gas (Maryland). Southern Company Gas is also involved in several other complementary ~~businesses.~~

~~Southern Company Gas manages its business through four reportable segments – gas distribution operations,~~businesses including gas pipeline investments, wholesale gas services, ~~which includes Sequent, a natural gas asset optimization company,~~ and gas marketing ~~services, which includes SouthStar, a provider of energy-related products and~~services. SCS, the system service company, provides, at cost, specialized services to ~~natural gas~~Southern Company and its subsidiary companies. Southern Linc provides digital wireless communications for use by Southern Company and its subsidiary companies and also markets –these services to the public and ~~one non-reportable segment, all other. During~~provides fiber optics services within the ~~fourth quarter 2018,~~Southeast. Southern Holdings is an intermediate holding company subsidiary, primarily for Southern Company's leveraged lease and other investments. Southern Nuclear operates and provides services to the Southern Company system's nuclear power plants, including Alabama Power's Plant Farley and Georgia Power's Plant Hatch and Plant Vogtle Units 1 and 2, and is currently managing construction and start-up of Plant Vogtle Units 3 and 4, which are co-owned by Georgia Power. PowerSecure provides energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency. See Note 15 for information regarding disposition activities, including Southern Company's sale of Gulf Power.

The Registrants' financial statements reflect investments in subsidiaries on a consolidated basis. Intercompany transactions have been eliminated in consolidation. The equity method is used for investments in entities in which a Registrant has significant influence but does not have control and for VIEs where a Registrant has an equity investment but is not the primary beneficiary. 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. See "Variable Interest Entities" herein and Note 7 for additional information.

The traditional electric operating companies, Southern Power, certain subsidiaries of Southern Company Gas, ~~changed its reportable segments~~and certain other subsidiaries are subject to ~~further align~~regulation by the FERC, and the traditional electric operating companies and the natural gas distribution utilities are also subject to regulation by their respective state PSCs or other applicable state regulatory agencies. As such, the respective financial statements of the applicable Registrants reflect the effects of rate regulation in accordance with GAAP and comply with the ~~way its new Chief Operating Decision Maker reviews operating~~accounting policies and practices prescribed by relevant state PSCs or other applicable state regulatory agencies.

The preparation of financial statements in conformity with GAAP requires the use of estimates, and the actual results ~~and has reclassified~~may differ from those estimates. Certain prior years' data presented in the financial statements have been reclassified to conform to the ~~new reportable segment~~current year presentation. ~~This~~These reclassifications had no impact on the Registrants' results of operations, financial position, or cash flows.

At December 31, 2020 and/or 2019, Southern Company, Southern Power, and Southern Company Gas each had assets and liabilities held for sale on their balance sheets. Unless otherwise noted, the disclosures herein related to specific asset and liability balances at December 31, 2020 and 2019 exclude assets and liabilities held for sale. See Note 15 under "Assets Held for Sale" for additional information including major classes of assets and liabilities classified as held for sale by Southern Company, Southern Power, and Southern Company Gas.

Recently Adopted Accounting Standards

Effective January 1, 2019, the Registrants adopted ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 required lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changed the recognition, measurement, and presentation of expense associated with leases and provided clarification regarding the identification of certain components of contracts that would represent a lease. Lessor accounting was relatively unchanged and there was no change ~~resulted~~to the accounting for existing leveraged leases. See Note 9 for additional information and related disclosures.

II-132

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Affiliate Transactions

The traditional electric operating companies, Southern Power, and Southern Company Gas have agreements with SCS under which certain of the following services are rendered to them at direct or allocated cost: general executive and advisory, general and design engineering, operations, purchasing, accounting, finance, treasury, legal, tax, information technology, marketing, auditing, insurance and pension administration, human resources, systems and procedures, digital wireless communications, cellular tower space, and other services with respect to business and operations, construction management, and Southern Company power pool transactions. These costs are primarily included in other operations and maintenance expenses or capitalized to property, plant, and equipment. Costs for these services from SCS in 2020, 2019, and 2018 were as follows:


	Alabama Power		Georgia Power		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	478	$	639	$	149	$	87	$	237
2019	527		704		118		90		183
2018	508		653		104		98		194

Alabama Power and Georgia Power also have agreements with Southern Nuclear under which Southern Nuclear renders the following nuclear-related services at cost: general executive and advisory services; general operations, management, and technical services; administrative services including procurement, accounting, employee relations, systems, and procedures services; strategic planning and budgeting services; other services with respect to business and operations; and, for Georgia Power, construction management. These costs are primarily included in other operations and maintenance expenses or capitalized to property, plant, and equipment. Costs for these services in 2020, 2019, and 2018 amounted to $262 million, $256 million, and $247 million, respectively, for Alabama Power and $883 million, $760 million, and $780 million, respectively, for Georgia Power. See Note 2 under "Georgia Power – Nuclear Construction" for additional information regarding Southern Nuclear's construction management of Plant Vogtle Units 3 and 4 for Georgia Power.

Cost allocation methodologies used by SCS and Southern Nuclear prior to the repeal of the Public Utility Holding Company Act of 1935, as amended, were approved by the SEC. Subsequently, additional cost allocation methodologies have been reported to the FERC and management believes they are reasonable. The FERC permits services to be rendered at cost by system service companies.

Alabama Power's and Georgia Power's power purchases from affiliates through the Southern Company power pool are included in purchased power, affiliates on their respective statements of income. Mississippi Power's and Southern Power's power purchases from affiliates through the Southern Company power pool are included in purchased power on their respective statements of income and were as follows:


	Mississippi Power		Southern Power
	(in millions)
2020	$	4	$	8
2019	3		14
2018	15		41

Georgia Power has entered into several PPAs with Southern Power for capacity and energy. Georgia Power's total expenses associated with these PPAs were $141 million, $177 million, and $216 million in 2020, 2019, and 2018, respectively. Southern Power's total revenues from all PPAs with Georgia Power, included in wholesale revenue affiliates on Southern Power's consolidated statements of income, were $139 million, $174 million, and $215 million for 2020, 2019, and 2018, respectively. Included within these revenues were affiliate PPAs accounted for as operating leases, which totaled $115 million, $116 million, and $65 million for 2020, 2019, and 2018, respectively. See Note 9 for additional information.

II-133

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

SCS (as agent for Alabama Power, Georgia Power, and Southern Power) and Southern Company Gas have long-term interstate natural gas transportation agreements with SNG that are governed by the terms and conditions of SNG's natural gas tariff and are subject to FERC regulation. See Note 7 under "Southern Company Gas – Equity Method Investments" for additional information. Transportation costs under these agreements in 2020, 2019, and 2018 were as follows:


	Alabama Power		Georgia Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	15	$	108	$	29	$	29
2019	17		99		28		31
2018	8		101		25		32

In 2018, SNG purchased the natural gas lateral pipeline serving Plant McDonough Units 4 through 6 from Georgia Power at net book value, as approved by the Georgia PSC. In January 2020, SNG paid Georgia Power $142 million, which included $71 million contributed to SNG by Southern Company Gas for its proportionate share. During the interim period, Georgia Power received a discounted shipping rate to reflect the deferred consideration and SNG constructed an extension to the pipeline.

SCS, as agent for the traditional electric operating companies and Southern Power, has agreements with certain subsidiaries of Southern Company Gas to purchase natural gas. Natural gas purchases made under these agreements were immaterial for Alabama Power and Mississippi Power and as follows for Georgia Power and Southern Power in 2020, 2019, and 2018:


	Georgia Power		Southern Power
	(in millions)
2020	$	0	$	26
2019	4		64
2018	21		119

Alabama Power and Mississippi Power jointly own Plant Greene County. The companies have an agreement under which Alabama Power operates Plant Greene County and Mississippi Power reimburses Alabama Power for its proportionate share of non-fuel operations and maintenance expenses, which totaled $9 million, $9 million, and $8 million in 2020, 2019, and 2018, respectively. See Note 5 under "Joint Ownership Agreements" for additional information.

The traditional electric operating companies each have agreements with Gulf Power. Alabama Power previously made transmission system upgrades to ensure firm delivery of energy under a non-affiliate PPA from the Central Alabama Generating Station, and, under a related tariff, received $11 million from Gulf Power in 2018. Gulf Power owns a 25% portion of Plant Scherer Unit 3. Georgia Power operates Plant Scherer Unit 3 and Gulf Power reimburses Georgia Power for its 25% proportionate share of the related non-fuel expenses, which totaled $8 million in 2018. Gulf Power also owns a 50% portion of Plant Daniel Units 1 and 2. Mississippi Power operates Plant Daniel and Gulf Power reimburses Mississippi Power for its proportionate share of all associated non-fuel operations and maintenance expenses, which totaled $31 million in 2018. See Note 5 under "Joint Ownership Agreements" and Note 15 under "Southern Company" and "Alabama Power" for additional information.

Alabama Power and Georgia Power each have agreements with PowerSecure for equipment purchases and/or services related to utility infrastructure construction, distributed energy, and energy efficiency projects. Alabama Power's costs for these services were immaterial for 2020 and totaled $7 million and $24 million in 2019 and 2018, respectively. Georgia Power's costs for these equipment purchases and services totaled approximately $11 million in 2020 and were immaterial for the other periods presented.

See Note 7 under "SEGCO" for information regarding Alabama Power's and Georgia Power's equity method investment in SEGCO and related affiliate purchased power costs, as well as Alabama Power's gas pipeline ownership agreement with SEGCO.

Southern Power has several agreements with SCS for transmission services, which are billed to Southern Power based on the Southern Company Open Access Transmission Tariff as filed with the FERC. Transmission services purchased by Southern Power from SCS totaled $15 million, $15 million, and $12 million for 2020, 2019, and 2018, respectively, and were charged to other operations and maintenance expenses in Southern Power's consolidated statements of income.

II-134

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Power and the traditional electric operating companies generally settle amounts related to the above transactions on a monthly basis in the month following the performance of such services or the purchase or sale of electricity. See "Revenues – Southern Power" herein for additional information.

The traditional electric operating companies, Southern Power, and Southern Company Gas provide incidental services to and receive such services from other Southern Company subsidiaries which are generally minor in duration and amount. Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas neither provided nor received any material services to or from affiliates in any year presented.

Regulatory Assets and Liabilities

The traditional electric operating companies and the natural gas distribution utilities are subject to accounting requirements for the effects of rate regulation. Regulatory assets represent probable future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent costs recovered that are expected to be incurred in the future or probable future reductions in revenues associated with amounts that are expected to be credited to customers through the ratemaking process.

In the event that a portion of a traditional electric operating company's or a natural gas distribution utility's operations is no longer subject to applicable accounting rules for rate regulation, such company would be required to write off to income or reclassify to AOCI related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the traditional electric operating company or the natural gas distribution utility would be required to determine if any impairment to other assets, including plant, exists and write down the assets, if impaired, to their fair values. All regulatory assets and liabilities are to be reflected in rates. See Note 2 for additional information including details of regulatory assets and liabilities reflected in the balance sheets for Southern Company, the traditional electric operating companies, and Southern Company Gas.

Revenues

The Registrants generate revenues from a variety of sources which are accounted for under various revenue accounting guidance, including revenue from contracts with customers, lease, derivative, and regulatory accounting. See Notes 4, 9, and 14 for additional information.

Traditional Electric Operating Companies

The majority of the revenues of the traditional electric operating companies are generated from contracts with retail electric customers. These revenues, generated from the integrated service to deliver electricity when and if called upon by the customer, are recognized as a single performance obligation satisfied over time, at a tariff rate, and as electricity is delivered to the customer during the month. Unbilled revenues related to retail sales are accrued at the end of each fiscal period. Retail rates may include provisions to adjust revenues for fluctuations in fuel costs, fuel hedging, the energy component of purchased power costs, and certain other costs. Revenues are adjusted for differences between these actual costs and amounts billed in current regulated rates. Under or over recovered regulatory clause revenues are recorded in the balance sheets and are recovered from or returned to customers, respectively, through adjustments to the billing factors. See Note 2 for additional information regarding regulatory matters of the traditional electric operating companies.

Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms. Energy and other revenues are generally recognized as services are provided. The contracts for capacity and energy in a ~~new reportable segment, gas pipeline investments,~~wholesale PPA have multiple performance obligations where the contract's total transaction price is allocated to each performance obligation based on the standalone selling price. The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, the traditional electric operating companies recognize revenue as the performance obligations are satisfied over time as electricity is delivered to the customer or as generation capacity is available to the customer.

For both retail and wholesale revenues, the traditional electric operating companies have elected to recognize revenue for their sales of electricity and capacity using the invoice practical expedient as they generally have a right to consideration in an amount that corresponds directly with the value to the customer of the performance completed to date and that may be invoiced. Payment for goods and services rendered is typically due in the subsequent month following satisfaction of the Registrants' performance obligation.

Southern Power

Southern Power sells capacity and energy at rates specified under contractual terms in long-term PPAs. These PPAs are accounted for as operating leases, non-derivatives, or normal sale derivatives. Capacity revenues from PPAs classified as operating leases

II-135

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

are recognized on a straight-line basis over the term of the agreement. Energy revenues are recognized in the period the energy is delivered.

Southern Power's non-lease contracts commonly include capacity and energy which ~~was formerly included~~are considered separate performance obligations. In these contracts, the total transaction price is allocated to each performance obligation based on the standalone selling price. The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, Southern Power recognizes revenue as the performance obligations are satisfied over time, as electricity is delivered to the customer or as generation capacity is made available to the customer.

Southern Power generally has a right to consideration in ~~gas midstream operations.~~an amount that corresponds directly with the value to the customer of the performance completed to date and may recognize revenue in the amount to which the entity has a right to invoice. Payment for goods and services rendered is typically due in the subsequent month following satisfaction of Southern Power's performance obligation.

When multiple contracts exist with the same counterparty, the revenues from each contract are accounted for as separate arrangements.

Southern Power may also enter into contracts to sell short-term capacity in the wholesale electricity markets. These sales are generally classified as mark-to-market derivatives and net unrealized gains and losses on such contracts are recorded in wholesale revenues. See Note 14 and "Financial Instruments" herein for additional information.

Southern Company Gas ~~pipeline investments consists primarily~~

Gas Distribution Operations

Southern Company Gas records revenues when goods or services are provided to customers. Those revenues are based on rates approved by the state regulatory agencies of ~~joint ventures in~~the natural gas ~~pipeline investments including~~distribution utilities. Atlanta Gas Light operates in a ~~50% interest~~deregulated natural gas market whereby Marketers, rather than a traditional utility, sell natural gas to end-use customers in ~~SNG, two significant pipeline construction projects,~~Georgia and handle customer billing functions. As required by the Georgia PSC, Atlanta Gas Light bills Marketers in equal monthly installments for each residential, commercial, and industrial end-use customer's distribution costs as well as for capacity costs utilizing a ~~50% joint ownership interest in~~seasonal rate design for the ~~Dalton Pipeline.~~calculation of each residential end-use customer's annual straight-fixed-variable charge, which reflects the historic volumetric usage pattern for the entire residential class.

The majority of the revenues of Southern Company Gas are generated from contracts with natural gas distribution ~~operations,~~customers. Revenues from this integrated service to deliver gas when and if called upon by the customer are recognized as a single performance obligation satisfied over time and are recognized at a tariff rate as gas is delivered to the customer during the month.

The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, Southern Company Gas recognizes revenue as the performance obligations are satisfied over time as natural gas is delivered to the customer. The performance obligations related to wholesale gas services are satisfied, and revenue is recognized, at a point in time when natural gas ~~marketing services continue~~is delivered to ~~remain as separate reportable segments and reflect~~ the ~~impact of the~~ customer.

Southern Company Gas ~~Dispositions. The all other non-reportable segment includes segments below~~has elected to recognize revenue for sales of gas using the ~~quantitative threshold for separate disclosure, including~~invoice practical expedient as it generally has a right to consideration in an amount that corresponds directly with the ~~storage and fuels operations that were formerly included in gas midstream operations, and other subsidiaries that fall below the quantitative threshold for separate disclosure. See Notes 5, 7, and 16~~value to the ~~financial statements~~customer of the performance completed to date and that may be invoiced. Payment for ~~additional information.~~

~~Many factors affect~~goods and services rendered is typically due in the ~~opportunities, challenges, and risks~~subsequent month following satisfaction of Southern Company Gas' ~~business. These factors include~~performance obligation.

With the ~~ability to maintain safety, to maintain constructive regulatory environments, to maintain and grow natural gas sales and number~~exception of customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, environmental standards, safety, reliability, resilience, natural gas, and capital expenditures, including updating and expandingAtlanta Gas Light, the ~~natural gas distribution systems. The~~ natural gas distribution utilities have ~~various regulatory mechanisms~~rate structures that ~~address cost recovery. Effectively operating pursuant~~include volumetric rate designs that allow the opportunity to recover certain costs based on gas usage. Revenues from sales and transportation services are recognized in the same period in which the related volumes are delivered to customers. Revenues from residential and certain commercial and industrial customers are recognized on the basis of scheduled meter readings. Additionally, unbilled revenues are recognized for estimated deliveries of gas not yet billed to these ~~regulatory mechanisms~~customers, from the last bill date to the end of the accounting period. For other commercial and ~~appropriately balancing required costs~~industrial customers and ~~capital expenditures with customer prices will continue to challenge Southern Company Gas~~for all wholesale customers, revenues are based on actual deliveries through the end of the period.

The tariffs for several of the natural gas distribution utilities include provisions which allow for the foreseeable future. Nicor Gas filed a rate case on November 9, 2018 and Atlanta Gas Light is required to file a rate case no later than June 1, 2019. These rate cases are both expected to conclude in 2019; however, the ultimate outcomerecognition of ~~these matters cannot be determined at this time. See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Regulatory Matters~~ ~~– Rate Proceedings" herein and Note 2~~certain revenues prior to the ~~financial statements under "Southern Company Gas~~ – ~~Rate Proceedings" for additional information.~~

~~Merger, Acquisition, and Disposition Activities~~

~~In 2016, Southern Company Gas completed the Merger, pursuant~~time such revenues are billed to which Southern Company Gas became a wholly-owned subsidiary of Southern Company. Southern Company accounted for the Merger using the acquisition method of accounting whereby the assets acquired and liabilities assumed were recognized at fair valuecustomers. These provisions are referred to as of the acquisition date. Pushdown accounting was applied to create a new cost basis for Southern Company Gas' assets, liabilities, and equity as of the acquisition date. Accordingly, the successor financial statements reflect the new basis of accounting, and successor and predecessor period financial results (separated by a heavy black line) are presented, but are not comparable. As a result of the application of acquisition accounting, certain discussions herein include disclosure of the predecessor and successor periods. See Note 15 to the financial statements under "~~Southern Company Merger with Southern Company Gas" for additional information.~~

In 2016, Southern Company Gas completed its purchase of Piedmont's 15% interest in SouthStar for $160 million and paid $1.4 billion to acquire a 50% equity interest in SNG, which is the owner of a 7,000-mile pipeline system connecting natural gas supply basins in Texas, Louisiana, Mississippi, and Alabama to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. The investment in SNG is accounted for using the equity method. In March 2017, Southern Company Gas made an additional $50 million contribution to maintain its 50% equity interest in SNG. See Note 7 to the financial statements under "~~Southern Company Gas" and Note 15 to the financial statements under "Southern Company Gas – Investment in SNG" for additional information.~~

~~During 2018, Southern Company Gas completed the following sales, resulting in approximately $2.7 billion in aggregate proceeds:~~

On June 4, 2018, Southern Company Gas completed the stock sale of Pivotal Home Solutions to American Water Enterprises LLC for a total cash purchase price of $365 million, which includes the final working capital adjustment.alternative revenue programs

II-136

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

and provide for the recognition of certain revenues prior to billing, as long as the amounts recognized will be collected from customers within 24 months of recognition. These programs are as follows:

~~This disposition resulted~~•Weather normalization adjustments – reduce customer bills when winter weather is colder than normal and increase customer bills when weather is warmer than normal and are included in the tariffs for Virginia Natural Gas, Chattanooga Gas, and, prior to its sale, Elizabethtown Gas;

•Revenue normalization mechanisms – mitigate the impact of conservation and declining customer usage and are contained in the tariffs for Virginia Natural Gas, Chattanooga Gas, Nicor Gas (effective November 1, 2019), and, prior to its sale, Elkton Gas; and

•Revenue true-up adjustment – included within the provisions of the GRAM program in which Atlanta Gas Light participates as a short-term alternative to formal rate case filings, the revenue true-up feature provides for a positive (or negative) adjustment to record revenue in the amount of any variance to budgeted revenues, which are submitted and approved annually as a requirement of GRAM. Such adjustments are reflected in customer billings in a ~~net loss of $67 million, which includes $34 million of income tax expense. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded in 2018.~~subsequent program year.

~~On July 1, 2018, a Southern Company~~Wholesale Gas subsidiary, Pivotal Utility Holdings, completed the sales of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. for a total cash purchase price of $1.7 billion, which includes the final working capital and other adjustments. This disposition resulted in a pre-tax gain that was entirely offset by $205 million of income tax expense, resulting in no material net income impact.

On July 29, 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI Corporation, completed the stock sale of Pivotal Utility Holdings, which primarily consisted of Florida City Gas, to NextEra Energy for a total cash purchase price of $587 million, which includes the final working capital adjustment less indebtedness assumed at closing. This disposition resulted in a net gain of $16 million, which includes $103 million of income tax expense.

The after-tax gain and loss on these dispositions included income tax expense on goodwill not deductible for tax purposes and for which a deferred tax liability had not been recorded previously. See Note 15 to the financial statements under "Southern Company Gas" herein for additional information.

~~Operating Metrics~~Services

Southern Company Gas ~~continues~~nets revenues from energy and risk management activities with the associated costs. Profits from sales between segments are eliminated and are recognized as goods or services sold to ~~focus~~end-use customers. Southern Company Gas records transactions that qualify as derivatives at fair value with changes in fair value recognized in earnings in the period of change and characterized as unrealized gains or losses. Gains and losses on ~~several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold.~~derivatives held for energy trading purposes are presented on a net basis in revenue.

Gas Marketing Services

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~~recognizes revenues from natural gas sales and transportation services in the same period in which the related volumes are delivered to customers and recognizes sales revenues from residential and certain commercial and industrial customers on the basis of scheduled meter readings. Southern Company Gas also recognizes unbilled revenues for estimated deliveries of gas not yet billed to these customers from the most recent meter reading date to the end of the accounting period. For other commercial and industrial customers and for all wholesale customers, revenues are based on actual deliveries during the period.

Southern Company Gas recognizes revenues on 12-month utility-bill management contracts as the lesser of cumulative earned or cumulative billed amounts.

Concentration of Credit Risk

Southern Company Gas' ~~distribution system. With~~wholesale gas services business has a concentration of credit risk for services it provides to its counterparties. This credit risk is generally concentrated in 20 of its counterparties and is measured by 30-day receivable exposure plus forward exposure. Counterparty credit risk is evaluated using a S&P equivalent credit rating, which is determined by a process of converting the lower of the S&P or Moody's rating to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being equivalent to D/Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of its financial ratios. As of December 31, 2020, the top 20 counterparties represented 58%, or $234 million, of the total counterparty exposure and had a weighted average S&P equivalent rating of A-.

Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of 16 Marketers in Georgia (including SouthStar). 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 functions of the retail sale of gas include the purchase and sale of natural gas, customer service, billings, and collections. 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 2 times a Marketer's highest month's estimated bill from Atlanta Gas Light.

Concentration of Revenue

Southern Company, Alabama Power, Georgia Power, Mississippi Power (with the exception of ~~Nicor Gas,~~its full requirements cost-based MRA electric tariffs described below), and Southern Company Gas ~~has various regulatory mechanisms, such as weather normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in~~ each of its utilities' respective service territory. However, the operating revenues from utility customers in Illinois and gas marketing services customers primarily in Georgia and Illinois can be impacted by warmer- or colder-than-normal weather. Southern Company Gas utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather, while retaininghave a ~~significant portion of the positive benefits of colder-than-normal weather for these businesses.~~

~~The number~~diversified base of customers ~~served by gas distribution operations~~ and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas marketing services' customers are primarily located in Georgia and Illinois.

~~Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects~~no single customer or industry comprises 10% or more of ~~weather and customer demand for natural gas. Wholesale gas services' physical sales volumes represent the daily average natural gas volumes sold to its customers.~~

~~See~~ ~~RESULTS OF OPERATIONS~~ ~~herein for additional information on these operating metrics.~~each company's revenues.

II-137

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

~~Seasonality~~Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based MRA electric tariffs, which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of ~~Results~~

~~During the Heating Season, natural gas usage and~~Mississippi Power's total operating revenues in 2020 and are generally ~~higher~~subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as ~~more~~a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers.

Significant portions of Southern Power's revenues have been derived from certain customers pursuant to PPAs. The following table shows the percentage of total revenues for Southern Power's top three customers for each of the years presented:


	2020		2019		2018
Southern California Edison	9.4	%	6.8	%	6.2	%
Georgia Power	8.0	%	9.0	%	9.8	%
Duke Energy Corporation	6.7	%	N/A		6.8	%
Morgan Stanley Capital Group	N/A		4.9	%	N/A

Fuel Costs

Fuel costs for the traditional electric operating companies and Southern Power are ~~connected to~~expensed as the ~~gas distribution systems~~fuel is used. Fuel expense generally includes fuel transportation costs and ~~natural gas usage is higher in periods of colder weather. Occasionally in~~ the ~~summer, wholesale gas services' operating revenues are impacted due to peak usage by power generators in response to summer energy demands. Southern Company Gas' base operating expenses, excluding~~ cost of ~~natural gas, bad debt~~purchased emissions allowances as they are used. For Alabama Power and Georgia Power, fuel expense ~~and certain incentive compensation costs, are incurred relatively evenly throughout~~also includes 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.

Percent Generated During Heating Season
Operating Revenues Net Income
Successor - 2018 68.7 % 96.0 %
Successor - 2017 67.3 % 73.7 %
Successor - July 1, 2016 through December 31, 2016 67.1 % 96.5 %
Predecessor - January 1, 2016 through June 30, 2016 70.0 % 138.9 %

~~Earnings~~

Net income attributable to Southern Company Gas for the successor year ended December 31, 2018 was $372 million, representing a $129 million, or 53.1%, increase over the previous year. Excluding a $121 million decrease related to the Southern Company Gas Dispositions, net income attributable to Southern Company Gas increased $251 million. This increase was primarily due to lower income tax expense, increased commercial activity at wholesale gas services, increased operating revenues from infrastructure replacement programs and base rate changes at gas distribution operations, and higher earnings from Southern Company Gas' investment in SNG. These increases were partially offset by higher other operations and maintenance expenses primarily due to increased compensation and benefit costs and disposition-related costs, higher depreciation on continued infrastructure investments at gas distribution operations, additional interest expense on new debt issuances, and an increase in charitable donations.

Net income attributable to Southern Company Gas for the successor year ended December 31, 2017 was $243 million, which included net income of $53 million from Southern Company Gas' investment in SNG and $44 million generated from Southern Company Gas' continued investment in infrastructure replacement programs and base rate increases at Atlanta Gas Light, Elizabethtown Gas, and Virginia Natural Gas, less the associated increases in depreciation. Net income also reflects $130 million of additional tax expense resulting from the revaluation of deferred tax assets of $93 million related to the Tax Reform Legislation and $37 million associated with State of Illinois income tax legislation enacted in the third quarter 2017 and new income tax apportionment factors in several states resulting from Southern Company Gas' inclusion in the consolidated Southern Company state tax filings. Also included in net income was $17 million of additional expense resulting from the pushdown of acquisition accounting.

~~See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Notes 10 and 15 to the financial statements for additional information.~~

Net income attributable to Southern Company Gas for the successor period of July 1, 2016 through December 31, 2016 was $114 million, which included $26 million in earnings from the SNG investment, net of related interest expense, partially offset by $12 million of additional expense resulting from the impactamortization of the ~~pushdown~~cost of ~~acquisition accounting and $27 million of Merger-related expenses.~~

Net income attributable to Southern Company Gas for the predecessor period of January 1, 2016 through June 30, 2016 was $131 million, which included $41 million of Merger-related expenses and $14 million of net income attributable to the SouthStar noncontrolling interest, which Southern Company Gas purchased in October 2016. Net income for the predecessor period reflected higher revenues from continued investment in infrastructure programs, partially offset by warm weather, net of hedging, and low earnings from wholesale gas services due to mark-to-market losses.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~RESULTS OF OPERATIONS~~

~~Operating Results~~

~~A condensed income statement for Southern Company Gas follows:~~

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016 through
June 30,
2018 2017 2016 2016
(in millions) (in millions)
Operating revenues $ 3,909
$ 3,920
$ 1,652
$ 1,905
Cost of natural gas 1,539
1,601
613
755
Cost of other sales 12
29
10
14
Other operations and maintenance 981
945
480
452
Depreciation and amortization 500
501
238
206
Taxes other than income taxes 211
184
71
99
Goodwill impairment 42
—
—
—
Gain on dispositions, net (291 ) —
—
—
Merger-related expenses —
—
41
56
Total operating expenses 2,994
3,260
1,453
1,582
Operating income 915
660
199
323
Earnings from equity method investments 148
106
60
2
Interest expense, net of amounts capitalized 228
200
81
96
Other income (expense), net 1
44
12
3
Earnings before income taxes 836
610
190
232
Income taxes 464
367
76
87
Net Income 372
243
114
145
Net income attributable to noncontrolling interest^(*)
—
—
—
14
Net Income Attributable to Southern Company Gas $ 372
$ 243
$ 114
$ 131


~~(*)~~	~~Includes Piedmont's 15% interest in SouthStar, which was acquired by Southern Company Gas in 2016. See Note 7 to the financial statements under "Southern Company Gas" for additional information.~~

The Southern Company Gas Dispositions were completed by July 29, 2018 and represent the primary variance driver for the 2018 changes. Detailed variance explanations are provided herein. See Note 15 to the financial statements under "Southern Company Gas" for additional information on the Southern Company Gas Dispositions.

~~Operating Revenues~~

Operating revenues for the successor year ended December 31, 2018 were $3.9 billion, reflecting an $11 million decrease from 2017. Operating revenues for the successor year ended December 31, 2017 and the successor period of July 1, 2016 through December 31, 2016 were $3.9 billion and $1.7 billion, respectively.nuclear fuel. For the ~~predecessor period of January 1, 2016 through June 30, 2016,~~traditional electric operating ~~revenues were $1.9 billion.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~For the successor year ended December 31, 2018, details of operating revenues were as follows:~~

(in millions) (% change)
Operating revenues – prior year $ 3,920

Estimated change resulting from –
Infrastructure replacement programs and base rate changes 31
0.8
Gas costs and other cost recovery 3
0.1
Weather 13
0.3
Wholesale gas services 138
3.5
Southern Company Gas Dispositions^(*)
(228 ) (5.8 )
Other 32
0.8
Operating revenues – current year $ 3,909
(0.3 )%


~~(*)~~	Includes a $154 million decrease related to natural gas revenues, including alternative revenue programs, and a $74 million decrease related to other revenues. See Note 15 to the financial statements under "Southern Company Gas" for additional information.

Revenues from infrastructure replacement programs and base rate changes increased in 2018 primarily due to a $48 million increase at Nicor Gas, partially offset by a $12 million decrease at Atlanta Gas Light. These amountscompanies, fuel costs also include gas distribution operations' continued investments recovered through infrastructure replacement programs and base rate increases less revenue reductions for the impacts of the Tax Reform Legislation. See Note 2 to the financial statements under "~~Southern Company Gas" for additional information.~~

~~Revenues increased due to colder weather in 2018 compared to 2017. See "Heating Degree Days" herein for additional information.~~

Revenues from wholesale gas services increased in 2018 primarily due to increased commercial activity, partially offset by derivative losses. See "Segment Information – Wholesale Gas Services" herein for additional information.

~~Other revenues increased in 2018 primarily due to a $15 million increase from the Dalton Pipeline being placed in service in August 2017 and a $14 million increase in Nicor Gas' revenue taxes.~~

For the successor year ended December 31, 2017, natural gas revenues included recovery of $1.6 billion in cost of natural gas and $6 million in net revenues from wholesale gas services, net of $21 million of amortization associated with assets established in the application of acquisition accounting. Also included in natural gas revenues for the successor year ended December 31, 2017 were $99 million in additional revenues generated from gas distribution operations as a result of continued investment in infrastructure replacement programs and increases in base rate revenues at Atlanta Gas Light, Elizabethtown Gas, and Virginia Natural Gas. Natural gas revenues were partially offset by a $13 million negative impact of warmer-than-normal weather, net of hedging.

For the successor period of July 1, 2016 through December 31, 2016, natural gas revenues included recovery of $613 million in cost of natural gas and $24 million in net revenues from wholesale gas services, net of $5 million of amortization associated with assets established in the application of acquisition accounting. Natural gas revenues were partially offset by a $5 million negative impact of warmer-than-normal weather, net of hedging.

~~For the predecessor period of January 1, 2016 through June 30, 2016, natural gas revenues included recovery of $755 million in cost of natural gas and $32 million in net~~gains and/or losses from ~~wholesale gas services. Natural gas revenues were partially offset~~fuel-hedging programs as approved by ~~a $7 million negative impact of warmer-than-normal weather, net of hedging.~~their respective state PSCs.

Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. See "Cost of Natural Gas~~" herein for additional information. Revenue impacts from weather and customer growth are described further below.~~

~~Heating Degree Days~~

During Heating Season, natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the Heating Season. The following table presents the Heating Degree Days information for Illinois and Georgia, the primary locations where Southern Company Gas' operations are impacted by weather.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Years Ended December 31, 2018 vs. normal 2018 vs. 2017 2017 vs. 2016

Normal^(*)
2018 2017 2016 colder colder colder (warmer)
(in thousands)
Illinois 5,813
6,101
5,246
5,243
5.0 % 16.3 % 0.1 %
Georgia 2,539
2,588
1,970
2,175
1.9 % 31.4 % (9.4 )%


~~(*)~~	Normal represents the 10-year average from January 1, 2008 through December 31, 2017 for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center.

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016
through
June 30,
2018 2017 2016 2016
(in millions) (in millions)
Gas Distribution Operations:
Pre-tax $ 2
$ (4 ) $ (1 ) $ (7 )
After tax 1
(2 ) (1 ) (5 )

Gas Marketing Services:
Pre-tax (2 ) (9 ) (4 ) —
After tax (1 ) (5 ) (3 ) —

~~Customer Count~~

~~The following table provides the number of customers served by Southern Company Gas at December 31, 2018, 2017, and 2016:~~

2018 2017 2016
(in thousands, except market share %)
Gas distribution operations^(a)
4,248
4,623
4,586
Gas marketing services
Energy customers^(b)
697
774
656
Market share of energy customers in Georgia 29.0 % 29.2 % 29.6 %


~~(a)~~	Includes total customers of approximately 407,000 and 402,000 at December 31, 2017 and 2016, respectively, related to Elizabethtown Gas, Elkton Gas, and Florida City Gas, which were sold in 2018. See Note 15 to the financial statements under "~~Southern Company Gas~~ – ~~Sale of Elizabethtown Gas and Elkton Gas" and " –~~ ~~Sale of Florida City Gas~~" ~~for additional information.~~


~~(b)~~	Includes customers in Ohio contracted through an annual auction process to serve for a 12-month period beginning April 1 of each year. At December 31, 2018 and 2017, there were approximately 70,000 and 140,000 contracted customers, respectively. At December 31, 2016, there were no contracted customers.

Southern Company Gas anticipates overall customer growth trends at the remaining four natural gas distribution utilities in gas distribution operations to continue as it expects continued improvement in the new housing market and low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to attract new customers and to retain existing customers.

~~Cost of Natural Gas~~

Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, ~~gas distribution operations~~Southern Company Gas charges its utility customers for natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. Southern Company Gas ~~distribution operations~~ defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given ~~period.~~period such that no operating income is recognized related to these costs. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred ~~natural gas costs are reflected as regulatory assets~~ and accrued natural gas costs are ~~reflected~~included in the balance sheets as regulatory ~~liabilities. Therefore, gas costs recovered through natural gas revenues generally equal~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~assets and regulatory liabilities, respectively.

Southern Company ~~Gas and Subsidiary Companies 2018 Annual Report~~

~~the amount expensed in cost of natural~~Gas' gas ~~and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 83.2% of the total cost of natural gas for 2018.~~

~~Gas~~ marketing ~~services~~services' customers are charged for actual ~~and~~or estimated natural gas consumed. ~~Cost~~Within cost of natural gas, Southern Company Gas also includes ~~the cost~~costs of ~~fuel and associated transportation costs,~~ lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, ~~if applicable,~~ and gains and losses associated with certain derivatives.

~~For~~Income Taxes

The Registrants use the ~~successor year ended December 31, 2018, cost~~liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. In accordance with regulatory requirements, deferred federal ITCs for the traditional electric operating companies are deferred and amortized over the average life of the related property, with such amortization normally applied as a credit to reduce depreciation and amortization in the statements of income. Southern Power's and the natural gas ~~was $1.5 billion, a decrease~~distribution utilities' deferred federal ITCs, as well as certain state ITCs for Nicor Gas, are deferred and amortized to income tax expense over the life of ~~$62 million, or 3.9%, compared~~the respective asset.

Under current tax law, certain projects at Southern Power related to ~~2017 substantially all~~the construction of renewable facilities are eligible for federal ITCs. Southern Power estimates eligible costs which, as they relate to acquisitions, may not be finalized until the allocation of the purchase price to assets has been finalized. Southern Power applies the deferred method to ITCs, whereby the ITCs are recorded as a ~~result~~deferred credit and amortized to income tax expense over the life of the respective asset. Furthermore, the tax basis of the asset is reduced by 50% of the ITCs received, resulting in a net deferred tax asset. Southern Power has elected to recognize the tax benefit of this basis difference as a reduction to income tax expense in the year in which the plant reaches commercial operation. State ITCs are recognized as an income tax benefit in the period in which the credits are generated. In addition, certain projects are eligible for federal and state PTCs, which are recognized as an income tax benefit based on KWH production.

Federal ITCs and PTCs, as well as state ITCs and other state tax credits available to reduce income taxes payable, were not fully utilized in 2020 and will be carried forward and utilized in future years. In addition, Southern Company is expected to have various state net operating loss (NOL) carryforwards for certain of its subsidiaries, including Mississippi Power and Southern Power, which would result in income tax benefits in the future, if utilized. See Note 10 under "Current and Deferred Income Taxes – Tax Credit Carryforwards" and " – Net Operating Loss Carryforwards" for additional information.

II-138

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The Registrants recognize tax positions that are "more likely than not" of being sustained upon examination by the appropriate taxing authorities. See Note 10 under "Unrecognized Tax Benefits" for additional information.

Other Taxes

Taxes imposed on and collected from customers on behalf of governmental agencies are presented net on the Registrants' statements of income and are excluded from the transaction price in determining the revenue related to contracts with a customer.

Southern Company Gas ~~Dispositions.~~

~~For~~is taxed on its gas revenues by various governmental authorities, but is allowed to recover these taxes from its customers. Revenue taxes imposed on the ~~successor year ended December 31, 2017, cost of~~ natural gas ~~was $1.6 billion,~~distribution utilities are recorded at the amount charged to customers, which ~~reflected an increase~~may include a small administrative fee, as operating revenues, and the related taxes imposed on Southern Company Gas are recorded as operating expenses on the statements of income. Revenue taxes included in operating expenses were $104 million, $114 million, and $111 million in 2020, 2019, and 2018, respectively.

Allowance for Funds Used During Construction and Interest Capitalized

The traditional electric operating companies and the natural gas ~~pricing~~distribution utilities record AFUDC, which represents the estimated debt and equity costs of ~~26.3% compared~~capital funds that are necessary to ~~2016, partially offset by lower demand~~finance the construction of new regulated facilities. While cash is not realized currently, AFUDC increases the revenue requirement and is recovered over the service life of the asset through a higher rate base and higher depreciation. The equity component of AFUDC is not taxable.

Interest related to financing the construction of new facilities at Southern Power and new facilities not included in the traditional electric operating companies' and Southern Company Gas' regulated rates is capitalized in accordance with standard interest capitalization requirements.

Total AFUDC and interest capitalized for ~~natural gas.~~the Registrants in 2020, 2019, and 2018 was as follows:

~~For~~


	Southern Company		Alabama Power		Georgia Power(*)		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	230	$	61	$	138	$	1	$	11	$	18
2019	202		71		103		0		15		13
2018	210		84		94		0		17		14

(*)See Note 2 under "Georgia Power – Nuclear Construction" for information on the ~~successor period~~inclusion of ~~July 1, 2016 through December 31, 2016~~a portion of construction costs related to Plant Vogtle Units 3 and 4 in Georgia Power's rate base.

The average AFUDC composite rates for 2020, 2019, and 2018 for the traditional electric operating companies and the ~~predecessor period of January 1, 2016 through June 30, 2016, cost of~~ natural gas ~~was $613 million and $755 million, respectively, which reflected low demand for natural gas driven by warm weather during those periods.~~distribution utilities were as follows:

~~Volumes of Natural Gas Sold~~


	2020		2019		2018
Alabama Power	8.1	%	8.4	%	8.3	%
Georgia Power(*)	6.9	%	6.9	%	7.3	%
Mississippi Power	5.4	%	7.3	%	3.3	%
Southern Company Gas:
Atlanta Gas Light	7.7	%	7.8	%	7.9	%
Chattanooga Gas	7.1	%	7.1	%	7.4	%
Nicor Gas	0.7	%	2.3	%	2.1	%

~~The following table details the volumes of natural gas sold during all periods presented.~~

Year Ended December 31, 2018 vs. 2017 2017 vs. 2016
2018 2017 2016 % Change % Change
Gas distribution operations (mmBtu in millions)

Firm 721
667
670
8.1 % (0.4 )%
Interruptible 95
95
96
— % (1.0 )%
Total 816
762
766
7.1 % (0.5 )%
Wholesale gas services (mmBtu in millions/day)

Daily physical sales 6.7
6.4
7.4
4.7 % (13.5 )%
Gas marketing services (mmBtu in millions)

Firm:
Georgia 37
32
34
15.6 % (5.9 )%
Illinois 13
12
12
8.3 % — %
Other 20
18
12
11.1 % 50.0 %
Interruptible large commercial and industrial 14
14
14
— % — %
Total 84
76
72
10.5 % 5.6 %

~~Cost of Other Sales~~

~~Cost of other sales~~(*)Excludes AFUDC related to ~~Pivotal Home Solutions, which was sold on June 4, 2018.~~the construction of Plant Vogtle Units 3 and 4. See Note ~~15 to the financial statements~~2 under "~~Southern Company Gas~~"Georgia Power – ~~Sale of Pivotal Home Solutions~~"Nuclear Construction" for additional information.

~~Other Operations~~Impairment of Long-Lived Assets

The Registrants evaluate long-lived assets and ~~Maintenance Expenses~~finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance, a sales transaction price that is less than the asset group's carrying value, or an estimate of undiscounted future cash flows attributable to the asset group, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by either the amount of regulatory disallowance or by estimating the fair value of the assets and recording a loss if the carrying value is greater than the

II-139

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

fair value. For assets identified as held for sale, the ~~successor year ended December 31, 2018, other operations and maintenance expenses increased $36 million, or 3.8%,~~carrying value is compared to the ~~prior year. Excluding a $39 million decrease related~~estimated fair value less the cost to sell in order to determine if an impairment loss is required. Until the Southern Company Gas Dispositions, other operations and maintenance expenses increased $75 million. This increase was primarily due to a $53 million increase in compensation and benefit costs, including a $12 million one-time increase for the adoptionassets are disposed of, a new paid time off policy to align with the Southern Company system, a $28 million increase in disposition-related costs, and an $11 million expense for a litigation settlement to facilitate the sale of Pivotal Home Solutions. These increases were partially offset by a $27 million decrease in bad debt expense primarily at Nicor Gas, which was offset by a decrease in revenues as a result of the related regulatory recovery mechanism.their estimated fair value is re-evaluated when circumstances or events change. See Note 3 ~~to the financial statements~~ under "Other Matters – Southern Company" and "~~General Litigation Matters~~ – Southern Company Gas" ~~for additional information on the litigation settlement.~~

~~For the successor year ended December 31, 2017~~ and ~~the successor period of July 1, 2016 through December 31, 2016, other operations~~Note 15 under "Southern Company," "Southern Power," and maintenance expenses were $945 million and $480 million, respectively, and primarily reflected compensation and benefit costs and professional services, including pipeline compliance and maintenance and legal services.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern~~"Southern Company Gas ~~and Subsidiary Companies 2018 Annual Report~~

For the predecessor period of January 1, 2016 through June 30, 2016, other operations and maintenance expenses were $452 million and included pipeline compliance and maintenance costs and compensation and benefit costs.

~~Depreciation and Amortization~~

For the successor year ended December 31, 2018, depreciation and amortization decreased $1 million, or 0.2%, compared to the prior year. Excluding a $37 million decrease related to the Southern Company Gas Dispositions, depreciation and amortization increased $36 million. This increase was primarily due to continued infrastructure investments at gas distribution operations, partially offset by lower amortization of intangible assets as a result of fair value adjustments in acquisition accounting at gas marketing services.

For the successor year ended December 31, 2017, depreciation and amortization was $501 million and included $38 million of additional amortization of intangible assets as a result of fair value adjustments in acquisition accounting, primarily at gas marketing services, and $28 million in additional depreciation at gas distribution operations, primarily due to continued investment in infrastructure programs.

For the successor period of July 1, 2016 through December 31, 2016, depreciation and amortization was $238 million and included $23 million of additional amortization of intangible assets as a result of fair value adjustments in acquisition accounting, primarily at gas marketing services, as well as depreciation at gas distribution operations due to continued investment in infrastructure programs.

For the predecessor period of January 1, 2016 through June 30, 2016, depreciation and amortization was $206 million and reflected depreciation related to additional assets placed in service at gas distribution operations due to continued investment in infrastructure programs.

~~See Notes 2 and 15 to the financial statements under "Southern Company Gas~~– ~~Infrastructure Replacement Programs and Capital Projects" and "Southern Company Merger with Southern Company Gas," respectively, for additional information on infrastructure programs and the application of acquisition accounting.~~

~~Taxes Other Than Income Taxes~~

For the successor year ended December 31, 2018, taxes other than income taxes increased $27 million, or 14.7%, compared to the prior year. Excluding a $4 million decrease related to the Southern Company Gas Dispositions, taxes other than income taxes increased $31 million. This increase primarily reflects a $13 million increase in revenue tax expenses as a result of higher natural gas revenues, a $12 million increase in Nicor Gas' invested capital tax that reflects a $7 million credit in 2017 to establish a related regulatory asset, and a $4 million increase in property taxes.

For the successor year ended December 31, 2017, the successor period of July 1, 2016 through December 31, 2016, and the predecessor period of January 1, 2016 through June 30, 2016, taxes other than income taxes were $184 million, $71 million, and $99 million, respectively, which consisted primarily of revenue tax expenses, property taxes, and payroll taxes.

~~Goodwill Impairment~~

~~For the successor year ended December 31, 2018, a goodwill impairment charge of $42 million was recorded~~ ~~in contemplation of the sale~~Sale of Pivotal ~~Home Solutions. See Notes 1~~LNG and ~~15 to~~Atlantic Coast Pipeline" for information regarding impairment charges recorded during the ~~financial statements under "~~periods presented.

Goodwill and Other Intangible Assets and Liabilities~~" and "~~

Southern Power's intangible assets consist primarily of certain PPAs acquired, which are amortized over the term of the respective PPA. Southern Company ~~Gas~~ – ~~Sale~~Gas' goodwill and other intangible assets and liabilities primarily relate to its 2016 acquisition by Southern Company. In addition to these items, Southern Company's goodwill and other intangible assets also relate to its 2016 acquisition of ~~Pivotal Home Solutions," respectively, for additional information.~~PowerSecure.

~~Gain on Dispositions, Net~~

~~For~~Goodwill is not amortized, but is subject to an annual impairment test during the ~~successor~~fourth quarter of each year, ~~ended December 31, 2018, gain on dispositions, net was $291 million~~or more frequently if impairment indicators arise, as discussed below. Southern Company and ~~was associated with the~~ Southern Company Gas ~~Dispositions. The income tax expense on these gains included income tax expense on~~each evaluated its goodwill ~~not deductible for tax purposes and for which a deferred tax liability had not been recorded previously.~~

~~Merger-Related Expenses~~

~~There were no Merger-related expenses~~ in the ~~successor years ended December 31, 2018~~fourth quarter 2020 and ~~2017.~~

~~For~~determined 0 impairment was required. If the ~~successor period~~impacts of ~~July 1, 2016 through December 31, 2016, Merger-related expenses were $41 million,~~the COVID-19 pandemic and related responses, including ~~$18 million in rate credits provided~~supply chain disruptions, reduced labor availability and/or productivity, and reduced economic activity, become significant to the ~~customers~~operating results of ~~Elizabethtown Gas~~PowerSecure and ~~Elkton Gas as conditions~~its businesses, a portion of its $263 million of goodwill may become impaired. The ultimate outcome of this matter cannot be determined at this time.

A goodwill impairment charge of $32 million was recorded in the second quarter 2019 in contemplation of the ~~Merger, $20~~July 2019 sale of PowerSecure's utility infrastructure services business. In the third quarter 2019, impairment charges of $2 million ~~for additional compensation-related expenses,~~ and $3 million ~~for financial advisory fees, legal expenses,~~were recorded to goodwill and other ~~Merger-related costs.~~intangible assets, net, respectively, in contemplation of the December 2019 sale of PowerSecure's lighting business. See Note 15 under "Southern Company" for additional information.

At December 31, 2020 and 2019, goodwill was as follows:


	Goodwill
	(in millions)
Southern Company	$	5,280
Southern Company Gas:
Gas distribution operations	$	4,034
Gas marketing services	981
Southern Company Gas total	$	5,015

II-140

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

At December 31, 2020 and 2019, other intangible assets were as follows:


	At December 31, 2020						At December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Other Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization		Other Intangible Assets, Net
	(in millions)						(in millions)
Southern Company
Other intangible assets subject to amortization:
Customer relationships	$	212	$	(135)	$	77	$	212	$	(116)	$	96
Trade names	64		(31)		33		64		(25)		39
Storage and transportation contracts	64		(64)		0		64		(62)		2
PPA fair value adjustments	390		(89)		301		390		(69)		321
Other	10		(9)		1		11		(8)		3
Total other intangible assets subject to amortization	$	740	$	(328)	$	412	$	741	$	(280)	$	461
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	75		0		75		75		0		75
Total other intangible assets	$	815	$	(328)	$	487	$	816	$	(280)	$	536

Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	390	$	(89)	$	301	$	390	$	(69)	$	321

Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services
Customer relationships	$	156	$	(119)	$	37	$	156	$	(104)	$	52
Trade names	26		(12)		14		26		(10)		16
Wholesale gas services
Storage and transportation contracts	64		(64)		0		64		(62)		2
Total other intangible assets subject to amortization	$	246	$	(195)	$	51	$	246	$	(176)	$	70

II-141

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Amortization associated with other intangible assets in 2020, 2019, and 2018 was as follows:


	2020		2019		2018
	(in millions)
Southern Company(a)	$	49	$	61	$	89
Southern Power(b)	20		19		25
Southern Company Gas:
Gas marketing services	$	17	$	23	$	32
Wholesale gas services(b)	2		8		20
Southern Company Gas total	$	19	$	31	$	52

(a)Includes $22 million, $27 million, and $45 million in 2020, 2019, and 2018, respectively, recorded as a reduction to operating revenues.

(b)Recorded as a reduction to operating revenues.

At December 31, 2020, the estimated amortization associated with other intangible assets for the next five years is as follows:


	2021		2022		2023		2024		2025
	(in millions)
Southern Company	$	43	$	39	$	37	$	35	$	32
Southern Power	20		20		20		20		20
Southern Company Gas	14		11		9		7		6

Intangible liabilities of $91 million recorded under acquisition accounting for transportation contracts at Southern Company Gas were fully amortized as of December 31, 2019.

Acquisition Accounting

At the time of an acquisition, management will assess whether acquired assets and activities meet the definition of a business. For acquisitions that meet the definition of a business, operating results from the date of acquisition are included in the acquiring entity's financial statements. The purchase price, including any contingent consideration, is allocated based on the fair value of the identifiable assets acquired and liabilities assumed (including any intangible assets). 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 management may engage independent valuation experts to assist in this process. Fair values are determined by using market participant assumptions and typically include the timing and amounts of future cash flows, incurred construction costs, the nature of acquired contracts, discount rates, power market prices, and expected asset lives. Any due diligence or transition costs incurred for potential or successful acquisitions are expensed as incurred.

Historically, contingent consideration primarily relates to fixed amounts due to the seller once an acquired construction project is placed in service. For contingent consideration with variable payments, management fair values the arrangement with any changes recorded in the statements of income. See Note 13 for additional fair value information.

Development Costs

For Southern Power, development costs are capitalized once a project is probable of completion, primarily based on a review of its economics and operational feasibility, as well as the ~~predecessor~~status of power off-take agreements and regulatory approvals, if applicable. Southern Power's capitalized development costs are included in CWIP on the balance sheets. All of Southern Power's development costs incurred prior to the determination that a project is probable of completion are expensed as incurred and included in other operations and maintenance expense in the statements of income. If it is determined that a project is no longer probable of completion, any of Southern Power's capitalized development costs are expensed and included in other operations and maintenance expense in the statements of income.

Long-Term Service Agreements

II-142

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

which generally includes the cost of all labor and materials. The LTSAs also obligate the counterparties to cover the costs of unplanned maintenance on the covered equipment subject to limits and scope specified in each contract.

Payments made under the LTSAs for the performance of any planned inspections or unplanned capital maintenance are recorded in the statements of cash flows as investing activities. Receipts of major parts into materials and supplies inventory prior to planned inspections are treated as noncash transactions in the statements of cash flows. Any payments made prior to the work being performed are recorded as prepayments in other current assets and noncurrent assets on the balance sheets. At the time work is performed, an appropriate amount is accrued for future payments or transferred from the prepayment and recorded as property, plant, and equipment or expensed.

Transmission Receivables/Prepayments

As a result of Southern Power's acquisition and construction of generating facilities, Southern Power has transmission receivables and/or prepayments representing the portion of interconnection network and transmission upgrades that will be reimbursed to Southern Power. Upon completion of the related project, transmission costs are generally reimbursed by the interconnection provider within a five-year period and the receivable/prepayments are reduced as payments or services are received.

Cash and Cash Equivalents

For purposes of ~~January 1, 2016 through June 30, 2016, Merger-related expenses were $56~~the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less.

Restricted Cash

At December 31, 2020 and 2019, Southern Company Gas had $2 million ~~including $31~~and $3 million, respectively, of restricted cash held as collateral for ~~financial advisory fees, legal expenses,~~workers' compensation, life insurance, and long-term disability insurance, which is included in cash, cash equivalents, and restricted cash on the statements of cash flows.

Storm Damage Reserves

Each traditional electric operating company maintains a reserve to cover or is allowed to defer and recover the cost of damages from major storms to its transmission and distribution lines and, for Mississippi Power, the cost of uninsured damages to its generation facilities and other ~~Merger-related costs,~~property. Alabama Power also has authority from the Alabama PSC to accrue certain additional amounts as circumstances warrant. Alabama Power recorded additional accruals of $100 million and ~~$25~~$84 million ~~for additional compensation-related expenses.~~in 2020 and 2019, respectively. In accordance with their respective state PSC orders, the traditional electric operating companies accrued the following amounts related to storm damage recovery in 2020, 2019, and 2018:


	Southern Company(a)(b)		Alabama Power(b)		Georgia Power		Mississippi Power
	(in millions)
2020	$	326	$	112	$	213	$	1
2019	170		139		30		1
2018	74		16		30		1

(a)Includes accruals at Gulf Power of $26.9 million in 2018. See Note 15 under "Southern Company" for information regarding the sale of Gulf Power.

(b)Includes $39 million applied in 2019 to ~~the financial statements~~Alabama Power's NDR from its remaining excess deferred income tax regulatory liability balance in accordance with an Alabama PSC order.

See Note 2 under "Alabama Power – Rate NDR," "Georgia Power – Storm Damage Recovery," and "Mississippi Power – System Restoration Rider" for additional information regarding each company's storm damage reserve.

Leveraged Leases

~~Earnings from Equity Method Investments~~

~~For~~reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the ~~successor year ended December 31, 2018, earnings from equity method investments increased $42 million, or 39.6%, compared to~~effective tax rate, the ~~prior year. The increase was primarily due to higher earnings from Southern Company Gas' equity method investment in SNG from new rates effective September 2018~~residual value, the credit quality of the lessees, and ~~lower operations and maintenance expenses due to~~ the timing of ~~pipeline maintenance.~~

For the successor year ended December 31, 2017, earnings from equity method investments were $106 million, reflecting $88 million in earnings from Southern Company Gas' investment in SNG, including $33 million related to a non-cash charge recorded by SNG to establish a regulatory liability associated with the Tax Reform Legislation, and $18 million in earnings from all other investments.

For the successor period of July 1, 2016 through December 31, 2016, earnings from equity method investments were $60 million, reflecting $56 million in earnings from Southern Company Gas' investment in SNG and $4 million in earnings from all other investments.

~~For the predecessor period of January 1, 2016 through June 30, 2016, earnings from equity method investments were not material.~~

expected tax cash flows. See Notes 73 and 15 ~~to the financial statements~~ under ""Other Matters – Southern ~~Company Gas~~ – ~~Equity Method Investments~~– ~~SNG~~"Company" and "~~Southern~~"Southern Company, ~~Gas~~ – ~~Investment in SNG~~," respectively, for additional information on ~~Southern Company Gas' investment in SNG.~~

~~Interest Expense, Net of Amounts Capitalized~~

~~For~~ the successor year ended December 31, 2018, interest expense, net of amounts capitalized increased $28 million, or 14.0%, compared to the prior year. The increase was primarily due to $21 million of additional interest expense related to new debt issuancesleveraged lease investments, including impairment charges and ~~a $4 million reduction in capitalized interest primarily due to the Dalton Pipeline being placed in service in August 2017.~~

For the successor year ended December 31, 2017, interest expense, net of amounts capitalized was $200 million, which includes the $38 million fair value adjustment on long-term debt in acquisition accounting. Interest expense also reflects debt issuancescompleted and ~~redemptions during the period and the recognition of previously deferred interest related to regulatory infrastructure programs.~~

For the successor period of July 1, 2016 through December 31, 2016, interest expense, net of amounts capitalized was $81 million, which includes the $19 million fair value adjustment on long-term debt in acquisition accounting. Interest expense also reflects debt issuances and redemptions during the period and the recognition of previously deferred interest related to regulatory infrastructure programs.

For the predecessor period of January 1, 2016 through June 30, 2016, interest expense, net of amounts capitalized was $96 million, reflecting debt issuances and redemptions during the period and the recognition of previously deferred interest related to regulatory infrastructure programs.

~~See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Regulatory Matters~~ ~~– Unrecognized Ratemaking Amounts" herein for additional information on the unrecognized costs related to the infrastructure programs. Also see~~ ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Financing Activities" herein and Note 8 to the financial statements for additional information on outstanding debt.~~

~~Other Income (Expense), Net~~

For the successor year ended December 31, 2018, other income (expense), net decreased $43 million, or 97.7%, compared to the prior year. Excluding a $3 million decrease related to the Southern Company Gas Dispositions, other income (expense), net decreased $40 million. This decrease was primarily due to a $23 million increase in charitable donations and a $13 million decrease in gains from the settlement of contractor litigation claims.

For the successor year ended December 31, 2017, other income (expense), net was $44 million and primarily related to a $20 million gain from the settlement of contractor litigation claims, $8 million of AFUDC, a $6 million tax gross-up on contributionsplanned sales.

II-143

Table of Contents �� Index to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

Southern Company's net investment in leveraged leases consists of the following at December 31:

~~in aid of construction, and $4 million of interest income.~~


	2020(*)		2019
	(in millions)
Net rentals receivable	$	734	$	1,410
Unearned income	(178)		(622)
Investment in leveraged leases	556		788
Deferred taxes from leveraged leases	(7)		(238)
Net investment in leveraged leases	$	549	$	550

(*)Excludes the investment classified as held for sale at December 31, 2020. See Note ~~2 to the financial statements~~15 under ~~"Southern Company Gas – PRP Settlement"~~"Assets Held for Sale" for additional ~~information on contractor litigation claims.~~information.

~~For~~The following table provides a summary of the ~~successor period~~components of ~~July 1, 2016 through December 31, 2016, other~~ income ~~(expense), net was $12 million and primarily~~ related to leveraged lease investments. Income was impacted in 2020 and 2019 by the ~~tax gross-up~~impairment charges discussed in Note 3 under "Other Matters – Southern Company."


	2020		2019		2018
	(in millions)
Pretax leveraged lease income (loss)	$	(180)	$	11	$	25
Income tax benefit (expense)	98		0		(6)
Net leveraged lease income (loss)	$	(82)	$	11	$	19

Materials and Supplies

Materials and supplies for the traditional electric operating companies generally includes the average cost of ~~contributions in aid of construction received from customers.~~

~~For the predecessor period of January 1, 2016 through June 30, 2016, other income (expense), net was not material.~~

~~Income Taxes~~

~~For the successor year ended December 31, 2018, income taxes increased $97 million, or 26.4%, compared to the prior year. Excluding a $329 million increase related to the~~transmission, distribution, and generating plant materials. Materials and supplies for Southern Company Gas ~~Dispositions, including tax~~generally includes propane gas inventory, fleet fuel, and other materials and supplies. Materials and supplies for Southern Power generally includes the average cost of generating plant materials.

Materials are recorded to inventory when purchased and then expensed or capitalized to property, plant, and equipment, as appropriate, at weighted average cost when installed. In addition, certain major parts are recorded as inventory when acquired and then capitalized at cost when installed to property, plant, and equipment.

Fuel Inventory

Fuel inventory for the traditional electric operating companies includes the average cost of coal, natural gas, oil, transportation, and emissions allowances. Fuel inventory for Southern Power, which is included in other current assets, includes the average cost of oil, natural gas, and emissions allowances. Fuel is recorded to inventory when purchased and then expensed, at weighted average cost, as used. Emissions allowances granted by the EPA are included in inventory at zero cost. The traditional electric operating companies recover fuel expense through fuel cost recovery rates approved by each state PSC or, for wholesale rates, the FERC.

Natural Gas for Sale

With the exception of Nicor Gas, the natural gas distribution utilities record natural gas inventories on a WACOG basis. In Georgia's deregulated, competitive environment, Marketers sell natural gas to firm end-use customers at market-based prices. On a monthly basis, Atlanta Gas Light assigns to Marketers the goodwill for which a deferred tax liability had not been previously provided, income taxes decreased $232 million. This decrease was primarily due to a lower federal income tax rate and the flowback of excess deferred taxes as a resultmajority of the ~~Tax Reform Legislation. In addition, 2017 included additional tax expense~~pipeline storage services that it has under contract, along with a corresponding amount of ~~$130 million from~~inventory. Atlanta Gas Light retains and manages a portion of its pipeline storage assets and related natural gas inventories for system balancing and to serve system demand.

Nicor Gas' natural gas inventory is carried at cost on a LIFO basis. Inventory decrements occurring during the ~~revaluation~~year that are restored prior to year end are charged to cost of ~~deferred tax assets associated with~~natural gas at the ~~Tax Reform Legislation,~~estimated annual replacement cost. Inventory decrements that are not restored prior to year end are charged to cost of natural gas at the ~~enactment~~actual LIFO cost of the ~~State~~inventory layers liquidated. The cost of ~~Illinois income tax legislation,~~natural gas, including inventory costs, is recovered from customers under a purchased gas recovery mechanism adjusted for differences between actual costs and ~~new income tax apportionment factors in several states.~~

For the successor year ended December 31, 2017, income taxes were $367 million. The effective tax rate in 2017 reflects additional expense from the revaluation of deferred tax assets of $93 million associated with the Tax Reform Legislation and $37 million associated with State of Illinois income tax legislation enacted in the third quarter 2017 and new income tax apportionment factors in several states resulting fromamounts billed; therefore, LIFO liquidations have no impact on Southern Company's or Southern Company Gas' ~~inclusion in the consolidated Southern Company state tax filings.~~

~~For the successor period of July 1, 2016 through~~net income. At December 31, ~~2016 and~~2020, the ~~predecessor period~~Nicor Gas LIFO inventory balance was $178 million. Based on the average cost of ~~January 1, 2016 through June 30, 2016, income taxes were $76 million and $87 million, respectively. The effective tax rates during these periods reflect certain nondeductible Merger-related expenses.~~gas purchased in December 2020, the estimated replacement cost of Nicor Gas' inventory at December 31, 2020 was $259 million.

~~See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Note 10~~

II-144

Table of ContentsIndex to ~~the financial statements for additional information.~~Financial Statements

~~Effects of Inflation~~

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas is subject to rate regulation that is generally based on the recovery of historical~~ and ~~projected costs. The effects of inflation can create an economic loss since the recovery of costs could be in dollars that have less purchasing power. Any adverse effect of inflation on~~ Subsidiary Companies 2020 Annual Report

Southern Company Gas' ~~results of operations has not been substantial in recent years.~~

~~Performance~~gas marketing services, wholesale gas services, and ~~Non-GAAP Measures~~

~~Prior to the Merger,~~all other segments record inventory at LOCOM, with cost determined on a WACOG basis. For these segments, Southern Company Gas ~~evaluated segment performance using EBIT, which includes operating income, earnings~~evaluates the weighted average cost of its natural gas inventories against market prices to determine whether any declines in market prices below the WACOG are other than temporary. For any declines considered to be other than temporary, Southern Company Gas records LOCOM adjustments to cost of natural gas to reduce the value of its natural gas inventories to market value. LOCOM adjustments for wholesale gas services were $1 million, $21 million, and $10 million during 2020, 2019, and 2018, respectively.

Energy Marketing Receivables and Payables

Southern Company Gas' wholesale gas services provides services to retail gas marketers, wholesale gas marketers, utility companies, and industrial customers. These counterparties utilize netting agreements that enable wholesale gas services to net receivables and payables by counterparty upon settlement. Southern Company Gas' wholesale gas services also nets across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, ~~equity method investments, and other income (expense), net. EBIT excludes interest expense,~~or owed to, wholesale gas services' counterparties are settled net, ~~of amounts capitalized and income taxes (benefit), which were evaluated~~they are recorded on a ~~consolidated~~gross basis ~~for those periods. EBIT~~in the balance sheets as energy marketing receivables and energy marketing payables.

Southern Company Gas' wholesale gas services has trade and credit contracts that contain minimum credit rating requirements. These credit rating requirements typically give counterparties the right to suspend or terminate credit if Southern Company Gas' credit ratings are downgraded to non-investment grade status. Under such circumstances, Southern Company Gas' wholesale gas services would need to post collateral to continue transacting business with some of its counterparties. As of December 31, 2020 and 2019, the required collateral in the event of a credit rating downgrade was $5 million and $11 million, respectively.

Southern Company Gas' wholesale gas services uses established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Collateral or credit security is ~~used herein to discuss~~most often in the ~~results~~form of cash or letters of credit from an investment-grade financial institution, but may also include cash or U.S. government securities held by a trustee. When more than one derivative transaction with the same counterparty is outstanding and a legally enforceable netting agreement exists with that counterparty, the "net" mark-to-market exposure represents a reasonable measure of Southern Company Gas' ~~segments~~credit risk with that counterparty. Southern Company Gas' wholesale gas services also uses other netting agreements with certain counterparties with whom it conducts significant transactions.

See "Concentration of Credit Risk" herein for additional information.

Provision for Uncollectible Accounts

The customers of the traditional electric operating companies and the natural gas distribution utilities are billed monthly. For the majority of receivables, a provision for uncollectible accounts is established based on historical collection experience and other factors. For the remaining receivables, if the company is aware of a specific customer's inability to pay, a provision for uncollectible accounts is recorded to reduce the receivable balance to the amount reasonably expected to be collected. If circumstances change, the estimate of the recoverability of accounts receivable could change as well. Circumstances that could affect this estimate include, but are not limited to, customer credit issues, customer deposits, and general economic conditions. Customers' accounts are written off once they are deemed to be uncollectible. For all periods presented, uncollectible accounts averaged less than 1% of revenues for each Registrant.

Credit risk exposure at Nicor Gas is mitigated by a bad debt rider approved by the Illinois Commission. The bad debt rider provides for the ~~predecessor period as EBIT was~~recovery from (or refund to) customers of the ~~primary measure~~difference between Nicor Gas' actual bad debt experience on an annual basis and the benchmark bad debt expense used to establish its base rates for the respective year.

See Note 2 for information regarding recovery of ~~segment profit or loss for that period. Subsequent~~incremental bad debt expense related to the ~~Merger,~~COVID-19 pandemic at certain of the traditional electric operating companies and the natural gas distribution utilities.

Financial Instruments

The traditional electric operating companies and Southern Power use derivative financial instruments to limit exposure to fluctuations in interest rates, the prices of certain fuel purchases, electricity purchases and sales, and occasionally foreign currency exchange rates. Southern Company Gas ~~changed its segment performance measure from EBIT~~uses derivative financial instruments to ~~net income~~limit exposure to better align with the performance measure utilized by Southern Company. EBIT for the successor periods presented herein is considered a non-GAAP measure. Southern Company Gas presents consolidated EBIT, which is considered a non-GAAP measure for all periods presented. The presentation of consolidated EBIT is believed to provide useful supplemental information regarding a consolidated measure of profit or loss. Southern Company Gas further believes the presentation of segment EBIT for the successor periods is useful as it allows for a measure of comparability to other companies with different capital and legal structures, which accordingly may be subject to differentfluctuations in natural gas prices, weather, interest rates, and ~~effective tax rates. The applicable reconciliations~~commodity prices. All derivative financial instruments are recognized as either assets or liabilities on the balance sheets (included in "Other" or shown separately as "Risk Management Activities") and are measured at fair value. See Note 13 for additional information regarding fair value. Substantially all of ~~net income~~the traditional electric operating companies' and Southern Power's bulk energy purchases and sales contracts that meet the definition of a derivative are excluded from fair value accounting requirements because they qualify for the "normal" scope exception, and are accounted for under the

II-145

Table of ContentsIndex to ~~consolidated EBIT~~Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and ~~segment EBIT~~Subsidiary Companies 2020 Annual Report

accrual method. Derivative contracts that qualify as cash flow hedges of anticipated transactions or are ~~provided herein.~~

~~Adjusted~~recoverable through the traditional electric operating ~~margin is a non-GAAP measure that is calculated as operating revenues less cost of~~companies' and the natural gas cost of other sales, and revenue tax expense. Adjusted operating margin excludes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, goodwill impairment, gain on dispositions, net, and Merger-related expenses, which are includeddistribution utilities' fuel-hedging programs result in the ~~calculation~~deferral of ~~operating~~related gains and losses in AOCI or regulatory assets and liabilities, respectively, until the hedged transactions occur. Other derivative contracts that qualify as fair value hedges are marked to market through current period income ~~as calculated in accordance with GAAP~~ and ~~reflected~~are recorded on a net basis in the statements of income. ~~The presentation~~Cash flows from derivatives are classified on the statements of ~~adjusted operating margin is believed to provide useful~~cash flows in the same category as the hedged item. See Note 14 for additional information regarding derivatives.

The Registrants offset fair value amounts recognized for multiple derivative instruments executed with the ~~contribution resulting~~same counterparty under netting arrangements. The Registrants had 0 outstanding collateral repayment obligations or rights to reclaim collateral arising from ~~base rate changes, infrastructure replacement programs~~derivative instruments recognized at December 31, 2020.

The Registrants are exposed to potential losses related to financial instruments in the event of counterparties' nonperformance. The Registrants have established risk management policies and ~~capital projects,~~controls to determine and ~~customer growth at gas distribution operations since~~monitor the ~~cost~~creditworthiness of ~~natural gas and revenue tax expense can vary significantly and are generally billed directly~~counterparties in order to ~~customers.~~ mitigate their exposure to counterparty credit risk.

Southern Company Gas further believes that utilizing adjusted operating margin at gas pipeline investments, wholesale gas services, and gas marketing services allows it to focus on a direct measure of performance before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

Southern Company Gas ~~and Subsidiary Companies 2018 Annual Report~~

EBIT and adjusted operating margin should not be considered alternatives to, or more meaningful indicators of, Southern Company Gas' operating performance than net income attributable to Southern Company Gas or operating incomeenters into weather derivative contracts as ~~determined in accordance with GAAP. In addition, Southern Company Gas' adjusted operating margin may not be comparable to similarly titled measures of other companies.~~

~~Detailed variance explanations of Southern Company Gas' financial performance are provided herein.~~

~~Reconciliations of operating income to adjusted operating margin and net income attributable to Southern Company Gas to EBIT are as follows:~~

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016
through
June 30,
2018 2017 2016 2016
(in millions) (in millions)
Operating Income $ 915
$ 660
$ 199
$ 323
Other operating expenses^(a)
1,443
1,630
830
813
Revenue taxes^(b)
(111 ) (98 ) (31 ) (56 )
Adjusted Operating Margin $ 2,247
$ 2,192
$ 998
$ 1,080


~~(a)~~	~~Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, goodwill impairment, gain on dispositions, net, and Merger-related expenses.~~


~~(b)~~	~~Nicor Gas' revenue tax expenses, which are passed through directly to customers.~~

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016 through
June 30,
2018 2017 2016 2016
(in millions) (in millions)
Net Income Attributable to Southern Company Gas $ 372
$ 243
$ 114
$ 131
Net income attributable to noncontrolling interest —
—
—
14
Income taxes 464
367
76
87
Interest expense, net of amounts capitalized 228
200
81
96
EBIT $ 1,064
$ 810
$ 271
$ 328

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Segment Information~~

~~Adjusted operating margin, operating expenses, and Southern Company Gas' primary performance metric for each segment are illustrated in the tables below.~~

Successor
Year ended December 31, 2018 Year ended December 31, 2017

Adjusted Operating Margin^(a)

Operating Expenses^(a)(b)

Net Income (Loss)^(b)

Adjusted Operating Margin^(a)

Operating Expenses^(a)
Net Income (Loss)
(in millions) (in millions)
Gas distribution operations $ 1,794
$ 890
$ 334
$ 1,834
$ 1,189
$ 353
Gas pipeline investments 32
12
103
17
7
(22 )
Wholesale gas services 134
64
38
5
56
(57 )
Gas marketing services 263
244
(40 ) 313
200
84
All other 33
131
(63 ) 35
92
(115 )
Intercompany eliminations (9 ) (9 ) —
(12 ) (12 ) —
Consolidated $ 2,247
$ 1,332
$ 372
$ 2,192
$ 1,532
$ 243


~~(a)~~	~~Adjusted operating margin and operating expenses are adjusted for Nicor Gas' revenue tax expenses, which are passed through directly to customers.~~


~~(b)~~	Operating expenses for gas distribution operations and gas marketing services include the gain on dispositions, net. Net income for gas distribution operations and gas marketing services includes the gain on dispositions, net and the associated income tax expense. See Note 15 to the financial statements under "~~Southern Company Gas" for additional information.~~

Successor Predecessor
July 1, 2016 through December 31, 2016 January 1, 2016 through June 30, 2016

Adjusted Operating Margin^(*)

Operating Expenses^(*)
Net Income (Loss)
Adjusted Operating Margin^(*)

Operating Expenses^(*)
EBIT
(in millions) (in millions)
Gas distribution operations $ 817
$ 592
$ 77
$ 911
$ 558
$ 353
Gas pipeline investments 3
2
29
3
—
3
Wholesale gas services 24
26
—
(36 ) 33
(68 )
Gas marketing services 139
112
19
190
81
109
All other 19
71
(11 ) 16
89
(69 )
Intercompany eliminations (4 ) (4 ) —
(4 ) (4 ) —
Consolidated $ 998
$ 799
$ 114
$ 1,080
$ 757
$ 328


~~(*)~~	~~Adjusted operating margin and operating expenses are adjusted for Nicor Gas' revenue tax expenses, which are passed through directly to customers.~~

~~Gas Distribution Operations~~

Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas with the opportunity to generate revenues to recover the costeconomic hedges of natural gas delivered to its customers and its fixed and variable costs, including depreciation, interest, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments.

~~With~~revenues in the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various weather mechanisms, such as weather normalization mechanisms and weather derivative instruments, that limit its exposure to weather changes within typical ranges in its natural gas distribution utilities' service territories.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

On July 1, 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings, completed the sales of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. On July 29, 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI Corporation, completed the sale of Pivotal Utility Holdings, which primarily consisted of Florida City Gas, to NextEra Energy. See Note 15 to the financial statements under "~~Southern Company Gas" for additional information.~~

~~2018 vs. 2017~~

Net income decreased $19 million, or 5.4%, compared to the prior year, which includes a $40 million decrease in adjusted operating margin, a $299 million decrease in operating expenses, and a $22 million decrease in other income (expense), net resulting in a $237 million increase in EBIT. The decrease in net income also includes a $25 million increase in interest expense, net of amounts capitalized and a $231 million increase in income tax expense.

Excluding a $90 million decrease attributable to the utilities sold during 2018, adjusted operating margin increased $50 million, which primarily reflects additional revenue from infrastructure investments and colder weather in 2018, partially offset by lower rates and revenue deferrals for regulatory liabilities associated with the Tax Reform Legislation impacts. Excluding a $391 million decrease attributable to the utilities sold during 2018 that includes the related gains on the sales, operating expenses increased $92 million. This increase reflects $40 million of additional depreciation primarily due to additional assets placed in service, $37 million of additional other operations and maintenance expenses primarily due to increased compensation and benefit costs, partially offset by a decrease in bad debt expense, and $15 million of additional taxes other than income taxes primarily due to a $12 million increase in Nicor Gas' invested capital tax. Excluding a $3 million decrease attributable to the utilities sold during 2018, other income (expense), net decreased $20 million, which primarily reflects a $13 million decrease in gains from the settlement of contractor litigation claims. The increase in interest expense reflects $14 million of additional interest expense primarily from the issuance of first mortgage bonds at Nicor Gas. Excluding a $290 million decrease attributable to the utilities sold in 2018, income tax expense decreased $59 million, primarily due to lower pretax earnings, a lower federal income tax rate, and the flowback of excess deferred taxes as a result of the Tax Reform Legislation.

~~Successor Year Ended December 31, 2017~~

Net income of $353 million includes $1.8 billion in adjusted operating margin, $1.2 billion in operating expenses, and $39 million in other income (expense), net, which resulted in EBIT of $684 million. Net income also includes $153 million in interest expense, net of amounts capitalized and $178 million in income tax expense. Adjusted operating margin reflects $99 million in additional revenue from continued investment in infrastructure replacement programs and base rate increases at Atlanta Gas Light, Elizabethtown Gas, and Virginia Natural Gas. Adjusted operating margin was also affected by increased customer growth, partially offset by the negative impactevent of warmer-than-normal weather ~~net of hedging. Operating expenses reflect a $28 million increase~~ in ~~depreciation associated~~the Heating Season. Exchange-traded options are carried at fair value, with additional assets placed in service, as well as benefit and compensation costs, legal expenses, and pipeline compliance and maintenance expenses. Other income (expense), net reflects a $20 million gain from the settlement of contractor litigation claims. Interest expense reflects the impact of intercompany promissory notes executed in December 2016 and the issuance of first mortgage bonds at Nicor Gas in August 2017 and November 2017. Income tax expense includes a $22 million benefit as a result of the Tax Reform Legislation.

~~See Note 2 to the financial statements under "Southern Company Gas~~ ~~– PRP Settlement" for additional information on contractor litigation claims. See~~ ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Financing Activities" herein and Note 8 to the financial statements for additional information on debt issuances. See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Note 10 to the financial statements for additional information.~~

~~Successor Period of July 1, 2016 through December 31, 2016~~

Net income of $77 million includes $817 million in adjusted operating margin, $592 million in operating expenses, and $8 million in other income (expense), net, resulting in EBIT of $233 million. Net income also includes $105 million in interest expense, net of amounts capitalized and $51 million in income tax expense. Adjusted operating margin reflects revenue from continued investment in infrastructure replacement programs, partially offset by the impact of warm weather, net of hedging. Operating expenses reflect the depreciation associated with additional assets placed in service, the related expenses associated with pipeline compliance and maintenance activities, and $18 million of rate credits provided to the customers of Elizabethtown Gas and Elkton Gas as conditions of the Merger. See Note 15 to the financial statements under "~~Southern Company Merger with Southern Company Gas" for additional information.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Predecessor Period of January 1, 2016 through June 30, 2016~~

EBIT of $353 million includes $911 million in adjusted operating margin and $558 million in operating expense. Adjusted operating margin reflects increased revenue from continued investment in infrastructure replacement programs and the impact of customer usage and growth, partially offset by the impact of warm weather, net of hedging. Operating expenses reflect the depreciation associated with additional assets placed in service.

~~Gas Pipeline Investments~~

~~Gas pipeline investments consists primarily of joint ventures~~changes reflected in natural gas ~~pipeline investments including SNG, Atlantic Coast Pipeline, PennEast Pipeline, and Dalton Pipeline. See Note 7 to~~revenues. Non-exchange-traded options are accounted for using the ~~financial statements under "Southern Company Gas" for additional information.~~

~~2018 vs. 2017~~

Net income increased $125 million compared to the prior year, which includes a $15 million increase in adjusted operating margin primarily due to the Dalton Pipeline being placed in service in August 2017, a $5 million increase in operating expenses primarily due to increased depreciation and property tax expense related to the Dalton Pipeline, and a $42 million increase in earnings from equity method investments primarily at SNG, resulting in a $52 million increase in EBIT. The increase in net income also includes an $8 million increase in interest expense, net of amounts capitalized primarily due to a reduction in capitalized interest after the Dalton Pipeline was placed in service and an $81 million decrease in income tax expense primarily due to a lower federal income tax rate in 2018 and additional tax expense recorded in 2017 associated with the Tax Reform Legislation, partially offset by higher pretax earnings.

~~Successor Year Ended December 31, 2017~~

Net loss of $22 million includes $17 million in adjusted operating margin, $7 million in operating expenses, and $103 million in earnings from equity method investments, consisting primarily of Southern Company Gas' equity interest in SNG, including $33 million related to a non-cash charge recorded by SNG to establish a regulatory liability associated with the Tax Reform Legislation, which resulted in EBIT of $113 million. Also included in net income are $26 million in interest expense, net of amounts capitalized and $109 million in income tax expense. Income tax expense includes $66 million resulting from the revaluation of deferred income tax assets associated with the Tax Reform Legislation and $7 million related to the allocation of new income tax apportionment factors in several states resulting from Southern Company Gas' inclusionintrinsic value method. Changes in the ~~consolidated Southern Company state tax filings. See~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Note 10 to~~intrinsic value for non-exchange-traded contracts are also reflected in natural gas revenues in the ~~financial~~ statements ~~for additional information.~~

~~Successor Period~~ of ~~July 1, 2016 through December 31, 2016~~

Net income of $29 million includes $3 million in adjusted operating margin, $2 million in operating expenses, and $59 million in earnings from equity method investments, consisting primarily of Southern Company Gas' 2016 acquired equity interest in SNG, resulting in EBIT of $60 million. Also included in net income are $10 million in interest expense, net of amounts capitalized and $21 million in income tax expense.

~~Predecessor Period of January 1, 2016 through June 30, 2016~~

~~Earnings before interest and taxes for the predecessor period of January 1, 2016 through June 30, 2016 was $3 million.~~

~~Wholesale Gas Services~~income.

Wholesale gas services ~~is involved in asset management and optimization, storage, transportation, producer and peaking services,~~purchases natural gas ~~supply,~~for storage when the current market price paid to buy and transport natural gas ~~services,~~plus the cost to store and ~~wholesale~~finance the natural gas ~~marketing.~~is less than the market price that can be received in the future, resulting in positive net natural gas revenues. NYMEX futures and OTC contracts are used to sell natural gas at that future price to substantially protect the natural gas revenues that will ultimately be realized when the stored natural gas is sold. Southern Company Gas ~~has positioned the business~~enters into transactions to generate positive economic earnings on an annual basis even under low volatility market conditions that can result from a number of factors. When market price volatility increases, wholesale gas services is well positionedsecure transportation capacity between delivery points in order to serve its customers and various markets. NYMEX futures and OTC contracts are used to capture ~~significant value and generate stronger results. Operating expenses primarily reflect employee compensation and benefits.~~

~~2018 vs. 2017~~

~~Net income increased $95 million,~~the price differential or ~~166.7%, compared~~spread between the locations served by the capacity in order to the prior year, which includes a $129 million increase in adjusted operating margin, an $8 million increase in operating expenses, a $1 million increase in interest income, and a $21 million decrease in other income (expense), net resulting in a $101 million increase in EBIT. The increase in net income also includes a $2 million increase in interest expense, net of amounts capitalized and a $4 million increase in income tax expense. Details of the increase in adjusted operating margin are provided in the table below. The increase in operating expenses primarily reflects higher

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

compensation and benefit expense. The decrease in other income (expense), net primarily reflects increased charitable donations. The increase in income tax expense reflects higher pretax earnings, partially offset by a lower federal income tax rate.

~~Successor Year Ended December 31, 2017~~

Net loss of $57 million includes $5 million in adjusted operating margin, $56 million in operating expenses, and $1 million in other income (expense), net, which resulted in a loss before interest and taxes of $50 million. Also included are $7 million in interest expense, net of amounts capitalized. Adjusted operating margin reflects a decrease of $21 million due to fair value adjustments to certain assets and liabilities in the application of acquisition accounting. Also reflected in adjusted operating margin is revenue from commercial activity partially offset by mark-to-market losses. Income tax expense includes $21 million resulting from the revaluation of deferred income tax assets associated with the Tax Reform Legislation. See ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Note 10 to the financial statements for additional information.~~

~~Successor Period of July 1, 2016 through December 31, 2016~~

Net income includes $24 million in adjusted operating margin, $26 million in operating expenses, and $2 million in other income (expense), net, resulting in no EBIT. Also included are $3 million in interest expense, net of amounts capitalized and $3 million in income tax benefit. Adjusted operating margin reflects a decrease of $5 million due to fair value adjustments to certain assets and liabilities in the application of acquisition accounting. Also reflected in adjusted operating margin are mark-to-market gains due to changes in natural gas prices in the fourth quarter 2016 and losses from commercial activity due to low volatility in natural gas prices and warm weather. Operating expenses reflect low incentive compensation expense due to low earnings.

~~Predecessor Period of January 1, 2016 through June 30, 2016~~

Loss before interest and taxes of $68 million includes $(36) million in adjusted operating margin, $33 million in operating expense, and $1 million in other income (expense), net. Adjusted operating margin reflects mark-to-market losses and LOCOM adjustments as a result of changes in natural gas prices and revenues from commercial activity driven by changes in price volatility. Operating expenses reflect lower incentive compensation expense as compared to the same period in the prior year due to lower earnings.

~~The following table illustrates the components of wholesale gas services' adjusted operating margin for the periods presented:~~

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016
through
June 30,
2018 2017 2016 2016
(in millions) (in millions)
Commercial activity recognized $ 254
$ 116
$ (15 ) $ 34
Gain (loss) on storage derivatives 9
23
(20 ) (38 )
Gain (loss) on transportation and forward
commodity derivatives (119 ) (113 ) 64
(31 )
LOCOM adjustments, net of current period recoveries (7 ) —
—
(1 )
Purchase accounting adjustments to fair value
inventory and contracts (3 ) (21 ) (5 ) —
Adjusted operating margin $ 134
$ 5
$ 24
$ (36 )

~~Change in Commercial Activity~~

The commercial activity at wholesale gas services includes recognition of storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. The increase in commercial activity in 2018 compared to the prior year was primarily due to natural gas price volatility that was generated by favorable weather and a corresponding increase in power generation volumes coupled with decreased natural gas supply.

~~Change in Storage and Transportation Derivatives~~

~~Volatility in~~substantially protect the natural gas market arises from a number of factors, such as weather fluctuations or changes in supply or demand for natural gas in different regions of the U.S. The volatility of natural gas commodity prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of wholesale gas

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

services to capture value from locational and seasonal spreads. Forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions in 2018 resulted in storage derivative gains. Transportation and forward commodity losses in 2018 are primarily the result of widening transportation spreads due to favorable weather, which impacted forward prices at natural gas receipt and delivery points primarily in the Northeast and Midwest regions.

~~The natural gas~~revenues that Southern Company Gas purchases and injects into storage is accounted for at the LOCOM value utilizing gas daily or spot prices at the end of the year. A LOCOM adjustment, net of current period recoveries of $7 million, was recorded during 2018 and LOCOM adjustments for all other periods presented were immaterial. See Note 1 to the financial statements under "Natural Gas for Sale" for additional information.

~~Withdrawal Schedule and Physical Transportation Transactions~~

The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage andwill ultimately be realized when the physical flow of natural gas between ~~contracted~~delivery points occurs. These contracts generally meet the definition of derivatives and are carried at fair value on the balance sheets, with changes in fair value recorded in natural gas revenues on the statements of income in the period of change. These contracts are not designated as hedges for accounting purposes.

The purchase, transportation, ~~receipt~~storage, and ~~delivery points. Wholesale~~sale of natural gas ~~services' expected net operating revenues exclude~~are accounted for on a weighted average cost or accrual basis, as appropriate, rather than on the fair value basis utilized for the derivatives used to mitigate the natural gas price risk associated with the storage and transportation portfolio. Monthly demand charges ~~as well as other variable fuel, withdrawal, receipt, and delivery charges, and exclude estimated profit sharing under asset management agreements. Further,~~are incurred for the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at December 31, 2018. A portion of wholesale gas services'contracted storage ~~inventory~~ and transportation capacity ~~is economically hedged~~and payments associated with ~~futures contracts, which results~~asset management agreements, and these demand charges and payments are recognized on the statements of income in the ~~realization~~period they are incurred. This difference in accounting methods can result in volatility in reported earnings, even though the economic margin is substantially unchanged from the dates the transactions were consummated.

Comprehensive Income

The objective of ~~substantially fixed net operating revenues.~~

Storage Withdrawal

Total storage^(a)

Expected net operating losses^(b)

Physical Transportation Transactions – Expected Net Operating Gains^(c)
(in mmBtu in millions) (in millions) (in millions)
2019 48
$ (8 ) $ 12
2020 and thereafter —
—
107
Total at December 31, 2018 48
$ (8 ) $ 119


~~(a)~~	~~At December 31, 2018, the WACOG of wholesale gas services' expected natural gas withdrawals~~comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from ~~storage was $2.90 per mmBtu.~~


~~(b)~~	Represents expected operating losses from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations.


~~(c)~~	~~Represents the periods associated with the transportation derivative net gains during which the derivatives will be settled and the physical transportation~~ transactions ~~will occur that offset the derivative gains and losses that were previously recognized.~~

~~Gas Marketing Services~~

Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. ~~Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments~~ and other ~~risk management tools,~~economic events of the period other than transactions with owners. Comprehensive income consists of net income attributable to ~~partially mitigate potential weather impacts.~~

~~On June 4, 2018,~~the Registrant, changes in the fair value of qualifying cash flow hedges, and reclassifications for amounts included in net income. Comprehensive income also consists of certain changes in pension and other postretirement benefit plans for Southern Company, ~~Gas completed the sale of Pivotal Home Solutions to American Water Enterprises LLC. See Note 15 under "~~Southern Power, and Southern Company ~~Gas~~ – ~~Sale of Pivotal Home Solutions" for additional information.~~

~~2018 vs. 2017~~

Net income decreased $124 million, or 147.6%, compared to the prior year, which includes a $50 million decrease in adjusted operating margin, a $44 million increase in operating expenses, and a $1 million increase in other income (expense), net resulting in a $93 million decrease in EBIT. The decrease in net income also includes a $1 million increase in interest expense, net of amounts capitalized and a $30 million increase in income tax expense.

Excluding a $57 million decrease attributable to Pivotal Home Solutions, adjusted operating margin increased $7 million, which primarily reflects colder weather in 2018, customer growth, and favorable retail price spreads. Excluding a $42 million increase attributable to Pivotal Home Solutions that includes the loss on disposition and the goodwill impairment charge, operating expense increased $2 million. Excluding a $39 million increase attributable to Pivotal Home Solutions, income tax expense decreased $9 million driven by a lower federal income tax rate, partially offset by higher pretax earnings.Gas.

II-146

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

AOCI (loss) balances, net of tax effects, for Southern Company, Southern Power, and Southern Company Gas were as follows:


	Qualifying Hedges		Pension and Other Postretirement Benefit Plans		Accumulated Other Comprehensive Income (Loss)
	(in millions)
Southern Company
Balance at December 31, 2019	$	(179)	$	(142)	$	(321)
Current period change	(30)		(45)		(75)
Balance at December 31, 2020(*)	$	(209)	$	(187)	$	(395)

Southern Power
Balance at December 31, 2019	$	11	$	(37)	$	(26)
Current period change	(32)		(10)		(42)
Balance at December 31, 2020(*)	$	(21)	$	(47)	$	(67)

Southern Company Gas
Balance at December 31, 2019	$	(6)	$	13	$	7
Current period change	(14)		(15)		(29)
Balance at December 31, 2020	$	(20)	$	(2)	$	(22)

(*)May not add due to rounding.

Variable Interest Entities

The Registrants may hold ownership interests in a number of business ventures with varying ownership structures. Partnership interests and other variable interests are evaluated to determine if each entity is a VIE. The primary beneficiary of a VIE is required to consolidate the VIE when 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. See Note 7 for additional information regarding VIEs.

Alabama Power has established a wholly-owned trust to issue preferred securities. See Note 8 under "Long-term Debt" for additional information. However, Alabama Power is not considered the primary beneficiary of the trust. Therefore, the investment in the trust is reflected as other investments, and the related loan from the trust is reflected as long-term debt in Alabama Power's balance sheets.

II-147

Table of ContentsIndex to Financial Statements

~~Successor Year Ended~~

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

2. REGULATORY MATTERS

Regulatory Assets and Liabilities

Details of regulatory assets and (liabilities) reflected in the balance sheets at December 31, ~~2017~~2020 and 2019 are provided in the following tables:


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2020
AROs(a)(s)	$	5,147	$	1,470	$	3,457	$	212	$	0
Retiree benefit plans(b)(s)	4,958		1,265		1,647		238		187
Remaining net book value of retired assets(c)	1,183		632		527		24		0
Deferred income tax charges(d)	801		235		531		32		0
Environmental remediation(e)(s)	310		0		41		0		269
Loss on reacquired debt(f)	304		47		248		6		3
Storm damage(g)	262		0		262		0		0
Vacation pay(h)(s)	207		80		104		10		13
Under recovered regulatory clause revenues(i)	185		58		0		52		75
Regulatory clauses(j)	142		142		0		0		0
Nuclear outage(k)	101		61		40		0		0
Long-term debt fair value adjustment(l)	92		0		0		0		92
Kemper County energy facility assets, net(m)	50		0		0		50		0
Plant Daniel Units 3 and 4(n)	32		0		0		32		0

Other regulatory assets(o)	205		52		68		4		81
Deferred income tax credits(d)	(6,016)		(2,016)		(2,805)		(320)		(847)
Other cost of removal obligations(a)	(1,999)		(335)		212		(194)		(1,649)
Over recovered regulatory clause revenues(i)	(185)		(46)		(44)		0		(95)
Storm/property damage reserves(p)	(81)		(77)		0		(4)		0
Customer refunds(q)	(56)		(50)		(6)		0		0
Other regulatory liabilities(r)	(149)		(37)		(30)		(6)		(54)
Total regulatory assets (liabilities), net	$	5,493	$	1,481	$	4,252	$	136	$	(1,925)

II-148

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2019
Retiree benefit plans(b)(s)	$	4,423	$	1,131	$	1,516	$	213	$	167
AROs(a)(s)	4,381		1,043		3,119		210		0
Remaining net book value of retired assets(c)	1,275		649		596		30		0
Deferred income tax charges(d)	803		245		523		33		0
Storm damage(g)	410		0		410		0		0
Environmental remediation(e)(s)	349		0		52		0		296
Loss on reacquired debt(f)	323		52		262		6		4
Vacation pay(h)(s)	186		72		93		9		11
Under recovered regulatory clause revenues(i)	159		40		0		47		72
Regulatory clauses(j)	142		142		0		0		0
Long-term debt fair value adjustment(l)	107		0		0		0		107
Nuclear outage(k)	105		78		27		0		0
Fuel-hedging (realized and unrealized) losses(t)	102		22		53		27		0
Kemper County energy facility assets, net(m)	61		0		0		61		0
Plant Daniel Units 3 and 4(n)	34		0		0		34		0
Other regulatory assets(o)	127		45		23		6		53
Deferred income tax credits(d)	(6,301)		(1,960)		(3,078)		(358)		(874)
Other cost of removal obligations(a)	(2,084)		(412)		156		(189)		(1,606)
Customer refunds(q)	(285)		(56)		(229)		0		0
Over recovered regulatory clause revenues(i)	(205)		(112)		(10)		0		(82)
Storm/property damage reserves(p)	(204)		(150)		0		(55)		0
Other regulatory liabilities(r)	(70)		(19)		(6)		(10)		(22)
Total regulatory assets (liabilities), net	$	3,838	$	810	$	3,507	$	64	$	(1,874)

Unless otherwise noted, the following recovery and amortization periods for these regulatory assets and (liabilities) have been approved by the respective state PSC or regulatory agency:

(a)AROs and other cost of removal obligations generally are recorded over the related property lives, which may range up to 53 years for Alabama Power, 60 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. AROs and cost of removal obligations will be settled and trued up following completion of the related activities. Effective January 1, 2020, Georgia Power is recovering CCR AROs, including past under recovered costs and estimated annual compliance costs, over three-year periods ending December 31, 2022, 2023, and 2024 through its Environmental Compliance Cost Recovery (ECCR) tariff, as discussed further under "Georgia Power – Rate Plans" herein. See Note 6 for additional information on AROs.

(b)Recovered and amortized over the average remaining service period, which may range up to 13 years for Alabama Power, 13 years for Georgia Power, 14 years for Mississippi Power, and 13 years for Southern Company Gas. Southern Company's balances also include amounts at SCS and Southern Nuclear that are allocated to the applicable regulated utilities. See Note 11 for additional information.

(c)Alabama Power: Primarily represents the net book value of Plant Gorgas Units 8, 9, and 10 ($585 million at December 31, 2020). Being amortized over remaining periods not exceeding 17 years (through 2037).

Georgia Power: Net ~~income~~book values of ~~$84~~Plant Hammond Units 1 through 4 and Plant Branch Units 2 through 4 (totaling $503 million ~~includes $313 million in adjusted operating margin~~at December 31, 2020) are being amortized over remaining periods of between two and ~~$200 million in operating expenses, which resulted in EBIT~~15 years (between 2022 and 2035) and the net book values of ~~$113 million. Net income also includes $5 million in interest expense, net of amounts capitalized~~Plant McIntosh Unit 1 and Plant Mitchell Unit 3 (totaling $24 million inat December 31, 2020) are being amortized through 2022.

Mississippi Power: Represents net book value associated with Plant Watson and Plant Greene County. The retail and wholesale portions totaling approximately $11 million and $13 million at December 31, 2020, respectively, are being amortized over a four-year period through 2024 and a 10-year period through 2030, respectively. See "Mississippi Power – Environmental Compliance Overview Plan" herein for additional information.

(d)Deferred income tax ~~expense. Adjusted operating margin reflects a~~charges are recovered and deferred income tax credits are amortized over the related property lives, which may range up to 53 years for Alabama Power, 60 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. See Note 10 for additional information. Included in the deferred income tax charges are amounts ($8 million, $9 million, ~~negative impact of warmer-than-normal weather, net of hedging,~~ and $4$1 million ~~in unrealized hedge losses, net of recoveries. Operating expenses includes $40 million in additional amortization of intangible assets established in~~for Alabama Power, Georgia Power, and Mississippi Power, respectively, at December 31, 2020) for the ~~application of acquisition accounting. Income tax expense includes a $19 million benefit as~~retiree Medicare drug subsidy, which are being recovered and amortized through 2027, 2022, and 2024 for Alabama Power, Georgia Power, and Mississippi Power, respectively. As a result of the Tax Reform ~~Legislation.~~Legislation, these accounts include certain deferred income tax assets and liabilities not subject to normalization, as described further below:

Alabama Power: Related amounts are being recovered and amortized ratably over the related property lives.

II-149

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Georgia Power: Related amounts at December 31, 2020 include $145 million of deferred income tax assets related to CWIP for Plant Vogtle Units 3 and 4 and approximately $440 million of deferred income tax liabilities. The recovery of deferred income tax assets related to CWIP for Plant Vogtle Units 3 and 4 is expected to be determined in a future regulatory proceeding. Effective January 1, 2020, the deferred income tax liabilities are being amortized through 2022.

Mississippi Power: Related amounts at December 31, 2020 include $74 million of deferred income tax liabilities, consisting of the retail portion of $66 million being amortized over three years (through 2023) and the wholesale portion of $9 million being amortized over two years (through 2021). See ~~FUTURE EARNINGS POTENTIAL~~"Mississippi Power – 2019 Base Rate Case" and "~~Income Tax Matters~~" – Municipal and Rural Associations Tariff" herein for additional information.

Southern Company Gas: Related amounts at December 31, 2020 include $8 million of deferred income tax liabilities, which are being amortized through 2024. See "Southern Company Gas – Rate Proceedings" herein for additional information.

(e)Georgia Power is recovering $12 million annually for environmental remediation. Southern Company Gas' costs are recovered through environmental cost recovery mechanisms when the remediation work is performed. See Note 3 under "Environmental Remediation" for additional information.

(f)Recovered over either the remaining life of the original issue or, if refinanced, over the remaining life of the new issue. At December 31, 2020, the remaining amortization periods do not exceed 28 years for Alabama Power, 32 years for Georgia Power, eight years for Mississippi Power, and seven years for Southern Company Gas.

(g)Georgia Power is recovering approximately $213 million annually for storm damage. See "Georgia Power – Storm Damage Recovery" herein and Note 101 under "Storm Damage Reserves" for additional information.

(h)Recorded as earned by employees and recovered as paid, generally within one year. Includes both vacation and banked holiday pay, if applicable.

(i)Alabama Power: Balances are recorded monthly and expected to be recovered or returned within nine years. Recovery periods could change based on several factors including changes in cost estimates, load forecasts, and timing of rate adjustments. See "Alabama Power – Rate CNP PPA," " – Rate CNP Compliance," and " – Rate ECR" herein for additional information.

Georgia Power: Balances are recorded monthly and expected to be recovered or returned within two years. See "Georgia Power – Rate Plans" herein for additional information.

Mississippi Power: At December 31, 2020, $37 million is being amortized over a four-year period through March 2024 and the remaining $15 million is expected to be recovered through various rate recovery mechanisms over a period to be determined in future rate filings. See "Mississippi Power – Ad Valorem Tax Adjustment" herein for additional information.

Southern Company Gas: Balances are recorded and recovered or amortized over periods generally not exceeding five years. In addition to natural gas cost recovery mechanisms, the natural gas distribution utilities have various other cost recovery mechanisms for the recovery of costs, including those related to infrastructure replacement programs.

(j)Will be amortized concurrently with the effective date of Alabama Power's next depreciation study, which is expected to occur no later than 2023.

(k)Nuclear outage costs are deferred to a regulatory asset when incurred and amortized over a subsequent period of 18 months for Alabama Power and up to 24 months for Georgia Power. See Note 5 for additional information.

(l)Recovered over the remaining lives of the original debt issuances at acquisition, which range up to 18 years at December 31, 2020.

(m)Includes $62 million of regulatory assets and $12 million of regulatory liabilities at December 31, 2020. The retail portion includes $50 million of regulatory assets and $12 million of regulatory liabilities that are expected to be fully amortized by 2024 and 2023, respectively. The wholesale portion includes $12 million of regulatory assets that are expected to be fully amortized by 2029. See Note 3 under "Mississippi Power – Other Matters – Kemper County Energy Facility" for additional information.

(n)Represents the difference between Mississippi Power's revenue requirement for Plant Daniel Units 3 and 4 under purchase accounting and operating lease accounting, which is expected to be amortized over a period to be determined in future retail and wholesale rate filings.

(o)Except as otherwise noted, comprised of numerous immaterial components with remaining amortization periods generally not exceeding 23 years for Alabama Power, three years for Georgia Power, four years for Mississippi Power, and 20 years for Southern Company Gas at December 31, 2020. Balances at December 31, 2020 include deferred COVID-19 costs (except for Alabama Power), as discussed further under "Deferral of Incremental COVID-19 Costs" for each applicable Registrant herein. Balances for Georgia Power also include certain operations and maintenance costs associated with software and cloud computing projects for which the recovery period will be determined in its next base rate case.

(p)Amortized as related expenses are incurred. See "Alabama Power – Rate NDR" and "Mississippi Power – System Restoration Rider" herein for additional information.

(q)Primarily includes approximately $50 million and $53 million at December 31, 2020 and 2019, respectively, for Alabama Power and $110 million at December 31, 2019 for Georgia Power as a result of each company exceeding its allowed retail return range. Georgia Power's December 31, 2019 balance also includes approximately $105 million pursuant to the ~~financial statements~~Georgia Power Tax Reform Settlement Agreement. Georgia Power's balances also include immaterial amounts related to refunds for transmission service customers. See "Alabama Power" and "Georgia Power – Rate Plans" herein for additional information.

~~Successor Period~~(r)Comprised of ~~July 1, 2016 through~~numerous immaterial components with remaining amortization periods generally not exceeding 17 years for Alabama Power, 12 years for Georgia Power, three years for Mississippi Power, and 20 years for Southern Company Gas at December 31, ~~2016~~2020.

~~Net income of $19 million includes $139 million~~(s)Generally not earning a return as they are excluded from rate base or are offset in adjusted operating margin and $112 million in operating expenses, resulting in EBIT of $27 million Net income also includes $1 million in interest expense, net of amounts capitalized and $7 million in income tax expense. Adjusted operating margin reflectsrate base by a ~~reduction of $5 million due to fair value adjustments to certain~~corresponding asset or liability.

(t)Fuel-hedging assets and liabilities are recorded over the life of the underlying hedged purchase contracts. Upon final settlement, actual costs incurred are recovered through the applicable traditional electric operating company's fuel cost recovery mechanism. Purchase contracts generally do not exceed three and a half years for Alabama Power, three years for Georgia Power, and five years for Mississippi Power. Immaterial amounts at December 31, 2020 are included in the application of acquisition accounting. Also reflected in adjusted operating margin are unrealized hedge gains and LOCOM adjustments. Operating expenses reflect $23 million in additional amortization of intangible assets, partially offset by a $2 million reduction in operations and maintenance expenses due to fair value adjustments to certainother regulatory assets and ~~liabilities~~liabilities.

Alabama Power

Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power.

II-150

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Petition for Certificate of Convenience and Necessity

On August 14, 2020, the Alabama PSC issued its order regarding Alabama Power's September 2019 petition for a CCN, which authorized Alabama Power to (i) construct an approximately 720-MW combined cycle facility at Alabama Power's Plant Barry (Plant Barry Unit 8) that is expected to be placed in service by the ~~application~~end of 2023, (ii) complete the acquisition ~~accounting.~~of the Central Alabama Generating Station, which occurred on August 31, 2020, (iii) purchase approximately 240 MWs of combined cycle generation under a long-term PPA, which began on September 1, 2020, and (iv) pursue up to approximately 200 MWs of cost-effective demand-side management and distributed energy resource programs. Alabama Power's petition for a CCN was predicated on the results of Alabama Power's 2019 IRP provided to the Alabama PSC, which identified an approximately 2,400-MW resource need for Alabama Power, driven by the need for additional winter reserve capacity. See Note ~~1 to the financial statements~~15 under ~~"Natural Gas for Sale" for additional information on LOCOM adjustments and Note 15 to the financial statements under "Southern Company Merger with Southern Company Gas~~""Alabama Power" for additional information on the ~~Merger.~~acquisition of the Central Alabama Generating Station.

~~Predecessor Period~~The Alabama PSC authorized the recovery of ~~January 1, 2016 through June 30, 2016~~

~~EBIT~~actual costs for the construction of ~~$109 million includes $190 million~~Plant Barry Unit 8 up to 5% above the estimated in-service cost of $652 million. In so doing, it recognized the potential for developments that could cause the project costs to exceed the capped amount, in adjusted operating margin and $81 million in operating expenses. Adjusted operating margin reflects $9 million in unrealized hedge gains. Operating expenses reflect lower bad debt, marketing, and depreciation and amortization, comparedwhich case Alabama Power would provide documentation to the ~~same period~~Alabama PSC to explain and justify potential recovery of the additional costs. At December 31, 2020, project expenditures associated with Plant Barry Unit 8 included in CWIP totaled approximately $66 million.

The Alabama PSC further directed that the proposed solar generation of approximately 400 MWs, coupled with battery energy storage systems (solar/battery systems), be evaluated under an existing Renewable Generation Certificate (RGC) issued by the Alabama PSC in September 2015. The contracts proposed in the ~~prior year. Earnings also include $14 million attributable~~CCN petition expired on July 31, 2020. Any future requests for solar/battery systems will be evaluated under the RGC process.

Energy Alabama, Gasp, Inc., and the Sierra Club filed requests for reconsideration and rehearing with the Alabama PSC, and, on December 10, 2020, the Alabama PSC issued an order denying the requests. On January 7, 2021, Energy Alabama and Gasp, Inc. filed judicial appeals regarding both the Alabama PSC's August 14, 2020 CCN order and the December 10, 2020 order denying reconsideration and rehearing.

Alabama Power expects to ~~noncontrolling interest.~~

~~All Other~~

All other includes Southern Company Gas' storage and fuels operations and its investment in Triton, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense)recover costs associated with ~~affiliate financing arrangements.~~

~~2018 vs. 2017~~

~~Net loss decreased $52 million, or 45.2%, compared~~Plant Barry Unit 8 pursuant to the prior year, which includes a $2 million decrease in adjusted operating margin, a $39 million increase in operating expenses, a $3 million increase in interest income, and a $5 million decrease in other income (expense), net resulting in a $43 million decrease in EBIT. The decrease in net loss also includes an $8 million decrease in interest expense, net of amounts capitalized and an $87 million decrease in income tax expense. The increase in operating expenses primarily reflects a $28 million increase in disposition-relatedits Rate CNP New Plant. Alabama Power is recovering all costs and a $12 million increase in compensation expenses resulting from the adoption of a new paid time off policy. The decrease in income tax expense primarily reflects the 2017 increase in income tax expense related to the revaluation of deferred tax assets associated with the ~~Tax Reform Legislation,~~Central Alabama Generating Station through the ~~enactment~~inclusion in Rate RSE of the State of Illinois income tax legislation, new income tax apportionment factors in several states, and a lower federal income tax rate in 2018. The decrease also reflects lower pretax earnings in 2018 compared to 2017.

~~Successor Year Ended December 31, 2017~~

Net loss of $115 million includes $35 million in adjusted operating margin and $92 million in operating expenses. Operating expenses included $26 million of integration-related costs. Interest expense, net of amounts capitalized was $9 million due to intercompany promissory notes that were executed in December 2016. Income tax expense was $56 million and includes $46 million resultingrevenues from the ~~revaluation~~existing power sales agreement and, on expiration of ~~deferred tax assets~~that agreement, expects to recover costs pursuant to Rate CNP New Plant. The recovery of costs associated with laws, regulations, and other such mandates directed at the utility industry are expected to be recovered through Rate CNP Compliance. Alabama Power expects to recover the capacity-related costs associated with the ~~Tax Reform Legislation~~PPAs through its Rate CNP PPA. In addition, fuel and $30 million associated with State of Illinois tax legislation enacted during the third quarter 2017 and new income tax apportionment factors in several states resulting from Southern Company Gas' inclusion in the consolidated Southern Company state tax filings, partially offset by income tax benefit on the pre-tax loss. See ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Financing Activities" herein for additional financing information and~~ ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" herein and Note 10 to the financial statements for additional information.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Successor Period of July 1, 2016 through December 31, 2016~~

Operating expenses included Merger-related expenses of $41 million primarily comprised of compensation-related expenses, financial advisory fees, legal expenses, and other Merger-related costs and $8 million in expenses associated with certain benefit arrangements.

~~Predecessor Period of January 1, 2016 through June 30, 2016~~

For the predecessor period of January 1, 2016 through June 30, 2016, operating expenses included Merger-related expenses of $56 million. These expenses are primarily comprised of financial advisory and legal expenses as well as additional compensation-related expenses, including acceleration of share-based compensation expenses, and change-in-control compensation charges. See Note 15 to the financial statements under "~~Southern Company Merger with Southern Company Gas" for additional information.~~

~~Segment Reconciliations~~

Reconciliations of net income attributable to Southern Company Gas to EBIT for the years ended December 31, 2018 and 2017 and the period of July 1, 2016 through December 31, 2016, and operating income to adjusted operating margin for all periods presented, are in the following tables. See Note 16 to the financial statements under "~~Southern Company Gas" for additional segment information.~~

Successor
Year Ended December 31, 2018
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Net Income (Loss) Attributable
to Southern Company Gas $ 334
$ 103
$ 38
$ (40 ) $ (63 ) $ —
$ 372
Income taxes (benefit) 409
28
4
54
(31 ) —
464
Interest expense, net of amounts
capitalized 178
34
9
6
1
—
228
EBIT $ 921
$ 165
$ 51
$ 20
$ (93 ) $ —
$ 1,064

Successor
Year Ended December 31, 2017
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Net Income (Loss) Attributable
to Southern Company Gas $ 353
$ (22 ) $ (57 ) $ 84
$ (115 ) $ —
$ 243
Income taxes 178
109
—
24
56
—
367
Interest expense, net of amounts
capitalized 153
26
7
5
9
—
200
EBIT $ 684
$ 113
$ (50 ) $ 113
$ (50 ) $ —
$ 810

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Successor
July 1, 2016 through December 31, 2016
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Net Income (Loss) Attributable
to Southern Company Gas $ 77
$ 29
$ —
$ 19
$ (11 ) $ —
$ 114
Income taxes (benefit) 51
21
(3 ) 7
—
—
76
Interest expense, net of amounts
capitalized 105
10
3
1
(38 ) —
81
EBIT $ 233
$ 60
$ —
$ 27
$ (49 ) $ —
$ 271

Successor
Year Ended December 31, 2018
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Operating Income (Loss) $ 904
$ 20
$ 70
$ 19
$ (98 ) $ —
$ 915
Other operating expenses^(a)
1,001
12
64
244
131
(9 ) 1,443
Revenue tax expense^(b)
(111 ) —
—
—
—
—
(111 )
Adjusted Operating Margin
$ 1,794
$ 32
$ 134
$ 263
$ 33
$ (9 ) $ 2,247

Successor
Year Ended December 31, 2017
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Operating Income (Loss) $ 645
$ 10
$ (51 ) $ 113
$ (57 ) $ —
$ 660
Other operating expenses^(a)
1,287
7
56
200
92
(12 ) 1,630
Revenue tax expense^(b)
(98 ) —
—
—
—
—
(98 )
Adjusted Operating Margin
$ 1,834
$ 17
$ 5
$ 313
$ 35
$ (12 ) $ 2,192

Successor
July 1, 2016 through December 31, 2016
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Operating Income (Loss) $ 225
$ 1
$ (2 ) $ 27
$ (52 ) $ —
$ 199
Other operating expenses^(a)
623
2
26
112
71
(4 ) 830
Revenue tax expense^(b)
(31 ) —
—
—
—
—
(31 )
Adjusted Operating Margin
$ 817
$ 3
$ 24
$ 139
$ 19
$ (4 ) $ 998

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Predecessor
January 1, 2016 through June 30, 2016
Gas Distribution Operations Gas Pipeline Investments Wholesale Gas Services Gas Marketing Services All Other Intercompany Elimination Consolidated
(in millions)
Operating Income (Loss) $ 353
$ 3
$ (69 ) $ 109
$ (73 ) $ —
$ 323
Other operating expenses^(a)
614
—
33
81
89
(4 ) 813
Revenue tax expense^(b)
(56 ) —
—
—
—
—
(56 )
Adjusted Operating Margin
$ 911
$ 3
$ (36 ) $ 190
$ 16
$ (4 ) $ 1,080


~~(a)~~	~~Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, goodwill impairment, gain on dispositions, net, and Merger-related expenses.~~


~~(b)~~	~~Nicor Gas' revenue tax expenses, which are passed through directly to customers.~~

~~FUTURE EARNINGS POTENTIAL~~

~~General~~

The results of operations for the past three years are not necessarily indicative of future earnings potential. The Southern Company Gas Dispositions are expected to materially decrease future earnings and cash flows to Southern Company Gas. For the year ended December 31, 2018, pre-tax earnings attributable to these dispositions were $297 million, which includes a $291 million gain on dispositions, net and a $42 million goodwill impairment. For the year ended December 31, 2017, net income attributable to these dispositions was $71 million, which included additional tax expense of $16 million associated with the Tax Reform Legislation. Due to the seasonal nature of the natural gas business and other factors including, but not limited to, weather, regulation, competition, customer demand, and general economic conditions, these results are not necessarily indicative of the results to be expected for any other period. The level of Southern Company Gas' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company Gas' primary business of natural gas distribution and its complementary businesses in the gas pipeline investments, wholesale gas services, and gas marketing services sectors. These factors include Southern Company Gas' ability to maintain constructive regulatory environments that allow for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, its ability to optimize its transportation and storage positions, and its ability to re-contract storage rates at favorable prices.

Future earnings will be driven by customer growth and are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of natural gas, the price elasticity of demand, and the rate of economic growth or decline in Southern Company Gas' service territories. Demand for natural gas is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings.

Volatility of natural gas prices has a significant impact on Southern Company Gas' customer rates, its long-term competitive position against other energy sources, and the ability of its gas marketing services and wholesale gas services segments to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability. Over the longer term, volatility is expected to be low to moderate and locational and/or transportation spreads are expected to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of the Northeast U.S. To the extent these pipelines are delayed or not built, volatility could increase. See "~~FERC Matters~~" herein for additional information on permitting challenges experienced by the Atlantic Coast Pipeline. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. Further, if economic conditions continue to improve, the demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis.

~~As part of its business strategy, Southern Company Gas regularly considers and evaluates joint development arrangements as well as acquisitions and dispositions of businesses and assets.~~

On June 4, 2018, Southern Company Gas completed the stock sale of Pivotal Home Solutions to American Water Enterprises LLC. Southern Company Gas and American Water Enterprises LLC entered into a transition services

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~agreement whereby Southern Company Gas provided certain administrative and operational services through November 4, 2018.~~

On July 1, 2018, a Southern Company Gas subsidiary, Pivotal Utility Holdings, completed the sales of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. Southern Company Gas and South Jersey Industries, Inc. entered into transition services agreements whereby Southern Company Gas will provide certain administrative and operational services through no later than July 31, 2020.

On July 29, 2018, Southern Company Gas and its wholly-owned direct subsidiary, NUI Corporation, completed the stock sale of Pivotal Utility Holdings, which primarily consisted of Florida City Gas, to NextEra Energy. Southern Company Gas and NextEra Energy entered into a transition services agreement whereby Southern Company Gas will provide certain administrative and operational services through no later than July 29, 2020.

~~See~~ ~~OVERVIEW~~ ~~– "Merger, Acquisition, and Disposition Activities" herein and Note 15 to the financial statements under "Southern Company Gas~~" for additional information on these dispositions. See BUSINESS – "Seasonality" in Item 1, RISK FACTORS in Item 1A, and OVERVIEW – "Seasonality of Results" for additional information on seasonality.

~~Environmental Matters~~

Southern Company Gas' operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Southern Company Gas maintains a comprehensive environmental compliance strategy to assess upcoming requirements and compliance costs associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to comply with environmental laws and regulations may impact future results of operations, cash flows, and financial condition. A major portion of these complianceenergy-related costs are expected to be recovered through ~~customer rates.~~ Rate ECR. Any remaining costs associated with Plant Barry Unit 8 and the acquisition of the Central Alabama Generating Station are expected to be recovered through Rate RSE.

The ultimate ~~impact of the environmental laws and regulations discussed herein will depend on various factors, such as state adoption and implementation of requirements and the~~ outcome of ~~pending and/or future legal challenges.~~

~~New or revised environmental laws and regulations could affect many areas of Southern Company Gas' operations. The impact of any such changes~~these matters cannot be determined at this time. ~~Environmental compliance~~

Rate RSE

The Alabama PSC has adopted Rate RSE that provides for periodic annual adjustments based upon Alabama Power's projected weighted common equity return (WCER) compared to an allowable range. Rate RSE adjustments are based on forward-looking information for the applicable upcoming calendar year. Rate RSE adjustments for any two-year period, when averaged together, cannot exceed 4.0% and any annual adjustment is limited to 5.0%. When the projected WCER is under the allowed range, there is an adjusting point of 5.98% and eligibility for a performance-based adder of seven basis points, or 0.07%, to the WCER adjusting point if Alabama Power (i) has an "A" credit rating equivalent with at least one of the recognized rating agencies or (ii) is in the top one-third of a designated customer value benchmark survey. As initially designed, if Alabama Power's actual retail return was above the allowed WCER range, the excess would be refunded to customers unless otherwise directed by the Alabama PSC; however, there was no provision for additional customer billings should the actual retail return fall below the WCER range.

In 2018, the Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address the growing pressure on its credit quality resulting from the Tax Reform Legislation, without increasing retail rates under Rate RSE in the near term. Alabama Power continues to reduce growth in total debt by increasing equity, with corresponding reductions in debt issuances, thereby de-leveraging its capital structure. Alabama Power's goal is to achieve an equity ratio of approximately 55% by the end of 2025. At December 31, 2020 and 2019, Alabama Power's equity ratio was approximately 51.6% and 50.3%, respectively.

II-151

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.

Generally, during a year without a Rate RSE upward adjustment, if Alabama Power's actual WCER is between 6.15% and 7.65%, customers will receive 25% of the amount between 6.15% and 6.65%, 40% of the amount between 6.65% and 7.15%, and 75% of the amount between 7.15% and 7.65%. Customers will receive all amounts in excess of an actual WCER of 7.65%. During a year with a Rate RSE upward adjustment, if Alabama Power's actual WCER exceeds 6.15%, customers receive 50% of the amount between 6.15% and 6.90% and all amounts in excess of an actual WCER of 6.90%. There is no provision for additional customer billings should the actual retail return fall below the WCER range.

In conjunction with these modifications to Rate RSE, in 2018, Alabama Power consented to a moratorium on any upward adjustments under Rate RSE for 2019 and 2020 and to return $50 million to customers through bill credits in 2019. Retail rates under Rate RSE remained unchanged for 2019 and 2020.

Together with Rate RSE, Alabama Power has an established retail tariff that provides for an adjustment to customer billings to recognize the impact of a change in the statutory income tax rate. In accordance with this tariff, Alabama Power returned $267 million to retail customers through bill credits during 2018 as a result of the change in the federal income tax rate under the Tax Reform Legislation.

At December 31, 2018, Alabama Power's retail return exceeded the allowed WCER range, which resulted in Alabama Power establishing a regulatory liability of $109 million for Rate RSE refunds. In accordance with an Alabama PSC order issued in February 2019, Alabama Power applied $78 million to reduce the Rate ECR under recovered balance and the remaining $31 million was refunded to customers through bill credits starting in July 2019. At December 31, 2019 and 2020, Alabama Power's WCER exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $53 million and $50 million, respectively, for Rate RSE refunds. In April 2020, the regulatory liability at December 31, 2019 was refunded to customers through bill credits. The $50 million regulatory liability at December 31, 2020 will be refunded to customers through bill credits in April 2021.

During 2019, Alabama Power provided to the Alabama PSC and the Alabama Office of the Attorney General information related to the operation and utilization of Rate RSE, in accordance with the rules governing the operation of Rate RSE. During 2020, the Alabama PSC concluded that Rate RSE continues to fulfill its intended purposes and that no significant revisions are needed or warranted.

On December 1, 2020, Alabama Power made its required annual Rate RSE submission to the Alabama PSC of projected data for calendar year 2021, resulting in an increase of 4.09%, or approximately $228 million annually, that became effective for the billing month of January 2021.

Rate CNP New Plant

Rate CNP New Plant allows for recovery of Alabama Power's retail costs ~~could~~associated with newly developed or acquired certificated generating facilities placed into retail service. No adjustments to Rate CNP New Plant occurred during the period 2018 through 2020. See "Petition for Certificate of Convenience and Necessity" herein for additional information.

Rate CNP PPA

Rate CNP PPA allows for the recovery of Alabama Power's retail costs associated with certificated PPAs. Revenues for Rate CNP PPA, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will have no significant effect on Southern Company's or Alabama Power's revenues or net income but will affect ~~earnings if~~annual cash flow. No adjustments to Rate CNP PPA occurred during the period 2018 through 2020 and no adjustment is expected for 2021. At December 31, 2020 and 2019, Alabama Power had an under recovered Rate CNP PPA balance of $58 million and $40 million, respectively, which is included in other regulatory assets, deferred on the balance sheet.

Rate CNP Compliance

Rate CNP Compliance allows for the recovery of Alabama Power's retail costs associated with laws, regulations, and other such mandates directed at the utility industry involving the environment, security, reliability, safety, sustainability, or similar considerations impacting Alabama Power's facilities or operations. Rate CNP Compliance is based on forward-looking information and provides for the recovery of these costs ~~cannot continue~~pursuant to factors that are calculated and submitted to the Alabama PSC by December 1 with rates effective for the following calendar year. Compliance costs to be recovered include operations and maintenance expenses, depreciation, and a return on certain invested capital. Revenues for Rate CNP Compliance, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates.

II-152

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Accordingly, changes in the billing factor will have no significant effect on Southern Company's or Alabama Power's revenues or net income, but will affect annual cash flow. Changes in Rate CNP Compliance-related operations and maintenance expenses and depreciation generally will have no effect on net income.

In November 2018, 2019, and 2020, Alabama Power submitted calculations associated with its cost of complying with governmental mandates for the following calendar year, as provided under Rate CNP Compliance. The 2018 filing reflected a projected under recovered retail revenue requirement of approximately $205 million, which was recovered in the billing months of January 2019 through December 2019. The 2019 filing reflected a projected over recovered retail revenue requirement, which resulted in a rate decrease of approximately $68 million that became effective for the billing month of January 2020. The 2020 filing reflected a projected under recovered retail revenue requirement of approximately $59 million.

On December 1, 2020, the Alabama PSC issued a consent order that Alabama Power leave the 2020 Rate CNP Compliance factor in effect for 2021, with any prior year under collected amount deemed recovered before any current year amounts are recovered. Any remaining under recovered amount will be reflected in the 2021 filing.

At December 31, 2020, Alabama Power had an over recovered Rate CNP Compliance balance of $28 million included in other regulatory liabilities, current on the balance sheet. At December 31, 2019, Alabama Power had an over recovered Rate CNP Compliance balance of $62 million, of which $55 million is included in other regulatory liabilities, current and $7 million is included in other regulatory liabilities, deferred on the balance sheet.

Rate ECR

Rate ECR recovers Alabama Power's retail energy costs based on an estimate of future energy costs and the current over or under recovered balance. Revenues recognized under Rate ECR and recorded on the financial statements are adjusted for the difference in actual recoverable fuel costs and amounts billed in current regulated rates. The difference in the recoverable fuel costs and amounts billed gives rise to the over or under recovered amounts recorded as regulatory assets or liabilities. Alabama Power, along with the Alabama PSC, continually monitors the over or under recovered cost balance to determine whether an adjustment to billing rates is required. Changes in the Rate ECR factor have no significant effect on Southern Company's or Alabama Power's net income but will impact operating cash flows. The Alabama PSC may approve billing rates under Rate ECR of up to 5.910 cents per KWH.

In May 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents per KWH to 2.353 cents per KWH effective July 2018 through December 2018. In December 2018, the Alabama PSC issued a ~~timely basis. Further, increased~~consent order to leave this rate in effect through December 31, 2019.

As discussed herein under "Rate RSE," in accordance with an Alabama PSC order issued in February 2019, Alabama Power utilized $78 million of the 2018 Rate RSE refund liability to reduce the Rate ECR under recovered balance.

In December 2019, the Alabama PSC approved a decrease to Rate ECR from 2.353 cents per KWH to 2.160 cents per KWH, equal to 1.82%, or approximately $102 million annually, that became effective for the billing month of January 2020.

In October 2020, Alabama Power reduced its over-collected fuel balance by $94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing Alabama Power to reduce its over-collected fuel balance by $100 million and return that amount to customers in the form of bill credits, with any undistributed amount remaining in the regulatory liability for the benefit of customers.

On December 1, 2020, the Alabama PSC approved a decrease to Rate ECR from 2.160 cents per KWH to 1.960 cents per KWH, equal to 1.84%, or approximately $103 million annually, that became effective for the billing month of January 2021. The rate will adjust to 5.910 cents per KWH in January 2022 absent a further order from the Alabama PSC.

At December 31, 2020, Alabama Power's over recovered fuel costs totaled $18 million and is included in other regulatory liabilities, current on the balance sheet. At December 31, 2019, Alabama Power's over recovered fuel costs totaled $49 million, of which $32 million is included in other regulatory liabilities, current and $17 million is included in other regulatory liabilities, deferred on the balance sheet. These classifications are based on estimates, which include such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a significant impact on the timing of any recovery or return of fuel costs.

Tax Reform Accounting Order

In 2018, the Alabama PSC approved an accounting order that authorized Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ended December 31, 2018 as a regulatory liability and to use up to $30 million of such deferrals to offset under recovered amounts under Rate ECR. The final excess deferred tax liability for the year ended December 31, 2018 totaled approximately $69 million, of which $30 million was used to offset the

II-153

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Rate ECR under recovered balance. In December 2019, the Alabama PSC issued an order authorizing Alabama Power to apply the remaining deferred balance of approximately $39 million to increase the balance in the NDR. See "Rate NDR" herein and Note 10 under "Current and Deferred Income Taxes" for additional information.

Software Accounting Order

In February 2019, the Alabama PSC approved an accounting order that authorizes Alabama Power to establish a regulatory asset for operations and maintenance costs associated with software implementation projects. The regulatory asset will be amortized ratably over the life of the related software. At December 31, 2020 and 2019, the regulatory asset balance totaled $17 million and $6 million, respectively, and is included in other deferred charges and assets on the balance sheet.

Plant Greene County

Alabama Power jointly owns Plant Greene County with an affiliate, Mississippi Power. See Note 5 under "Joint Ownership Agreements" for additional information. In December 2019, Mississippi Power updated its proposed RMP, originally filed in 2018 with the Mississippi PSC. The RMP proposed a four-year acceleration of the retirement of Plant Greene County Units 1 and 2 to the third quarter 2021 and the third quarter 2022, respectively. On December 17, 2020, the Mississippi PSC issued an order concluding the RMP docket and requiring Mississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation, which could include Plant Greene County, by year-end 2027 to reduce Mississippi Power's excess reserve margin. Mississippi Power's IRP is scheduled to be filed in April 2021.

Any proposed Plant Greene County unit retirements by Mississippi Power would require the completion of transmission and system reliability improvements, as well as agreement by Alabama Power. Alabama Power will continue to monitor the status of Mississippi Power's IRP and associated regulatory processes, as well as the transmission and system reliability improvements. Alabama Power will review all the facts and circumstances and will evaluate all of its alternatives prior to reaching a final determination on the ongoing operations of Plant Greene County. The ultimate outcome of this matter cannot be determined at this time.

Rate NDR

The second component of the Rate NDR charge is intended to allow recovery of any existing deferred storm-related operations and maintenance costs and any future reserve deficits over a 24-month period. The Alabama PSC order gives Alabama Power authority to record a deficit balance in the NDR when costs of storm damage exceed any established reserve balance. Absent further Alabama PSC approval, the maximum total Rate NDR charge consisting of both components is $10 per month per non-residential customer account and $5 per month per residential customer account. Alabama Power has the authority, based on an order from the Alabama PSC, to accrue certain additional amounts as circumstances warrant. The order allows for reliability-related expenditures to be charged against the additional accruals when the NDR balance exceeds $75 million. Alabama Power may designate a portion of the NDR to reliability-related expenditures as a part of an annual budget process for the following year or during the current year for identified unbudgeted reliability-related expenditures that are ~~recovered through regulated rates could contribute~~incurred. Accruals that have not been designated can be used to ~~reduced demand~~offset storm charges. Additional accruals to the NDR enhance Alabama Power's ability to mitigate the financial effects of future natural disasters, promote system reliability, and offset costs retail customers would otherwise bear. Alabama Power made additional accruals of $100 million and $84 million in 2020 and 2019, respectively. There were 0 such accruals in 2018.

As discussed herein under "Tax Reform Accounting Order," in accordance with an Alabama PSC order issued in December 2019, Alabama Power also applied the remaining excess deferred income tax regulatory liability balance of approximately $39 million to increase the balance in the NDR, resulting in an accumulated balance of $150 million at December 31, 2019. Of this amount, Alabama Power designated $37 million to be applied to budgeted reliability-related expenditures for ~~natural gas,~~2020, which ~~could negatively affect results~~was included in other regulatory liabilities, current and was utilized in 2020. The remaining NDR balance of operations, cash flows, and/or financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for natural gas.

~~Environmental Remediation~~

Southern Company Gas is subject to environmental remediation liabilities associated with 40 former MGP sites in four different states. Southern Company Gas conducts studies to determine the extent of any required cleanup and has recognized the costs to clean up known impacted sites in its financial statements. An accrued environmental remediation liability of $294$113 million was included in other regulatory liabilities, deferred on the balance ~~sheets~~sheet.

Alabama Power collected approximately $16 million annually in 2018 and 2019 through the reserve establishment charge. Effective with March 2020 billings, the reserve establishment charge was suspended and the reserve maintenance charge was

II-154

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

activated as a result of the NDR balance exceeding $75 million. Alabama Power collected approximately $5 million in 2020 and expects to collect $3 million annually beginning in 2021 unless the NDR balance falls below $50 million. During 2020, Alabama Power recorded $51 million and $67 million against the NDR for damages incurred to its transmission and distribution facilities from Hurricane Sally and Hurricane Zeta, respectively. The remaining balance of $77 million is included in other regulatory liabilities, deferred on the balance sheet.

As revenue from the Rate NDR charge is recognized, an equal amount of operations and maintenance expenses related to the NDR will also be recognized. As a result, the Rate NDR charge will not have an effect on net income but will impact operating cash flows.

Environmental Accounting Order

Based on an order from the Alabama PSC (Environmental Accounting Order), Alabama Power is authorized to establish a regulatory asset to record the unrecovered investment costs, including the unrecovered plant asset balance and the unrecovered costs associated with site removal and closure associated with future unit retirements caused by environmental regulations. The regulatory asset is amortized and recovered over the affected unit's remaining useful life, as established prior to the decision regarding early retirement, through Rate CNP Compliance.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2019 ARP, which includes traditional base tariffs, Demand-Side Management (DSM) tariffs, the Environmental Compliance Cost Recovery (ECCR) tariff, and Municipal Franchise Fee (MFF) tariffs. In addition, financing costs on certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a fuel cost recovery tariff, both under separate regulatory proceedings.

As approved by the Georgia PSC in the seventeenth VCM proceeding, prior to the expected in-service date of Plant Vogtle Unit 3, Georgia Power expects to file a request to adjust retail base rates to include the portion of costs related to Plant Vogtle Unit 3 and common facilities that were deemed prudent in a previous stipulated agreement. As costs are included in retail base rates, the related financing costs will no longer be recovered through the NCCR tariff. See "Nuclear Construction" herein for additional information on Plant Vogtle Units 3 and 4.

Rate Plans

2019 ARP

In December 2019, the Georgia PSC voted to approve the 2019 ARP, under which Georgia Power increased its rates on January 1, 2020. On December 15, 2020, the Georgia PSC approved tariff adjustments effective January 1, 2021. Details of tariff adjustments are provided in the table below:


Tariff	2020		2021
	(in millions)
Traditional base	$	0	$	120
ECCR(*)	318		2
DSM	12		(15)
MFF	12		4
Total	$	342	$	111

(*) Effective January 1, 2020, CCR AROs are being recovered through the ECCR tariff.

In July 2019, the Georgia PSC voted to approve Georgia Power's modified triennial IRP (Georgia Power 2019 IRP), including Georgia Power's proposed environmental compliance strategy associated with ash pond and certain landfill closures and post-closure care in compliance with the CCR Rule and the related state rule. In the 2019 ARP, the Georgia PSC approved recovery of the estimated under recovered balance of these compliance costs at December 31, ~~2018,~~2019 over a three-year period ending December 31, 2022 and recovery of ~~which $26 million~~estimated compliance costs for 2020, 2021, and 2022 over three-year periods ending December 31, 2022, 2023, and 2024, respectively, with recovery of construction contingency beginning in the year following actual expenditure. The ECCR tariff is expected to be ~~incurred over~~revised for actual expenditures and updated estimates through future annual compliance filings. On February 4, 2020, the ~~next 12 months. The accrued environmental remediation liability decreased at December 31, 2018 primarily due to~~Georgia PSC denied a motion for reconsideration filed by the ~~disposition of $85 million that related to Elizabethtown Gas. The natural gas distribution utilities in Illinois and~~Sierra Club regarding the Georgia have received authority from their respective state regulators to recover approved environmental compliance costs through regulatory mechanisms, which covers substantially all of the total accrued remediation costs. See ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Capital Requirements and Contractual Obligations" herein and Note 3 to the financial statements under "Environmental Remediation" for additional information.~~

~~Water Quality~~

In 2015, the EPA and the U.S. Army Corps of Engineers (Corps) jointly published a final rule that revised the regulatory definition of waters of the United States (WOTUS) for all Clean Water Act programs. The rule significantly expanded the scope of federal jurisdiction over waterbodies (such as rivers, streams, and canals), which could impact permitting and reporting requirements associated with the installation, expansion, and maintenance of pipeline projects. The EPA and the Corps are expected to publish a final rule in 2019 to replace the 2015 WOTUS definition. The impact of any changes to the 2015 WOTUS rule will depend on the content of this final rule and the outcome of any legal challenges.

~~Global Climate Issues~~

~~The EPA's GHG reporting rule requires annual reporting of GHG emissions expressed in terms of metric tons of CO~~₂ ~~equivalent emissions for a company's operational control of facilities. Based on ownership or financial control of facilities, Southern~~PSC's

II-155

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

decision in the 2019 ARP allowing Georgia Power to recover compliance costs for CCR AROs, and, on December 7, 2020, the Superior Court of Fulton County affirmed the decision of the Georgia PSC. On January 5, 2021, the Sierra Club filed a notice of appeal with the Georgia Court of Appeals. The ultimate outcome of this matter cannot be determined at this time. See Note 6 for additional information regarding Georgia Power's AROs.

Under the 2019 ARP, Georgia Power's retail ROE is set at 10.50%, and earnings will be evaluated against a retail ROE range of 9.50% to 12.00%. Any retail earnings above 12.00% will be shared, with 40% being applied to reduce regulatory assets, 40% directly refunded to customers, and the remaining 20% retained by Georgia Power. There will be no recovery of any earnings shortfall below 9.50% on an actual basis. However, if at any time during the term of the 2019 ARP, Georgia Power projects that its retail earnings will be below 9.50% for any calendar year, it could petition the Georgia PSC for implementation of the Interim Cost Recovery (ICR) tariff to adjust Georgia Power's retail rates to achieve a 9.50% ROE. The Georgia PSC would have 90 days to rule on Georgia Power's request. The ICR tariff would expire at the earlier of January 1, 2023 or the end of the calendar year in which the ICR tariff becomes effective. In lieu of requesting implementation of an ICR tariff, or if the Georgia PSC chooses not to implement the ICR tariff, Georgia Power may file a full rate case. In 2020, Georgia Power's retail ROE was within the allowed retail ROE range.

Additionally, under the 2019 ARP and pursuant to the sharing mechanism approved in the 2013 ARP whereby two-thirds of any earnings above the top of the allowed ROE range are shared with Georgia Power's customers, (i) Georgia Power used 50% (approximately $50 million) of the customer share of earnings above the band in 2018 to reduce regulatory assets and refunded 50% (approximately $50 million) to customers in 2020 and (ii) Georgia Power agreed to forego its share of 2019 earnings in excess of the earnings band so 50% (approximately $60 million) of all earnings over the 2019 band were refunded to customers in 2020 and 50% (approximately $60 million) were used to reduce regulatory assets.

Except as provided above, Georgia Power will not file for a general base rate increase while the 2019 ARP is in effect. Georgia Power is required to file a general base rate case by July 1, 2022, in response to which the Georgia PSC would be expected to determine whether the 2019 ARP should be continued, modified, or discontinued.

2013 ARP

Under the 2013 ARP, there were no changes to Georgia Power's traditional base tariffs, ECCR tariff, DSM tariffs, or MFF tariffs in 2019. Georgia Power's retail ROE under the 2013 ARP was set at 10.95% and earnings were evaluated against a retail ROE range of 10.00% to 12.00%. Two-thirds of any earnings above 12.00% were to be directly refunded to customers, with the remaining one-third retained by Georgia Power. In 2019 and 2018, Georgia Power's retail ROE exceeded 12.00% and, under the modified sharing mechanism pursuant to the 2019 ARP, Georgia Power reduced regulatory assets by a total of approximately $110 million and accrued refunds for retail customers of a total of approximately $110 million. In June 2020 and October 2020, Georgia Power issued bill credits to retail customers of approximately $50 million and $60 million, respectively, related to the excess retail earnings in 2018 and 2019, respectively. See "2019 ARP" herein for additional information.

Deferral of Incremental COVID-19 Costs

On April 7, 2020 and June 2, 2020, in response to the COVID-19 pandemic, the Georgia PSC approved orders directing Georgia Power to continue its previous, voluntary suspension of customer disconnections through July 14, 2020 and to defer the resulting incremental bad debt as a regulatory asset. On June 16, 2020 and July 7, 2020, the Georgia PSC approved orders establishing a methodology for identifying incremental bad debt and allowing the deferral of other incremental costs associated with the COVID-19 pandemic. The period over which such costs will be recovered is expected to be determined in Georgia Power's next base rate case. At December 31, 2020, the incremental costs deferred totaled approximately $38 million. The ultimate outcome of this matter cannot be determined at this time.

Fuel Cost Recovery

Georgia Power has established fuel cost recovery rates approved by the Georgia PSC. On May 28, 2020, the Georgia PSC approved a stipulation agreement among Georgia Power, the staff of the Georgia PSC, and certain intervenors to lower total fuel billings by approximately $740 million over a two-year period effective June 1, 2020. In addition, Georgia Power further lowered fuel billings by approximately $44 million under an interim fuel rider effective June 1, 2020 through September 30, 2020. Georgia Power continues to be allowed to adjust its fuel cost recovery rates under an interim fuel rider prior to the next fuel case if the under or over recovered fuel balance exceeds $200 million. Georgia Power is scheduled to file its next fuel case no later than February 28, 2023.

Georgia Power's over recovered fuel balance totaled $113 million at December 31, 2020 and is included in other current liabilities on Southern Company's balance sheets and over recovered fuel clause revenues on Georgia Power's balance sheets. At

II-156

Table of ContentsIndex to Financial Statements

~~Company Gas' 2017 GHG emissions were approximately 0.6 million metric tons of CO~~₂ ~~equivalent. The preliminary estimate of Southern Company Gas' 2018 GHG emissions on the same basis is approximately 0.6 million metric tons of CO~~₂ ~~equivalent.~~

~~FERC Matters~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~and Subsidiary Companies 2020 Annual Report

December 31, 2019, Georgia Power's over recovered fuel balance totaled $73 million and is ~~involved~~included in ~~two~~other deferred credits and liabilities on Southern Company's and Georgia Power's balance sheets.

Georgia Power's fuel cost recovery mechanism includes costs associated with a natural gas hedging program, as revised and approved by the Georgia PSC, allowing the use of an array of derivative instruments within a 36-month time horizon.

Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant ~~pipeline~~effect on Southern Company's or Georgia Power's revenues or net income but will affect operating cash flows.

Storm Damage Recovery

Georgia Power defers and recovers certain costs related to damages from major storms as mandated by the Georgia PSC. Beginning January 1, 2020, Georgia Power is recovering $213 million annually under the 2019 ARP. At December 31, 2020 and 2019, the balance in the regulatory asset related to storm damage was $262 million and $410 million, respectively, with $213 million for each year included in other regulatory assets, current on Southern Company's balance sheets and regulatory assets – storm damage on Georgia Power's balance sheets and $49 million and $197 million, respectively, included in other regulatory assets, deferred on Southern Company's and Georgia Power's balance sheets. During October 2020, Tropical Storm Zeta caused significant damage to Georgia Power's transmission and distribution facilities. The incremental restoration costs related to this tropical storm deferred in the regulatory asset for storm damage totaled approximately $50 million. The rate of storm damage cost recovery is expected to be adjusted in future regulatory proceedings as necessary. As a result of this regulatory treatment, costs related to storms are not expected to have a material impact on Southern Company's or Georgia Power's financial statements.

Nuclear Construction

In 2009, the Georgia PSC certified construction ~~projects within gas pipeline investments. These projects, along~~of Plant Vogtle Units 3 and 4, in which Georgia Power holds a 45.7% ownership interest. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the 2 AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement.

In connection with the EPC Contractor's bankruptcy filing in March 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into several transitional arrangements to allow construction to continue. In July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, entered into the Vogtle Services Agreement, whereby Westinghouse provides facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement provides that it will continue until the start-up and testing of Plant Vogtle Units 3 and 4 are complete and electricity is generated and sold from both units. The Vogtle Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.

In October 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, executed the Bechtel Agreement, a cost reimbursable plus fee arrangement, whereby Bechtel is reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Vogtle Owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs, and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including certain Vogtle Owner suspensions of work, certain breaches of the Bechtel Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.

See Note 8 under "Long-term Debt – DOE Loan Guarantee Borrowings" for information on the Amended and Restated Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.

II-157

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas' existing pipelines, are intended~~and Subsidiary Companies 2020 Annual Report

Cost and Schedule

Georgia Power's approximate proportionate share of the remaining estimated capital cost to ~~provide diverse sources~~complete Plant Vogtle Units 3 and 4 by the expected in-service dates of ~~natural gas supplies to customers, resolve current~~November 2021 and ~~long-term supply planning for new capacity, enhance system reliability, and generate economic development in the areas served. The following table provides an overview of these pipeline projects.~~November 2022, respectively, is as follows:

Miles of Pipe
Capital Expenditures^(a)
Ownership
Percentage
(in millions)
Atlantic Coast Pipeline^(b)
594
$ 350-390 5 %
PennEast Pipeline^(c)
118
$ 276 20 %


~~(a)~~			~~Represents Southern Company Gas' expected total~~(in billions)
Base project capital ~~expenditures, excluding AFUDC, at completion, which may change.~~cost forecast(a)(b)

$	8.5
~~(b)~~Construction contingency estimate			In 2014, Southern Company Gas entered into a joint venture to construct and operate a natural gas pipeline that will run from West Virginia through Virginia and into eastern North Carolina to meet the region's growing demand for natural gas. The proposed pipeline project is expected to transport natural gas to customers in Virginia. In August 2017, the Atlantic Coast Pipeline received FERC approval.

0.2
~~(c)~~ Total project capital cost forecast(a)(b)	~~In 2014, Southern Company Gas entered into a joint venture~~8.7
Net investment as of December 31, 2020(b)	(7.2)
Remaining estimate to construct and operate a natural gas pipeline that will transport low-cost natural gas from the Marcellus Shale area to customers in New Jersey. Southern Company Gas believes this will alleviate takeaway constraints in the Marcellus region and help mitigate some of the price volatility experienced during recent winters. On January 19, 2018, the PennEast Pipeline received FERC approval.complete(a)	$	1.5

~~Work~~(a)Excludes financing costs expected to be capitalized through AFUDC of approximately $246 million, of which $93 million had been accrued through December 31, 2020.

(b)Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds.

Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.0 billion, of which $2.6 billion had been incurred through December 31, 2020.

As part of its ongoing processes, Southern Nuclear continues ~~with state~~to evaluate cost and ~~federal agencies~~schedule forecasts on a regular basis to ~~obtain~~incorporate current information available, particularly in the ~~required permits~~areas of engineering support, commodity installation, system turnovers and related test results, and workforce statistics. Southern Nuclear has established aggressive target values for monthly construction production and system turnover activities as part of a strategy that was designed to ~~begin~~maintain margin to the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4.

As of June 30, 2020, assignments of contingency exceeded the remaining balance of the $366 million construction oncontingency originally established in the ~~PennEast Pipeline. Any material delays may impact forecasted capital expenditures~~second quarter 2018 by approximately $34 million and ~~the expected in-service date.~~

~~The Atlantic Coast Pipeline has experienced challenges to its permits since~~Georgia Power established $115 million of additional construction ~~began in 2018.~~contingency. During the third and fourth quarters ~~2018, a FERC stop work order, together with delays~~2020, this construction contingency, plus an additional $5 million, was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including the April 2020 reduction in ~~obtaining permits necessary for construction and construction delays due~~workforce designed to judicial actions, impacted the cost and schedule for the project. As a result, total project cost estimates have increased from between $6.0 billion and $6.5 billion to between $7.0 billion and $7.8 billion, excluding financing costs. Southern Company Gas' sharemitigate impacts of the ~~total~~COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project ~~costs is 5%~~management, initial test program, start-up, engineering support, and ~~Southern Company Gas' investment at December 31, 2018 totaled $83 million. The operator~~operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore, Georgia Power established $171 million of the joint venture currently expects to achieve a late 2020 in-service date for at least key segments of the Atlantic Coast Pipeline, while the remainder may extend into early 2021. Southern Company Gas has evaluated the recoverability of its investment and determined there was no impairmentadditional construction contingency as of December 31, ~~2018. Abnormal weather,~~2020.

In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site, including worker distancing measures, isolating individuals who have tested positive for COVID-19, are showing symptoms consistent with COVID-19, are being tested for COVID-19, or have been in close contact with such persons, requiring self-quarantine, and adopting additional precautionary measures. In April 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and began reducing the then-existing site workforce by approximately 20%. This reduction in workforce was a mitigation action intended to address the impact of the COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and construction site, including challenges with labor productivity that were exacerbated by the impact of the COVID-19 pandemic, by increasing productivity of the remaining workforce and reducing workforce fatigue and absenteeism. Further, it was also intended to allow for increased social distancing by the workforce and facilitate compliance with the recommendations from the Centers for Disease Control and Prevention. The April 2020 workforce reduction did reduce absenteeism, providing an improvement in operational efficiency and allowing for increased social distancing. Since April 2020, the number of active cases at the site has fluctuated and has continued to impact productivity levels and pace of activity completion.

The lower productivity levels and slower pace of activity completion contributed to a backlog to the aggressive site work plan established at the beginning of 2020. To address these issues, in July 2020, Southern Nuclear updated its aggressive site work plan for both Unit 3 and Unit 4; however, through October 2020, the project continued to face challenges in meeting the updated

II-158

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

aggressive site work plan targets including, but not limited to, overall construction and subcontractor labor productivity, resulting in further extension of certain milestone dates in the aggressive site work plan. From November 2020 through January 2021, the number of active COVID-19 cases at the site increased significantly, consistent with a national rise in cases, which further impacted productivity and the pace of activity completion. In addition, and exacerbated by this rise in COVID-19 cases, the project continues to face challenges including, but not limited to, higher than expected absenteeism; overall construction and subcontractor labor productivity; system turnover and testing activities; and electrical equipment and commodity installation.

As a result of these factors, overall production levels were not achieved at the levels anticipated, contributing to the December 31, 2020 allocation of construction contingency and increase in total project capital cost forecast described previously. Georgia Power estimates the productivity impacts of the COVID-19 pandemic have consumed approximately three to four months of schedule margin previously embedded in the site work plan for Unit 3 and Unit 4. Also, after considering these factors, Southern Nuclear has further extended certain milestone dates, including the start of hot functional testing and fuel load for Unit 3, from those established in October 2020. These updated milestone dates are expected to support the regulatory-approved in-service dates of November 2021 and November 2022 for Units 3 and 4, respectively. With minimal schedule margin remaining, the Unit 3 schedule is challenged, and any further extension of the hot functional testing or fuel load milestones, or other delays ~~(including due~~from the challenges described below, could impact the ability to ~~judicial~~achieve the November 2021 in-service date. As Unit 3 approaches hot functional testing, achievement of the extended milestone dates for Unit 3 primarily depends on improvements in the pace of work package completion and system turnovers, as well as the level of any required construction remediation work. Achievement of the extended milestone dates for Unit 4 primarily depends on overall construction productivity and production levels significantly improving as well as appropriate levels of craft laborers, particularly electrical and pipefitter craft labor, being added and maintained.

In addition, the continuing effects of the COVID-19 pandemic could further disrupt or ~~regulatory action)~~delay construction and testing activities at Plant Vogtle Units 3 and 4. Georgia Power's proportionate share of the estimated incremental cost associated with COVID-19 mitigation actions and impacts on construction productivity is currently estimated to be between $150 million and $190 million and is included in the total project capital cost. As described previously, estimated costs associated with near-term COVID-19 mitigation actions and related impacts on construction productivity were included in the additional contingency established as of December 31, 2020.

There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. Findings resulting from such inspections could require additional remediation and/or further NRC oversight. In addition, certain license amendment requests have been filed and approved or are pending before the NRC. On August 10, 2020, the Atomic Safety and Licensing Board rejected the Blue Ridge Environmental Defense League's (BREDL) May 11, 2020 petition challenging a license amendment request. The staff of the NRC has issued the requested amendment to the combined construction and operating license for Plant Vogtle Unit 3. BREDL appealed the Atomic Safety and Licensing Board decision to the NRC, which the NRC denied on December 22, 2020. BREDL also filed a motion to reopen the proceeding and submitted an amended contention on December 7, 2020, which is pending before the NRC.

In September 2020, Southern Nuclear notified the NRC of its intent to load fuel for Unit 3 in 2021. Various design and other ~~conditions~~licensing-based compliance matters, including the timely submittal by Southern Nuclear of the ITAAC documentation for each unit and the related reviews and approvals by the NRC necessary to support NRC authorization to load fuel, may arise, which may result in additional ~~cost~~license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues, including inspections and ITAACs, are not resolved in a timely manner, there may be delays in the project schedule ~~modifications, which~~that could result in ~~an impairment~~increased costs.

II-159

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas' investment~~ and Subsidiary Companies 2020 Annual Report

million per month for Unit 3 and approximately $15 million per month for Unit 4, as well as the related AFUDC. While Georgia Power is not precluded from seeking recovery of any future capital cost forecast increase, management will ultimately determine whether or not to seek recovery. Any further changes to the capital cost forecast that are not expected to be recoverable through regulated rates will be required to be charged to income and such charges could be material.

Joint Owner Contracts

In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 to provide for, among other conditions, additional Vogtle Owner approval requirements. Effective in August 2018, the Vogtle Owners further amended the joint ownership agreements to clarify and provide procedures for certain provisions of the joint ownership agreements related to adverse events that require the vote of the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 to continue construction (as amended, and together with the November 2017 amendment, the Vogtle Joint Ownership Agreements). The Vogtle Joint Ownership Agreements also confirm that the Vogtle Owners' sole recourse against Georgia Power or Southern Nuclear for any action or inaction in connection with their performance as agent for the Vogtle Owners is limited to removal of Georgia Power and/or Southern Nuclear as agent, except in cases of willful misconduct.

As a result of an increase in the total project capital cost forecast and Georgia Power's decision not to seek rate recovery of the increase in the base capital costs in conjunction with the nineteenth VCM report in 2018, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 were required to vote to continue construction. In September 2018, the Vogtle Owners unanimously voted to continue construction of Plant Vogtle Units 3 and 4.

Amendments to the Vogtle Joint Ownership Agreements

In connection with the vote to continue construction, Georgia Power entered into (i) a binding term sheet (Vogtle Owner Term Sheet) with the other Vogtle Owners and MEAG Power's wholly-owned subsidiaries MEAG Power SPVJ, LLC (MEAG SPVJ), MEAG Power SPVM, LLC (MEAG SPVM), and MEAG Power SPVP, LLC (MEAG SPVP) to take certain actions which partially mitigate potential financial exposure for the other Vogtle Owners, including additional amendments to the Vogtle Joint Ownership Agreements and the purchase of PTCs from the other Vogtle Owners at pre-established prices, and (ii) a term sheet (MEAG Term Sheet) with MEAG Power and MEAG SPVJ to provide up to $300 million of funding with respect to MEAG SPVJ's ownership interest in Plant Vogtle Units 3 and 4 under certain circumstances. In January 2019, Georgia Power, MEAG Power, and MEAG SPVJ entered into an agreement to implement the provisions of the MEAG Term Sheet. In February 2019, Georgia Power, the other Vogtle Owners, and MEAG Power's wholly-owned subsidiaries MEAG SPVJ, MEAG SPVM, and MEAG SPVP entered into certain amendments to the Vogtle Joint Ownership Agreements to implement the provisions of the Vogtle Owner Term Sheet (Global Amendments).

As previously disclosed, pursuant to the Global Amendments: (i) each Vogtle Owner must pay its proportionate share of qualifying construction costs for Plant Vogtle Units 3 and 4 based on its ownership percentage up to the estimated cost at completion (EAC) for Plant Vogtle Units 3 and 4 which formed the basis of Georgia Power's forecast of $8.4 billion in the nineteenth VCM plus $800 million; (ii) Georgia Power will be responsible for 55.7% of actual qualifying construction costs between $800 million and $1.6 billion over the EAC in the nineteenth VCM (resulting in $80 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 44.3% of such costs pro rata in accordance with their respective ownership interests; and (iii) Georgia Power will be responsible for 65.7% of qualifying construction costs between $1.6 billion and $2.1 billion over the EAC in the nineteenth VCM (resulting in a further $100 million of potential additional costs to Georgia Power), with the remaining Vogtle Owners responsible for 34.3% of such costs pro rata in accordance with their respective ownership interests. If the EAC is revised and exceeds the EAC in the nineteenth VCM by more than $2.1 billion, each of the other Vogtle Owners will have a ~~material impact~~one-time option at the time the project budget forecast is so revised to tender a portion of its ownership interest to Georgia Power in exchange for Georgia Power's agreement to pay 100% of such Vogtle Owner's remaining share of total construction costs in excess of the EAC in the nineteenth VCM plus $2.1 billion.

In addition, pursuant to the Global Amendments, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and 4 must vote to continue construction if certain adverse events occur, including, among other events: (i) the bankruptcy of Toshiba; (ii) the termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement, the Bechtel Agreement, or the agency agreement with Southern Nuclear; (iii) Georgia Power's public announcement of its intention not to submit for rate recovery any portion of its investment in Plant Vogtle Units 3 and 4 or the Georgia PSC determines that any of Georgia Power's costs relating to the construction of Plant Vogtle Units 3 and 4 will not be recovered in retail rates, excluding any additional amounts paid by Georgia Power on behalf of the other Vogtle Owners pursuant to the Global Amendments described above and the first 6% of costs during any six-month VCM reporting period that are disallowed by the Georgia PSC for recovery, or for which Georgia Power elects not to seek cost recovery, through retail rates; and (iv) an incremental extension of one year or more over the most recently approved schedule.

II-160

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas'~~and Subsidiary Companies 2020 Annual Report

The ultimate outcome of these matters cannot be determined at this time.

Regulatory Matters

In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff up to the certified capital cost of $4.418 billion. At December 31, 2020, Georgia Power had recovered approximately $2.5 billion of financing costs. Financing costs related to capital costs above $4.418 billion are being recognized through AFUDC and are expected to be recovered through retail rates over the life of Plant Vogtle Units 3 and 4; however, Georgia Power will not record AFUDC related to any capital costs in excess of the total deemed reasonable by the Georgia PSC (currently $7.3 billion) and not requested for rate recovery. On November 3, 2020, the Georgia PSC approved Georgia Power's request to decrease the NCCR tariff by $142 million annually, effective January 1, 2021.

In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) Georgia Power's seventeenth VCM report and modified the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following regulatory matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement was reasonable and prudent and none of the $0.3 billion paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) (a) capital costs incurred up to $5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, (b) Georgia Power would have the burden to show that any capital costs above $5.68 billion were prudent, and (c) a revised capital cost forecast of $7.3 billion (after reflecting the impact of payments received under the Guarantee Settlement Agreement and related customer refunds) was found reasonable; (iv) construction of Plant Vogtle Units 3 and 4 should be completed, with Southern Nuclear serving as project manager and Bechtel as primary contractor; (v) approved and deemed reasonable Georgia Power's revised schedule placing Plant Vogtle Units 3 and 4 in service in November 2021 and November 2022, respectively; (vi) confirmed that the revised cost forecast does not represent a cost cap and that prudence decisions on cost recovery will be made at a later date, consistent with applicable Georgia law; (vii) reduced the ROE used to calculate the NCCR tariff (a) from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016, (b) from 10.00% to 8.30%, effective January 1, 2020, and (c) from 8.30% to 5.30%, effective January 1, 2021 (provided that the ROE in no case will be less than Georgia Power's average cost of long-term debt); (viii) reduced the ROE used for AFUDC equity for Plant Vogtle Units 3 and 4 from 10.00% to Georgia Power's average cost of long-term debt, effective January 1, 2018; and (ix) agreed that upon Unit 3 reaching commercial operation, retail base rates would be adjusted to include the costs related to Unit 3 and common facilities deemed prudent in the Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not commercially operational by June 1, 2021 and June 1, 2022, respectively, the ROE used to calculate the NCCR tariff will be further reduced by 10 basis points each month (but not lower than Georgia Power's average cost of long-term debt) until the respective Unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $150 million, $75 million, and $100 million in 2020, 2019, and 2018, respectively, and are estimated to have negative earnings impacts of approximately $260 million and $200 million in 2021 and 2022, respectively. In its January 11, 2018 order, the Georgia PSC also stated if other conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Georgia PSC reserved the right to reconsider the decision to continue construction.

In 2018, Georgia Interfaith Power & Light, Inc., Partnership for Southern Equity, Inc., and Georgia Watch filed petitions in Fulton County Superior Court seeking judicial review of the Georgia PSC's January 11, 2018 order. The petitions were dismissed by the Fulton County Superior Court and later remanded by the Georgia Court of Appeals. The Fulton County Superior Court issued another order dismissing the petitions and, in August 2020, the petitioners withdrew their notice of appeal. This matter is now concluded.

The Georgia PSC has approved 23 VCM reports covering periods through June 30, 2020, including total construction capital costs incurred through that date of $8.1 billion (before $1.7 billion of payments received under the Guarantee Settlement Agreement

II-161

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

and approximately $188 million in related customer refunds). The Georgia PSC's order approving the twenty-third VCM report also instructed Georgia Power and the staff of the Georgia PSC to develop a mutually-agreeable recommendation to the Georgia PSC by the end of March 2021 regarding the procedure for and the timing, form, and substance of the rate adjustment filing related to the Unit 3 and common facility costs. Georgia Power expects to file its twenty-fourth VCM report with the Georgia PSC on February 18, 2021, covering the period from July 1, 2020 through December 31, 2020, requesting approval of $670 million of construction capital costs incurred during that period.

The ultimate outcome of these matters cannot be determined at this time.

Mississippi Power

Mississippi Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's rates are a combination of base rates and several separate cost recovery clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased power, ad valorem taxes, property damage, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are expected to be recovered through Mississippi Power's base rates.

2019 Base Rate Case

Under the terms of the Mississippi Power Rate Case Settlement Agreement, annual retail rates decreased approximately $16.7 million, or 1.85%, effective for the first billing cycle of April 2020, based on a test year period of January 1, 2020 through December 31, 2020, a 53% average equity ratio, an allowed maximum actual equity ratio of 55% by the end of 2020, and a 7.57% return on investment.

Additionally, the Mississippi Power Rate Case Settlement Agreement: (i) established common amortization periods of four years for regulatory assets and three years for regulatory liabilities included in the approved revenue requirement, including those related to unprotected deferred income taxes; (ii) established new depreciation rates reflecting an annual increase in depreciation of approximately $10 million; and (iii) excluded certain compensation costs totaling approximately $3.9 million. It also eliminated separate rates for costs associated with Plant Ratcliffe and energy efficiency initiatives and includes such costs in the PEP, ECO Plan, and ad valorem tax adjustment factor, as applicable. In accordance with the previous order of the Mississippi PSC suspending the operation of PEP and the ECO Plan for 2018 through 2020, Mississippi Power submitted its 2021 ECO Plan filing on February 12, 2021 and plans to submit its 2021 PEP filing in March 2021.

Performance Evaluation Plan

Mississippi Power's retail base rates generally are set under the PEP, a rate plan approved by the Mississippi PSC. In recognition that Mississippi Power's long-term financial ~~statements.~~success is dependent upon how well it satisfies its customers' needs, PEP includes performance indicators that directly tie customer service indicators to Mississippi Power's allowed ROE. PEP measures Mississippi Power's performance on a 10-point scale as a weighted average of results in three areas: average customer price, as compared to prices of other regional utilities (weighted at 40%); service reliability, measured in percentage of time customers had electric service (40%); and customer satisfaction, measured in a survey of residential customers (20%). Typically, 2 PEP filings are made for each calendar year: the PEP projected filing and the PEP lookback filing. On July 24, 2020, the Mississippi PSC approved Mississippi Power's revisions to the PEP compliance rate clause as agreed to in the Mississippi Power Rate Case Settlement Agreement. These revisions include, among other things, changing the filing date for the annual PEP rate projected filing from November of the immediately preceding year to March of the current year, utilizing a historic test year adjusted for "known and measurable" changes, using discounted cash flow and regression formulas to determine base ROE, and moving all embedded ad valorem property taxes currently collected in PEP to the ad valorem tax adjustment clause. The PEP lookback filing will continue to be filed after the end of the year and allows for review of the actual revenue requirement.

In 2018, Mississippi Power revised its annual projected PEP filing for 2018 to reflect the impacts of the Tax Reform Legislation. The revised filing requested an increase of $26 million in annual revenues, based on a performance adjusted ROE of 9.33% and an increased equity ratio of 50%. Mississippi Power and the MPUS entered into a settlement agreement, which was approved by the Mississippi PSC, with respect to the 2018 PEP filing and all unresolved PEP filings for prior years (2018 PEP Settlement Agreement). Rates under the 2018 PEP Settlement Agreement became effective with the first billing cycle of September 2018. The 2018 PEP Settlement Agreement provided for an increase of approximately $21.6 million in annual base retail revenues, which excluded certain compensation costs contested by the MPUS, as well as approximately $2 million subsequently approved

II-162

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

for recovery through the 2018 Energy Efficiency Cost Rider. Under the 2018 PEP Settlement Agreement, Mississippi Power deferred a portion of the contested compensation costs for 2018 and 2019 as a regulatory asset totaling $4 million, which was included in other regulatory assets, deferred on the balance sheet at December 31, 2019. These costs are being recovered over a four-year period through March 2024 as approved in the Mississippi Power Rate Case Settlement Agreement.

Pursuant to the 2018 PEP Settlement Agreement, Mississippi Power's performance-adjusted allowed ROE was 9.31% and its allowed equity ratio was capped at 51%, pending further review by the Mississippi PSC. In lieu of the requested equity ratio increase, Mississippi Power retained $44 million of excess accumulated deferred income taxes resulting from the Tax Reform Legislation. The Mississippi Power Rate Case Settlement Agreement set amortization periods for the excess accumulated deferred income taxes, as discussed under "2019 Base Rate Case" herein.

Pursuant to the 2018 PEP Settlement Agreement, Mississippi Power was not required to make any PEP filings for regulatory years 2018, 2019, and 2020. Mississippi Power plans to submit its 2021 PEP filing in March 2021. The ultimate outcome of this matter cannot be determined at this time.

Operations Review

In 2018, the Mississippi PSC began an operations review of Mississippi Power. The review includes, but is not limited to, a comparative analysis of its costs, its cost recovery framework, and ways in which it may streamline management operations for the reasonable benefit of ratepayers. The ultimate outcome of this matter cannot be determined at this time.

Reserve Margin Plan

In December 2019, Mississippi Power updated its proposed RMP, originally filed in 2018, as required by the Mississippi PSC. In 2018, Mississippi Power had proposed alternatives to reduce its reserve margin and lower or avoid operating costs, with the most economic alternatives being the two-year and seven-year acceleration of the retirement of Plant Watson Units 4 and 5, respectively, to the first quarter 2022 and the four-year acceleration of the retirement of Plant Greene County Units 1 and 2 to the third quarter 2021 and the third quarter 2022, respectively. The December 2019 update noted that Plant Daniel Units 1 and 2 currently have long-term economics similar to Plant Watson Unit 5. The Plant Greene County unit retirements would require the completion by Alabama Power of transmission and system reliability improvements, as well as agreement by Alabama Power.

On December 17, 2020, the Mississippi PSC issued an order concluding the RMP docket and requiring Mississippi Power to incorporate into its 2021 IRP a schedule of early or anticipated retirement of 950 MWs of fossil-steam generation by year-end 2027 to reduce Mississippi Power's excess reserve margin. The order stated that Mississippi Power will be allowed to defer any retirement-related costs as regulatory assets for future recovery. Mississippi Power's IRP is scheduled to be filed in April 2021.

The ultimate outcome of these matters cannot be determined at this time. See ~~Notes 7 and 9 to the financial statements~~Note 3 under "~~Southern Company Gas~~"Other Matters – ~~Equity Method Investments" and "Guarantees," respectively,~~Mississippi Power" for additional information on ~~these pipeline projects.~~Plant Daniel Units 1 and 2.

Environmental Compliance Overview Plan

In ~~August~~accordance with a 2011 accounting order from the Mississippi PSC, Mississippi Power has the authority to defer in a regulatory asset for future recovery all plant retirement- or partial retirement-related costs resulting from environmental regulations.

In 2018, the Mississippi PSC approved an annual increase in revenues related to the ECO Plan of approximately $17 million, effective with the first billing cycle for September 2018. This increase represented the maximum 2% annual increase in revenues and primarily related to the carryforward from the prior year. The increase was the result of Mississippi PSC approval of an agreement between Mississippi Power and the MPUS to settle the 2018 ECO Plan filing (ECO Settlement Agreement) and was sufficient to recover costs through 2019, including remaining amounts deferred from prior years along with the related carrying costs. In accordance with the ECO Settlement Agreement, Mississippi Power was not required to make any ECO Plan filings for 2018, 2019, and 2020, and any necessary adjustments were reflected in Mississippi Power's 2019 base rate case. The ECO Settlement Agreement contains the same terms as the 2018 PEP Settlement Agreement described herein with respect to allowed ROE and equity ratio.

In October 2019, the Mississippi PSC approved Mississippi Power's July 2019 request for a CPCN to complete certain environmental compliance projects, primarily associated with the Plant Daniel coal units co-owned 50% with Gulf Power. The total estimated cost is approximately $125 million, with Mississippi Power's share of approximately $66 million being proposed for recovery through its ECO Plan. Approximately $17 million of Mississippi Power's share is associated with ash pond closure and is reflected in Mississippi Power's ARO liabilities. See Note 6 for additional information on AROs and Note 3 under "Other Matters – Mississippi Power" for additional information on Gulf Power's ownership in Plant Daniel.

II-163

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

On February 12, 2021, Mississippi Power submitted its ECO Plan filing for 2021, which requested an annual decrease in revenues of approximately $9 million primarily due to a change in the amortization periods of certain regulatory assets and liabilities. The ultimate outcome of this matter cannot be determined at this time.

Fuel Cost Recovery

Mississippi Power annually establishes and is required to file for an adjustment to the retail fuel cost recovery factor that is approved by the Mississippi PSC. The Mississippi PSC approved an increase of $39 million effective February 2018, decreases of $35 million and $24 million effective in February 2019 and 2020, respectively, and an increase of $2 million effective in February 2021. At December 31, 2020 and 2019, over recovered retail fuel costs totaled approximately $24 million and $23 million, respectively, and were included in other current liabilities on Southern Company's balance sheets and over recovered regulatory clause liabilities on Mississippi Power's balance sheets.

Mississippi Power has wholesale MRA and Market Based (MB) fuel cost recovery factors. Effective with the first billing cycles for January 2019, 2020, and 2021, annual revenues under the wholesale MRA fuel rate increased $16 million, increased $1 million, and decreased $5 million, respectively. The wholesale MB fuel rate did not change materially in any period presented. At December 31, 2020 and 2019, over recovered wholesale fuel costs totaled approximately $10 million and $6 million, respectively, and were included in other current liabilities on Southern Company's balance sheets and over recovered regulatory clause liabilities on Mississippi Power's balance sheets.

Mississippi Power's operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, changes in the billing factor should have no significant effect on Mississippi Power's revenues or net income but will affect operating cash flows.

Ad Valorem Tax Adjustment

Mississippi Power establishes annually an ad valorem tax adjustment factor that is approved by the Mississippi PSC to collect the ad valorem taxes paid by Mississippi Power. In 2020, 2019, and 2018, the annual revenues collected through the ad valorem tax adjustment factor increased by $10 million, decreased by $2 million, and increased by $7 million, respectively. On February 12, 2021, Mississippi Power submitted its ad valorem tax adjustment factor filing for 2021, which requested an annual increase in revenues of approximately $28 million, primarily due to higher ad valorem taxes and inclusion of the ad valorem taxes previously recovered in PEP in accordance with the Mississippi Power Rate Case Settlement Agreement. The ultimate outcome of this matter cannot be determined at this time.

System Restoration Rider

Mississippi Power carries insurance for the cost of certain types of damage to generation plants and general property. However, Mississippi Power is self-insured for the cost of storm, fire, and other uninsured casualty damage to its property, including transmission and distribution facilities. As permitted by the Mississippi PSC and the FERC, Mississippi Power accrues for the cost of such damage through an annual expense accrual which is credited to regulatory liability accounts for the retail and wholesale jurisdictions. The cost of repairing actual damage resulting from such events that individually exceed $50,000 is charged to the reserve. Every three years the Mississippi PSC, the MPUS, and Mississippi Power agree on SRR revenue level(s) for the ensuing period, based on historical data, expected exposure, type and amount of insurance coverage, excluding insurance cost, and any other relevant information. The accrual amount and the reserve balance are determined based on the SRR revenue level(s). If a significant change in circumstances occurs, then the SRR revenue level can be adjusted more frequently if Mississippi Power, the MPUS, and the Mississippi PSC deem the change appropriate. The property damage reserve accrual will be the difference between the approved SRR revenues and the SRR revenue requirement. In addition, SRR allows Mississippi Power to set up a regulatory asset, pending review, if the allowable actual retail property damage costs exceed the amount in the retail property damage reserve. The SRR rate was 0 for all years presented.

On October 28, 2020, Hurricane Zeta hit the Gulf Coast of Mississippi causing major damage to Mississippi Power's transmission and distribution infrastructure and, as a result, approximately $43 million was charged to the retail property damage reserve. These costs are expected to be addressed in a subsequent SRR rate filing. The ultimate outcome of this matter cannot be determined at this time.

Mississippi Power made retail SRR annual expense accruals of $1 million in 2020, 2019, and 2018. As of December 31, 2020, the retail property damage reserve balance was $4 million.

II-164

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Deferral of Incremental COVID-19 Costs

On April 14, 2020 and May 12, 2020, in order to mitigate the economic impact of the COVID-19 pandemic on customers, the Mississippi PSC approved orders directing Mississippi Power to continue its previous, voluntary suspension of customer disconnections through May 26, 2020 and to defer as a regulatory asset all necessary and reasonable incremental costs or expenses to plan, prepare, stage, or react to protect and keep safe its employees and customers, and to reliably operate its utility system during the COVID-19 pandemic. The period over which such costs will be recovered is expected to be determined in a future PEP filing. At December 31, 2020, the incremental costs deferred totaled approximately $1 million. The ultimate outcome of this matter cannot be determined at this time.

Municipal and Rural Associations Tariff

Mississippi Power provides wholesale electric service to Cooperative Energy, East Mississippi Electric Power Association, and the City of Collins, all located in southeastern Mississippi, under a long-term, cost-based, FERC-regulated MRA tariff.

In 2017, Mississippi Power and Cooperative Energy executed, and the ~~Dalton Pipeline,~~FERC accepted, a Shared Service Agreement (SSA), as part of the MRA tariff, under which ~~serves~~Mississippi Power and Cooperative Energy will share in providing electricity to the Cooperative Energy delivery points under the tariff, effective January 1, 2018. The SSA may be cancelled by Cooperative Energy with 10 years notice. As of December 31, 2020, Cooperative Energy has the option to decrease its use of Mississippi Power's generation services under the MRA tariff up to 2.5% annually, with required notice, up to a maximum total reduction of 11%, or approximately $9 million in cumulative annual base revenues.

In May 2019, the FERC accepted Mississippi Power's requested $3.7 million annual decrease in MRA base rates effective January 1, 2019, as anagreed upon in a settlement agreement reached with its wholesale customers resolving all matters related to the Kemper County energy facility, similar to the 2018 PEP Settlement Agreement, and reflecting the impacts of the Tax Reform Legislation.

On June 25, 2020, the FERC accepted Mississippi Power's requested $2 million annual increase in MRA base rates effective June 1, 2020, as agreed upon in a settlement agreement reached with its wholesale customers.

Cooperative Energy Power Supply Agreement

Effective April 1, 2018, Mississippi Power and Cooperative Energy amended and extended a previous power supply agreement (PSA) through March 31, 2021, which was subsequently extended through May 31, 2021. The amendment increased the total capacity from 86 MWs to 286 MWs. The parties are currently negotiating a further extension of the ~~Transco pipeline system and provides additional natural gas supply to customers in Georgia, was placed in service. Southern Company Gas~~agreement. The ultimate outcome of this matter cannot be determined at this time.

Cooperative Energy also has a ~~50% ownership interest in the Dalton Pipeline. See Note 5~~10-year network integration transmission service agreement (NITSA) with SCS for transmission service to ~~the financial statements under "Joint Ownership Agreements" for additional information.~~

~~On November 16, 2018, SNG completed its purchase of Georgia~~certain delivery points on Mississippi Power's ~~natural gas lateral pipeline serving Plant McDonough Units 4~~transmission system through 6 at net book value, as approved by the Georgia PSC on January 16, 2018. SNG expects to pay $142 million to Georgia Power in the first quarter 2020. During the interim period, Georgia Power will receiveMarch 31, 2021. As a ~~discounted shipping rate to reflect the delayed consideration. Southern Company Gas' portion~~result of the ~~expected capital expenditures~~PSA amendment, Cooperative Energy and SCS also amended the terms of the NITSA, which the FERC approved, to provide for the purchase of ~~this pipeline and additional construction is $122 million.~~incremental transmission capacity from April 1, 2018 through March 31, 2021. On February 7, 2021, the NITSA was renewed for a 10-year term beginning April 1, 2021.

~~Regulatory Matters~~

Southern Company Gas

~~Utility Regulation and Rate Design~~Notes to the Financial Statements

for

The ~~natural gas distribution utilities are subject to regulations~~Southern Company and ~~oversight by their respective state regulatory agencies. Rates charged to customers vary according to customer class (residential, commercial, or industrial)~~Subsidiary Companies

Alabama Power Company

Georgia Power Company

Mississippi Power Company

Southern Power Company and rate jurisdiction. These agencies approve rates designed to provide the opportunity to generate revenues to recover all prudently-incurred costs, including a return on rate base sufficient to pay interest on debt and provide a reasonable ROE. Rate base generally consists of the original

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~Subsidiary Companies

Southern Company Gas and Subsidiary Companies ~~2018~~

Index to the Combined Notes to Financial Statements


Note		Page
1	Summary of Significant Accounting Policies	II-132
2	Regulatory Matters	II-148
3	Contingencies, Commitments, and Guarantees	II-170
4	Revenue from Contracts with Customers	II-179
5	Property, Plant, and Equipment	II-183
6	Asset Retirement Obligations	II-187
7	Consolidated Entities and Equity Method Investments	II-190
8	Financing	II-193
9	Leases	II-201
10	Income Taxes	II-208
11	Retirement Benefits	II-216
12	Stock Compensation	II-243
13	Fair Value Measurements	II-246
14	Derivatives	II-255
15	Acquisitions and Dispositions	II-265
16	Segment and Related Information	II-270

Index to Applicable Notes to Financial Statements by Registrant


Registrant			Applicable Notes
Southern Company			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16
Alabama Power			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Georgia Power			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14
Mississippi Power			1, 2, 3, 4, 5, 6, 8, 9, 10, 11, 12, 13, 14
Southern Power			1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
Southern Company Gas			1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

II-131

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~cost~~General

Southern Company is the parent company of 3 traditional electric operating companies, as well as Southern Power, Southern Company Gas, SCS, Southern Linc, Southern Holdings, Southern Nuclear, PowerSecure, and other direct and indirect subsidiaries. The traditional electric operating companies – Alabama Power, Georgia Power, and Mississippi Power – are vertically integrated utilities providing electric service in 3 Southeastern states. In January 2019, Southern Company completed the ~~utility plant~~sale of Gulf Power (another traditional electric operating company through December 31, 2018) to NextEra Energy. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy and battery energy storage projects, and sells electricity at market-based rates in ~~service, working capital, and certain other assets, less accumulated depreciation on~~ the ~~utility plant in service and net deferred income tax liabilities, and may include certain other additions or deductions.~~

~~The~~wholesale market. Southern Company Gas distributes natural gas market for Atlanta Gas Light was deregulated in 1997. Accordingly, Marketers, rather than a traditional utility, sell natural gas to end-use customers in Georgia and handle customer billing functions. The Marketers file their rates monthly with the Georgia PSC. As a result of operating in a deregulated environment, Atlanta Gas Light's role includes:

~~distributing natural gas for Marketers;~~

~~constructing, operating, and maintaining the gas system infrastructure, including responding to customer service calls and leaks;~~

~~reading meters and maintaining underlying customer premise information for Marketers; and~~

~~planning and contracting for capacity on interstate transportation and storage systems.~~

Atlanta Gas Light earns revenue by charging rates to its customers based primarily on monthly fixed charges that are set by the Georgia PSC and adjusted periodically. The Marketers add these fixed charges when billing customers. This mechanism, called a straight-fixed-variable rate design, minimizes the seasonality of Atlanta Gas Light's revenues since the monthly fixed charge is not volumetric or directly weather dependent.

~~Georgia Rate Adjustment Mechanism (GRAM)~~

In February 2017, the Georgia PSC approved GRAM and a $20 million increase in annual base rate revenues for Atlanta Gas Light, effective March 1, 2017. GRAM adjusts base rates annually, up or down, using an earnings band based on the previously approved ROE of 10.75% and does not collect revenue through special riders and surcharges. Atlanta Gas Light adjusts rates up to the lower end of the band of 10.55% and adjusts rates down to the higher end of the band of 10.95%. Various infrastructure programs previously authorized by the Georgia PSC under Atlanta Gas Light's STRIDE program including the Integrated Vintage Plastic Replacement Program (i-VPR) to replace aging plastic pipe and the Integrated System Reinforcement Program (i-SRP) to upgrade Atlanta Gas Light's distribution system and LNG facilities in Georgia continue under GRAM and the recovery of and return on the infrastructure program investments are included in annual base rate adjustments. The Georgia PSC reviews Atlanta Gas Light's performance annually under GRAM. See "~~Rate Proceedings" herein for additional information.~~

Pursuant to the GRAM approval, Atlanta Gas Light and the staff of the Georgia PSC agreed to a variation of the Integrated Customer Growth Program to extend pipeline facilities to serve customers in areas without pipeline access and create new economic development opportunities in Georgia, which was formerly part of the STRIDE program. As a result, a new tariff was created, effective October 10, 2017, to provide up to $15 million annually for Atlanta Gas Light to commit to strategic economic development projects. Projects under this tariff must be approved by the Georgia PSC.

~~PRP~~

In 2015, Atlanta Gas Light began recovering incremental PRP surcharge amounts through three phased-in increases in addition to its already existing PRP surcharge amount, which was established to address recovery of the unrecovered PRP balance of $144 million and the estimated amounts to be earned under the program through 2025. The unrecovered balance is the result of the continued revenue requirement earned under the program offset by the existing and incremental PRP surcharges. The under recovered balance at December 31, 2018 was $171 million, including $95 million of unrecognized equity return. The PRP surcharge will remain in effect until the earlier of the full recovery of the under recovered amount or December 31, 2025. See "~~Rate Proceedings" and "Unrecognized Ratemaking Amounts" herein for additional information.~~

~~With the exception of Atlanta Gas Light, the earnings of the~~ natural gas distribution utilities, ~~can be affected~~including Nicor Gas (Illinois), Atlanta Gas Light (Georgia), Virginia Natural Gas, and Chattanooga Gas (Tennessee). In 2018, Southern Company Gas sold its other natural gas utilities – Elizabethtown Gas (New Jersey), Florida City Gas, and Elkton Gas (Maryland). Southern Company Gas is also involved in several other complementary businesses including gas pipeline investments, wholesale gas services, and gas marketing services. SCS, the system service company, provides, at cost, specialized services to Southern Company and its subsidiary companies. Southern Linc provides digital wireless communications for use by ~~customer consumption patterns that~~Southern Company and its subsidiary companies and also markets these services to the public and provides fiber optics services within the Southeast. Southern Holdings is an intermediate holding company subsidiary, primarily for Southern Company's leveraged lease and other investments. Southern Nuclear operates and provides services to the Southern Company system's nuclear power plants, including Alabama Power's Plant Farley and Georgia Power's Plant Hatch and Plant Vogtle Units 1 and 2, and is currently managing construction and start-up of Plant Vogtle Units 3 and 4, which are ~~largely~~co-owned by Georgia Power. PowerSecure provides energy solutions to electric utilities and their customers in the areas of distributed generation, energy storage and renewables, and energy efficiency. See Note 15 for information regarding disposition activities, including Southern Company's sale of Gulf Power.

The Registrants' financial statements reflect investments in subsidiaries on a ~~function of weather conditions and price levels for natural gas. Specifically, customer demand substantially increases during the Heating Season when natural gas~~consolidated basis. Intercompany transactions have been eliminated in consolidation. The equity method is used for ~~heating purposes.~~investments in entities in which a Registrant has significant influence but does not have control and for VIEs where a Registrant has an equity investment but is not the primary beneficiary. 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. See "Variable Interest Entities" herein and Note 7 for additional information.

The traditional electric operating companies, Southern Power, certain subsidiaries of Southern Company Gas, ~~has various mechanisms, such as weather normalization mechanisms~~ and ~~weather derivative instruments, that limit exposure~~certain other subsidiaries are subject to ~~weather changes within typical ranges in these utilities' respective service territories.~~

~~With~~regulation by the ~~exception of Atlanta Gas Light,~~FERC, and the traditional electric operating companies and the natural gas distribution utilities are authorized by the relevant regulatory agencies in the states in which they serve to use natural gas cost recovery mechanisms that adjust rates to reflect changes in the wholesale cost of natural gas and ensure recovery of all costs prudently incurred in purchasing natural gas for customers. Since Atlanta Gas Light does not sell natural gas directly to its end-use customers, it does not utilize a traditional natural gas cost recovery mechanism. However, Atlanta Gas Light does maintain natural gas inventory for the Marketers in Georgia and recovers the cost through recovery mechanisms approved by the Georgia PSC specific to Georgia's deregulated market. In addition to natural gas recovery mechanisms, there are other cost recovery mechanisms, such as regulatory riders, which vary by utility but allow recovery of certain costs, such as those related to infrastructure replacement programs as well as environmental remediation and

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

energy efficiency plans. In traditional rate designs, utilities recover a significant portion of the fixed customer service and pipeline infrastructure costs based on assumed natural gas volumes used by customers. With the exception of Nicor Gas, the utilities have decoupled regulatory mechanisms that Southern Company Gas believes encourage conservation by separating the recoverable amount of these fixed costs from the amounts of natural gas used by customers. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Changes in the billing factor will not have a significant effect on Southern Company Gas' revenues or net income, but will affect cash flows. See Note 2 to the financial statements under "~~Southern Company Gas" for additional information.~~

~~The following table provides regulatory information for Southern Company Gas' natural gas distribution utilities:~~

Nicor Gas Atlanta Gas Light Virginia Natural Gas Chattanooga Gas
Authorized ROE^(a)(b)
9.80% 10.75% 9.50% 9.80%
Weather normalization mechanisms^(c)
ü ü
Decoupled, including straight-fixed-variable rates^(d)
ü ü
Regulatory infrastructure program rates^(e)(f)
ü
ü
Bad debt rider^(g)
ü ü ü
Energy efficiency plan^(h)
ü ü
Year of last rate decision⁽ⁱ⁾
2018 2018 2018 2018


~~(a)~~	~~Represents the authorized ROE, or the midpoint of the authorized ROE range, at December 31, 2018.~~


~~(b)~~	~~The authorized ROE range for Atlanta Gas Light and Virginia Natural Gas was 10.55% - 10.95% and 9.00% - 10.00%, respectively, at December 31, 2018.~~

~~(c)~~

Regulatory mechanisms that allow recovery of costs in the event of unseasonal weather, but are not direct offsets to the potential impacts on earnings of weather and customer consumption. These mechanisms are designed to help stabilize operating results by increasing base rate amounts charged to customers when weather is warmer than normal and decreasing amounts charged when weather is colder than normal.


~~(d)~~	~~Recovery of fixed customer service costs separately from assumed natural gas volumes used by customers.~~


~~(e)~~	~~Programs that update or expand distribution systems and LNG facilities.~~


~~(f)~~	~~Recovery of program costs at Atlanta Gas Light was incorporated in GRAM, which the Georgia PSC approved in February 2017. See "Infrastructure Replacement Programs and Capital Projects~~ – ~~Atlanta Gas Light" herein for additional information.~~


~~(g)~~	The recovery (refund) of bad debt expense over (under) an established benchmark expense. Nicor Gas, Virginia Natural Gas, and Chattanooga Gas recover the gas portion of bad debt expense through their purchased gas adjustment mechanisms.


~~(h)~~	~~Recovery of costs associated with plans to achieve specified energy savings goals.~~


~~(i)~~	~~See "Rate Proceedings" herein and Note 2 to the financial statements under "Southern Company Gas~~ – ~~Rate Proceedings" for additional information.~~

~~Infrastructure Replacement Programs and Capital Projects~~

Southern Company Gas continues to focus on capital discipline and cost control while pursuing projects and initiatives that are expected to have current and future benefits to customers, provide an appropriate return on invested capital, and help ensure the safety and reliability of the utility infrastructure. In addition to capital expenditures recovered through base rates by each of the natural gas distribution utilities, Nicor Gas and Virginia Natural Gas have separate rate riders that provide timely recovery of capital expenditures for specific infrastructure replacement programs. Total capital expenditures incurred during 2018 for gas distribution operations were $1.4 billion, including $97 million related to Elizabethtown Gas, Elkton Gas, and Florida City Gas, which were sold in 2018.

The following table and discussions provide updates on the infrastructure replacement programs and capital projects at the natural gas distribution utilities at December 31, 2018. These programs are risk-based and designed to update and replace cast iron, bare steel, and mid-vintage plastic materials or expand Southern Company Gas' distribution systems to improve reliability and meet operational flexibility and growth. The anticipated expenditures for these programs in 2019 are quantified in the discussion below.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Utility Program Recovery Expenditures in 2018 Expenditures Since Project Inception Pipe
Installed Since
Project Inception Scope of
Program Program Duration Last
Year of Program
(in millions) (miles) (miles) (years)
Nicor Gas
Investing in Illinois^(*)
Rider $ 409
$ 1,316
706
1,500
9
2023
Virginia Natural Gas Steps to Advance Virginia's Energy (SAVE and SAVE II) Rider 40
196
287
496
10
2021
Total $ 449
$ 1,512
993
1,996


~~(*)~~	~~Includes replacement of pipes, compressors, and transmission mains along with other improvements such as new meters. Scope of program miles is an estimate and~~also subject to ~~change.~~

~~Nicor Gas~~

In 2013, Illinois enacted legislation that allows Nicor Gas to provide more widespread safety and reliability enhancements to its distribution system. The legislation stipulates that rate increases to customers as a result of any infrastructure investments shall not exceed a cumulative annual average of 4.0% or, in any given year, 5.5% of base rate revenues. In 2014, the Illinois Commission approved the nine-year regulatory infrastructure program, Investing in Illinois, subject to annual review. Nicor Gas expects to place into service $373 million of qualifying projects under Investing in Illinois in 2019.

In conjunction with the base rate case order issued by the Illinois Commission on January 31, 2018, Nicor Gas is recovering program costs incurred prior to December 31, 2017 through base rates. Nicor Gas has requested that the program costs incurred subsequent to December 31, 2017, which are currently being recovered through a separate rider, be addressed in the base rate case filed November 9, 2018. See "Rate Proceedings" herein for additional information.

~~Virginia Natural Gas~~

In 2012, the Virginia Commission approved the SAVE program, an accelerated infrastructure replacement program, to be completed over a five-year period. In 2016, the Virginia Commission approved an extension to the SAVE program for Virginia Natural Gas to replace more than 200 miles of aging pipeline infrastructure and invest up to $30 million in 2016 and up to $35 million annually through 2021. Virginia Natural Gas expects to invest $35 million under this program in 2019.

The SAVE program is subject to annual review by the Virginia Commission. In conjunction with the base rate case order issued by the Virginia Commission in December 2017, Virginia Natural Gas is recovering program costs incurred prior to September 1, 2017 through base rates. Program costs incurred subsequent to September 1, 2017 are currently recovered through a separate rider and are subject to future base rate case proceedings.

~~Atlanta Gas Light~~

~~As discussed previously under "Utility Regulation and Rate Design," i-SRP and i-VPR will continue under GRAM and the recovery of and return on current and future capital investments under the STRIDE program will be included in annual base rate adjustments.~~

The orders for the STRIDE program provide for recovery of all prudent costs incurred in the performance of the program. Atlanta Gas Light will recover from end-use customers, through billings to Marketers, the costs related to the program, net of any related cost savings. The regulatory asset represents incurred program costs that will be collected through GRAM. The future expected costs to be recovered through rates related to allowed, but not incurred, costs are recognized in an unrecognized ratemaking amount that is not reflected on the balance sheets. This allowed cost is primarily the equity return on the capital investment under the program. See "~~Unrecognized Ratemaking Amounts~~"~~herein for additional information.~~

Atlanta Gas Light capitalizes and depreciates the capital expenditure costs incurred from the STRIDE programs over the life of the assets. Operations and maintenance costs are expensed as incurred. Recoveries, which are recorded as revenue, are based on a formula that allows Atlanta Gas Light to recover operations and maintenance costs in excess of those included in its current base rates, depreciation, and an allowed rate of return on capital expenditures. However, Atlanta Gas Light is allowed the recovery of carrying costs on the under recovered balance resulting from the timing difference.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Rate Proceedings~~

~~Nicor Gas~~

On January 31, 2018, the Illinois Commission approved a $137 million increase in annual base rate revenues, including $93 million related to the recovery of investments under the Investing in Illinois program, effective February 8, 2018, based on a ROE of 9.8%.

On April 19, 2018, the Illinois Commission approved Nicor Gas' variable income tax adjustment rider. This rider provides for refund or recovery of changes in income tax expense that result from income tax rates that differ from those used in Nicor Gas' last rate case. Customer refunds, via bill credits, related to the impacts of the Tax Reform Legislation from January 25, 2018 through May 4, 2018 began on July 1, 2018 and are expected to conclude in the second quarter 2019.

On May 2, 2018, the Illinois Commission approved Nicor Gas' rehearing request for revised base rates to incorporate the reduction in the federal income tax rate as a result of the Tax Reform Legislation. The resulting decrease of approximately $44 million in annual base rate revenues became effective May 5, 2018. Nicor Gas' previously-authorized capital structure and ROE of 9.80% were not addressed in the rehearing and remain unchanged.

On November 9, 2018, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $230 million increase in annual base rate revenues. The requested increase is based on a projected test year for the 12-month period ending September 30, 2020, a ROE of 10.6%, and an increase in the equity ratio from 52.0% to 54.0% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. The Illinois Commission is expected to rule on the requested increase within the 11-month statutory time limit, after which rate adjustments will be effective. The ultimate outcome of this matter cannot be determined at this time.

~~Atlanta Gas Light~~

On February 23, 2018, Atlanta Gas Light revised its annual base rate filing to reflect the impacts of the Tax Reform Legislation and requested a $16 million rate reduction in 2018. On May 15, 2018, the Georgia PSC approved a stipulation for Atlanta Gas Light's annual base rates to remain at the 2017 level for 2018 and 2019, with customer credits of $8 million in each of July 2018 and October 2018 to reflect the impacts of the Tax Reform Legislation. The Georgia PSC maintained Atlanta Gas Light's previously authorized earnings band based on a ROE between 10.55% and 10.95% and increased the allowed equity ratio by 4% to an equity ratio of 55% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. Additionally, Atlanta Gas Light is required to file a traditional base rate case on or before June 1, 2019 for rates effective January 1, 2020.

Atlanta Gas Light's recovery of the previously unrecovered PRP revenue through 2014, as well as the mitigation costs associated with the PRP that were not previously included in its rates, were included in GRAM. In connection with the GRAM approval, the last monthly PRP surcharge increase became effective March 1, 2017.

~~Virginia Natural Gas~~

On December 17, 2018, the Virginia Commission approved Virginia Natural Gas' annual information form filing, which reduced annual base rates by $14 million effective January 1, 2019 due to lower tax expense as a result of the lower corporate income tax rate and the impact of the flowback of excess deferred income taxes. This approval also requires Virginia Natural Gas to issue customer refunds, via bill credits, for the entire $14 million which was deferred as a regulatory liability, current, on the balance sheet at December 31, 2018. These customer refunds are expected to be completed in the first quarter 2019.

~~Affiliate Asset Management Agreements~~

With the exception of Nicor Gas, the natural gas distribution utilities use asset management agreements with an affiliate, Sequent, for the primary purpose of reducing utility customers' gas cost recovery rates through payments to the utilities by Sequent. For Atlanta Gas Light, these payments are controlled by the Georgia PSC and are utilized for infrastructure improvements and to fund heating assistance programs, rather than as a reduction to gas cost recovery rates. Under these asset management agreements, Sequent supplies natural gas to the utility and markets available pipeline and storage capacity to improve the overall cost of supplying gas to the utility customers. Currently, the natural gas distribution utilities primarily purchase their gas from Sequent. The purchase agreements require Sequent to provide firm gas to the natural gas distribution utilities, but these natural gas distribution utilities maintain the right and ability to make their own long-term supply arrangements if they believe it is in the best interest of their customers.

Upon closing the sales of Elizabethtown Gas and Elkton Gas, an affiliate of South Jersey Industries, Inc. assumed the asset management agreements with wholesale gas services for Elizabethtown Gas and Elkton Gas. The sale of Pivotal Utility Holdings to NextEra Energy did not impact the asset management agreement between Sequent and Florida City Gas, which will remain in

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~effect until March 31, 2019. See Note 15 to the financial statements under "Southern Company Gas~~ ~~" for additional information on these dispositions.~~

Each agreement provides for Sequent to make payments to the natural gas distribution utility through either an annual minimum guarantee within a profit sharing structure, a profit sharing structure without an annual minimum guarantee, or a fixed fee. From the inception of these agreements in 2001 through December 31, 2018, Sequent made sharing payments to the natural gas distribution utilities under these agreements totaling $425 million.

~~The following table provides payments made by Sequent to the remaining natural gas distribution utilities under these agreements during the last three years:~~

Successor Predecessor
Year Ended December 31, Year Ended December 31, July 1, 2016 through December 31, January 1, 2016
through
June 30,
2018 2017 2016 2016 Expiration Date
(in millions) (in millions)
Virginia Natural Gas $ 11
$ 6
$ 2
$ 9
March 2019
Atlanta Gas Light 9
4
1
6
March 2020
Chattanooga Gas 1
1
—
1
March 2021
Total^(*)
$ 21
$ 11
$ 3
$ 16

~~(*)~~

~~Payments made to Elizabethtown Gas, Elkton Gas, and Florida City Gas, which were sold in July 2018, were $14 million~~ ~~and~~ $12 million for the successor years ended December 31, 2018 and 2017, respectively, $3 million for the successor period of July 1, 2016 through December 31, 2016, and $13 million for the predecessor period of January 1, 2016 through June 30, 2016. See Note 15 to the financial statements under "~~Southern Company Gas" for additional information on these dispositions.~~

~~energySMART~~

The Illinois Commission approved Nicor Gas' energySMART program, which includes energy efficiency program offerings and therm reduction goals. Through December 31, 2017, Nicor Gas spent $107 million of the initial authorized expenditure of $113 million. A new program began on January 1, 2018, with an additional authorized expenditure of $160 million through 2021. Through December 31, 2018, Nicor Gas had spent $29 million.

~~Unrecognized Ratemaking Amounts~~

The following table illustrates Southern Company Gas' authorized ratemaking amounts that are not recognized on its balance sheets. These amounts are primarily composed of an allowed equity rate of return on assets associated with certain regulatory infrastructure programs. These amounts will be recognized as revenues in Southern Company Gas' financial statements in the periods they are billable to customers, the majority of which will be recovered by 2025.

December 31, 2018 December 31, 2017
(in millions)
Atlanta Gas Light $ 95
$ 104
Virginia Natural Gas 11
11
Nicor Gas 4
2
Total $ 110
$ 117

~~Income Tax Matters~~

~~Federal Tax Reform Legislation~~

In December 2017, the Tax Reform Legislation was signed into law and became effective on January 1, 2018. The Tax Reform Legislation, among other things, reduced the federal corporate income tax rate to 21%, retained normalization provisions for public utility property and existing renewable energy incentives, and repealed the corporate alternative minimum tax. In addition, under the Tax Reform Legislation, net operating losses (NOL) generated after December 31, 2017 can no longer be carried back to previous tax years but can be carried forward indefinitely, with utilization limited to 80% of taxable income of the subsequent tax year. The projected reduction of Southern Company's consolidated income tax liability resulting from the tax rate reduction

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

also delays the expected utilization of existing tax credit carryforwards. See Note 10 to the financial statements for information on Southern Company's joint consolidated income tax allocation agreement.

Following the enactment of the Tax Reform Legislation, the SEC staff issued Staff Accounting Bulletin 118 – "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provided for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes and their application under GAAP, Southern Company Gas considered all amounts recorded in the financial statements as a result of the Tax Reform Legislation "provisional" as discussed in SAB 118 and subject to revision prior to filing its 2017 tax return in the fourth quarter 2018. Southern Company Gas recognized tax benefits of $3 million and tax expense of $93 million in 2018 and 2017, respectively, for a total net tax expense of $90 million as a result of the Tax Reform Legislation. In addition, in total, Southern Company Gas recorded a $781 million increase in regulatory liabilities as a result of the Tax Reform Legislation and $4 million of stranded excess deferred tax balances in AOCI at December 31, 2017 were adjusted through retained earnings in 2018. As of December 31, 2018, Southern Company Gas considered the measurement of impacts from the Tax Reform Legislation on deferred income tax assets and liabilities, primarily due to the impact of the reduction of the corporate income tax rate, to be complete.

However, the IRS continues to issue regulations that provide further interpretation and guidance on the law and each state's adoption of the provisions contained in the Tax Reform Legislation remains uncertain. In addition, the regulatory treatment of certain impacts of the Tax Reform Legislation is subject to the discretion of the FERC and the relevant state regulatory bodies. The ultimate impact of these matters cannot be determined at this time. See Note 2 to the financial statements under "Southern Company Gas – ~~Rate Proceedings~~" for additional information on the natural gas distribution utilities' rate filings to reflect the impacts of the Tax Reform Legislation. Also see FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" herein and Note 10 to the financial statements under "~~Current and Deferred Income Taxes" for additional information.~~

~~Bonus Depreciation~~

Under the Tax Reform Legislation, projects with binding contracts prior to September 28, 2017 and placed in service after September 27, 2017 remain eligible for bonus depreciation under the PATH Act. The PATH Act allowed for 50% bonus depreciation for 2015 through 2017, 40% bonus depreciation for 2018, and 30% bonus depreciation for 2019 and certain long-lived assets placed in service in 2020. Based on provisional estimates, bonus depreciation is expected to result in positive cash flows of approximately $40 million for the 2018 tax year and approximately $20 million for the 2019 tax year. See Note 10 to the financial statements under "Current and Deferred Income Taxes" for additional information. The ultimate outcome of this matter cannot be determined at this time.

~~Other Matters~~

Southern Company Gas is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company Gas is subject to certain claims and legal actions arising in the ordinary course of business.

Southern Company Gas is involved in litigation relating to an incident that occurred in one of its prior service territories that resulted in several deaths, injuries, and property damage. Southern Company Gas has resolved all claims for personal injuries or death, but it is continuing to defend litigation seeking to recover alleged property damages. Southern Company Gas has insurance that provides full coverage of the expected financial exposure in excess of $11 million per incident. During the successor period ended December 31, 2016, Southern Company Gas recorded reserves for substantially all of its potential exposure from these cases.

The ultimate outcome of this matter and such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings 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 would have a material effect on Southern Company Gas' financial statements. See Notes 2 and 3 to the financial statements for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

Southern Company Gas owns a 50% interest in a LNG liquefaction and storage facility in Jacksonville, Florida, which was placed in service in October 2018. The facility, outfitted with a 2.0 million gallon storage tank with the capacity to produce in excess of 120,000 gallons of LNG per day, is not expected to have a material impact on Southern Company Gas' 2019 financial statements.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Company Gas retiring the cavern early. At December 31, 2018, the facility's property, plant, and equipment had a net book value of $109 million, of which the cavern itself represents approximately 20%. A potential early retirement of this cavern is dependent upon several factors including compliance with an order from the Louisiana DNR detailing the requirements to place the cavern back in service, which includes, among other things, obtaining core samples to determine the composition of the sheath surrounding the edge of the salt dome.

The cavern continues to maintain its pressures and overall structural integrity. Southern Company Gas intends to monitor the cavern and comply with the Louisiana DNR order through 2020 and place the cavern back in service in 2021. These events were considered in connection with Southern Company Gas' annual long-lived asset impairment analysis, which determined there was no impairment as of December 31, 2018. Any changes in results of monitoring activities, rates at which expiring capacity contracts are re-contracted, timing of placing the cavern back in service, or Louisiana DNR requirements could trigger impairment. Further, early retirement of the cavern could trigger impairment of other long-lived assets associated with the natural gas storage facility. The ultimate outcome of this matter cannot be determined at this time, but could have a material impact on Southern Company Gas' financial statements.

Effective January 1, 2018, Southern Company Gas conformed its paid time off policy to align with Southern Company. Under the new policy, paid time off days are vested by the employee on the first day of each year and will continue to be recovered through rates on an as-paid basis. As a result, Southern Company Gas accrued $21 million as of January 1, 2018, of which $9 million was recorded as regulatory assets by the natural gas distribution utilities. See Note 2 to the financial statements under "~~Southern Company Gas" for additional information.~~

~~ACCOUNTING POLICIES~~

~~Application of Critical Accounting Policies and Estimates~~

Southern Company Gas prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Notes 1, 5, and 6 to the financial statements. In the application of these policies, certain estimates are made that may have a material impact on Southern Company Gas' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Senior management has reviewed and discussed the following critical accounting policies and estimates with the Audit Committee of Southern Company's Board of Directors.

~~Utility Regulation~~

~~The natural gas distribution utilities comprised approximately 82% of Southern Company Gas' total operating revenues for 2018 and are subject to rate~~ regulation by their respective state PSCs or other applicable state regulatory ~~agencies, which set~~agencies. As such, the ~~rates utilities are permitted to charge customers based on allowable costs, including a reasonable ROE. As a result, the natural gas distribution utilities apply accounting standards which require the~~respective financial statements toof the applicable Registrants reflect the effects of rate ~~regulation. Through~~regulation in accordance with GAAP and comply with the ~~ratemaking process,~~accounting policies and practices prescribed by relevant state PSCs or other applicable state regulatory agencies.

The preparation of financial statements in conformity with GAAP requires the ~~regulators may require the inclusion~~use 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~~estimates, 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 has a further effect on Southern Company Gas' financial statements as a result of the estimates of allowable costs used in the ratemaking process. These estimatesactual results may differ from those ~~actually incurred by~~estimates. Certain prior years' data presented in the ~~natural gas distribution utilities; therefore,~~financial statements have been reclassified to conform to the ~~accounting estimates inherent in specific costs such as depreciation and pension and other postretirement benefits have less of a direct~~current year presentation. These reclassifications had no impact on ~~Southern Company Gas'~~the Registrants' results of operations, financial position, or cash flows.

At December 31, 2020 and/or 2019, Southern Company, Southern Power, and ~~financial condition than they would on a non-regulated company.~~

~~As reflected in Note 2 to the financial statements under "~~Southern Company Gas – ~~Regulatory Assets and Liabilities," significant regulatory~~ each had assets and liabilities ~~have been recorded. Management reviews~~held for sale on their balance sheets. Unless otherwise noted, the ~~ultimate recoverability of these regulatory assets~~disclosures herein related to specific asset and ~~any requirement to refund these regulatory liabilities based on applicable regulatory guidelines~~liability balances at December 31, 2020 and ~~GAAP. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory~~2019 exclude assets and liabilities ~~and could adversely impact Southern Company Gas' financial statements.~~

~~Accounting~~held for ~~Income Taxes~~

~~The consolidated income tax provision and deferred income tax~~sale. See Note 15 under "Assets Held for Sale" for additional information including major classes of assets and liabilities classified as ~~well as any unrecognized tax benefits and valuation allowances, require significant judgment and estimates. These estimates are supported~~held for sale by historical tax return data, reasonable projections of taxable income, 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 many states in which Southern Company, ~~Gas operates.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

Southern Power, and Southern Company ~~Gas and Subsidiary Companies 2018 Annual Report~~Gas.

On behalf of Southern Company Gas, Southern Company files a consolidated federal income tax return and 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 no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. Certain deductions and credits can be limited at the consolidated or combined level resulting in NOL and tax credit carryforwards that would not otherwise result on a stand-alone basis. Utilization of NOL carryforwards and the assessment of valuation allowances are based on significant judgment and extensive analysis of Southern Company Gas', as well as Southern Company's, current financial position and result of operations, including currently available information about future years, to estimate when future taxable income will be realized.

Current and deferred state income tax liabilities and assets are estimated based on laws of multiple states that determine the income to be apportioned to their jurisdictions. States utilize various formulas to calculate the apportionment of taxable income, primarily using sales, assets, or payroll within the jurisdiction compared to the consolidated totals. In addition, each state varies as to whether a stand-alone, combined, or unitary filing methodology is required. The calculation of deferred state taxes considers apportionment factors and filing methodologies that are expected to apply in future years. The apportionments and methodologies which are ultimately finalized in a manner inconsistent with expectations could have a material effect on Southern Company Gas' financial statements.

Given the significant judgment involved in estimating NOL carryforwards and tax credit carryforwards and multi-state apportionments, Southern Company Gas considers state deferred income tax liabilities and assets to be critical accounting estimates.

~~Assessment of Assets~~

~~Goodwill~~

Southern Company Gas does not amortize its goodwill, but tests it annually for impairment at the reporting unit level during the fourth quarter or more frequently if impairment indicators arise. These indicators include, but are not limited to, a significant change in operating performance, the business climate, legal or regulatory factors, or a planned sale or disposition of a significant portion of the business. A reporting unit is the operating segment, or a business one level below the operating segment (a component), if discrete financial information is prepared and regularly reviewed by management. Components are aggregated if they have similar economic characteristics.

As part of Southern Company Gas' impairment test, Southern Company Gas may perform an initial qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount before applying the quantitative goodwill impairment test. If Southern Company Gas elects to perform the qualitative assessment, it evaluates relevant events and circumstances, including but not limited to, macroeconomic conditions, industry and market conditions, cost factors, financial performance, entity specific events, and events specific to each reporting unit. If Southern Company Gas determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or it elects not to perform a qualitative assessment, it compares the fair value of the reporting unit to its carrying value to determine if the fair value is greater than its carrying value. Under ASU No. 2017-04, which was adopted effective January 1, 2018, any goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value.

For the 2018 and 2016 annual impairment tests, Southern Company Gas performed the qualitative assessment and determined that it was more likely than not that the fair value of all of its reporting units with goodwill exceeded their carrying amounts, and therefore no quantitative analysis was required. For the 2017 annual impairment test, Southern Company Gas performed the quantitative assessment, which resulted in the fair value of all of its reporting units that have goodwill exceeding their carrying value. In the first quarter 2018, Southern Company Gas recorded a $42 million impairment charge in contemplation of the sale of Pivotal Home Solutions.

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, Southern Company Gas considers these estimates to be critical accounting estimates.

~~See Note 1 to the financial statements under "~~Recently Adopted Accounting Standards – ~~Other" for information on Southern Company Gas' adoption of ASU No. 2017-04.~~

~~Long-Lived Assets~~

Southern Company Gas depreciates or amortizes its long-lived and intangible assets over their estimated useful lives. Southern Company Gas assesses its long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. When such events or circumstances are present, Southern Company Gas

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~assesses~~Effective January 1, 2019, the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected future cash flows. Impairment is indicated if the carrying amount of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If impairment is indicated, Southern Company Gas records an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset.

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, Southern Company Gas considers these estimates to be critical accounting estimates.

~~See Notes 2 and 3 to the financial statements under "FERC Matters – Southern Company Gas" and "Other Matters~~ – ~~Southern Company Gas," respectively, for information on certain assets recently evaluated for impairment.~~

~~Derivatives and Hedging Activities~~

Determining whether a contract meets the definition of a derivative instrument, contains an embedded derivative requiring bifurcation, or qualifies for hedge accounting treatment is complex. The treatment of a single contract may vary from period to period depending upon accounting elections, changes in Southern Company Gas' assessment of the likelihood of future hedged transactions, or new interpretations of accounting guidance. As a result, judgment is required in determining the appropriate accounting treatment. In addition, the estimated fair value of derivative instruments may change significantly from period to period depending upon market conditions, and changes in hedge effectiveness may impact the accounting treatment.

Derivative instruments (including certain derivative instruments embedded in other contracts) are recorded on the balance sheets as either assets or liabilities measured at their fair value. If the transaction qualifies for, and is designated as, a normal purchase or normal sale, it is exempted from fair value accounting treatment and is, instead, subject to traditional accrual accounting. Southern Company Gas utilizes market data or assumptions that market participants would use in pricing the derivative asset or liability, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

Changes in the derivatives' fair value are recognized concurrently in earnings unless specific hedge accounting criteria are met. If the derivatives meet those criteria, derivative gains and losses offset related results of the hedged item in the income statement in the case of a fair value hedge, or gains and losses are recorded in OCI on the balance sheets until the hedged transaction affects earnings in the case of a cash flow hedge. Additionally, a company is required to formally designate a derivative as a hedge as well as document and assess the effectiveness of derivatives associated with transactions that receive hedge accounting treatment.

Nicor Gas utilizes derivative instruments to hedge the price risk for the purchase of natural gas for customers. These derivatives are reflected at fair value and are not designated as accounting hedges. Realized gains or losses on such instruments are included in the cost of gas delivered and are passed through directly to customers, subject to review by the applicable state regulatory agencies, and therefore have no direct impact on earnings. Unrealized changes in the fair value of these derivative instruments are deferred as regulatory assets or liabilities. Prior to its disposition, Elizabethtown Gas utilized the same policy.

Southern Company Gas uses derivative instruments primarily to reduce the impact to its results of operations due to the risk of changes in the price of natural gas and to a lesser extent Southern Company Gas hedges against warmer-than-normal weather and interest rates. The fair value of natural gas derivative instruments used to manage exposure to changing natural gas prices reflects the estimated amounts that Southern Company Gas would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. For derivatives utilized at gas marketing services and wholesale gas services that are not designated as accounting hedges, changes in fair value are reported as gains or losses in Southern Company Gas' results of operations in the period of change. Gas marketing services records derivative gains or losses arising from cash flow hedges in OCI and reclassifies them into earnings in the same period that the underlying hedged item is recognized in earnings.

Southern Company Gas classifies derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The determination of the fair value of the derivative instruments incorporates various required factors. These factors include:

~~the creditworthiness of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit);~~

~~events specific to a given counterparty; and~~

~~the impact of Southern Company Gas' nonperformance risk on its liabilities.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

If there is a significant change in the underlying market prices or pricing assumptions Southern Company Gas uses in pricing its derivative assets or liabilities, Southern Company Gas may experience a significant impact on its financial position, results of operations, and cash flows. See Note 14 to the financial statements for additional information.

~~Given the assumptions used in pricing the derivative asset or liability, Southern Company Gas considers the valuation of derivative assets and liabilities a critical accounting estimate. See~~ ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Market Price Risk" herein for more information.~~

~~Pension and Other Postretirement Benefits~~

Southern Company Gas' calculation of pension and other postretirement benefits expense is dependent on a number of assumptions. These assumptions include discount rates, healthcare cost trend rates, expected long-term return 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 Southern Company Gas believes that the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect its pension and other postretirement benefit costs and obligations.

Key elements in determining Southern Company Gas' pension and other postretirement benefit expense are the expected long-term return on plan assets and the discount rate used to measure the benefit plan obligations and the periodic benefit plan expense for future periods. The expected long-term return on pension and other postretirement benefit plan assets is based on Southern Company's investment strategy, historical experience, and expectations for long-term rates of return that consider external actuarial advice. Southern Company determines the long-term return on plan assets by applying the long-term rate of expected returns on various asset classes to Southern Company's target asset allocation. For purposes of determining Southern Company Gas' liability related to the pension and other postretirement benefit plans, Southern Company discounts the future related cash flows using a single-point discount rate developed from the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to expected benefit payments.

A 25 basis point change in any significant assumption (discount rate, salary increases, or long-term rate of return on plan assets) would result in a $3 million or less change in total annual benefit expense, a $30 million or less change in the projected obligation for the pension plan, and a $6 million or less change in the projected obligation for other post retirement benefit plans.

~~See Note 11 to the financial statements for additional information regarding pension and other postretirement benefits.~~

~~Contingent Obligations~~

Southern Company Gas is subject to a number of federal and state laws and regulations as well as other factors and conditions that subject it 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. Southern Company Gas periodically evaluates its exposure to such risks and records 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 Southern Company Gas' results of operations, cash flows, or financial condition.

~~Recently Issued Accounting Standards~~

~~See Note 1 to the financial statements under "Recently Adopted Accounting Standards" for additional information.~~

~~In 2016, the FASB issued~~Registrants adopted ASU No. 2016-02, Leases (Topic 842) ~~(ASU~~(ASU 2016-02). ASU 2016-02 ~~requires~~required lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also ~~changes~~changed the recognition, measurement, and presentation of expense associated with leases and ~~provides~~provided clarification regarding the identification of certain components of contracts that would represent a lease. Lessor accounting was relatively unchanged and there was no change to the accounting for existing leveraged leases. See Note 9 for additional information and related disclosures.

II-132

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Affiliate Transactions

The ~~accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018~~traditional electric operating companies, Southern Power, and Southern Company Gas ~~adopted~~have agreements with SCS under which certain of the ~~new standard effective January 1, 2019.~~

following services are rendered to them at direct or allocated cost: general executive and advisory, general and design engineering, operations, purchasing, accounting, finance, treasury, legal, tax, information technology, marketing, auditing, insurance and pension administration, human resources, systems and procedures, digital wireless communications, cellular tower space, and other services with respect to business and operations, construction management, and Southern Company ~~Gas elected~~power pool transactions. These costs are primarily included in other operations and maintenance expenses or capitalized to property, plant, and equipment. Costs for these services from SCS in 2020, 2019, and 2018 were as follows:


	Alabama Power		Georgia Power		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	478	$	639	$	149	$	87	$	237
2019	527		704		118		90		183
2018	508		653		104		98		194

Alabama Power and Georgia Power also have agreements with Southern Nuclear under which Southern Nuclear renders the ~~transition methodology provided~~following nuclear-related services at cost: general executive and advisory services; general operations, management, and technical services; administrative services including procurement, accounting, employee relations, systems, and procedures services; strategic planning and budgeting services; other services with respect to business and operations; and, for Georgia Power, construction management. These costs are primarily included in other operations and maintenance expenses or capitalized to property, plant, and equipment. Costs for these services in 2020, 2019, and 2018 amounted to $262 million, $256 million, and $247 million, respectively, for Alabama Power and $883 million, $760 million, and $780 million, respectively, for Georgia Power. See Note 2 under "Georgia Power – Nuclear Construction" for additional information regarding Southern Nuclear's construction management of Plant Vogtle Units 3 and 4 for Georgia Power.

Cost allocation methodologies used by ~~ASU No. 2018-11,~~ ~~Leases (Topic 842): Targeted Improvements, whereby~~SCS and Southern Nuclear prior to the ~~requirements of ASU 2016-02 are applied on a prospective basis as~~repeal of the ~~adoption date~~Public Utility Holding Company Act of ~~January 1, 2019, without restating prior periods.~~1935, as amended, were approved by the SEC. Subsequently, additional cost allocation methodologies have been reported to the FERC and management believes they are reasonable. The FERC permits services to be rendered at cost by system service companies.

Alabama Power's and Georgia Power's power purchases from affiliates through the Southern Company ~~Gas elected~~power pool are included in purchased power, affiliates on their respective statements of income. Mississippi Power's and Southern Power's power purchases from affiliates through the package of practical expedients provided by ASU 2016-02 that allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. Additionally, Southern Company ~~Gas applied the use-of-hindsight practical expedient~~power pool are included in ~~determining lease terms~~purchased power on their respective statements of income and were as follows:


	Mississippi Power		Southern Power
	(in millions)
2020	$	4	$	8
2019	3		14
2018	15		41

Georgia Power has entered into several PPAs with Southern Power for capacity and energy. Georgia Power's total expenses associated with these PPAs were $141 million, $177 million, and $216 million in 2020, 2019, and 2018, respectively. Southern Power's total revenues from all PPAs with Georgia Power, included in wholesale revenue affiliates on Southern Power's consolidated statements of ~~the date of adoption~~income, were $139 million, $174 million, and ~~elected the practical expedient that allows existing land easements not previously~~$215 million for 2020, 2019, and 2018, respectively. Included within these revenues were affiliate PPAs accounted for as operating leases, ~~not to be reassessed. Southern Company Gas also made accounting policy elections to account~~which totaled $115 million, $116 million, and $65 million for 2020, 2019, and 2018, respectively. See Note 9 for additional information.

II-133

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

SCS (as agent for ~~short-term leases in all asset classes as off-balance sheet leases~~Alabama Power, Georgia Power, and ~~combined lease~~Southern Power) and ~~non-lease components in the computations of lease obligations and right-of-use assets for most asset classes.~~

Southern Company Gas completed the implementation of a new application to track and account for its leases and updated its internal controls and accounting policies to support the accounting for leases under ASU 2016-02. Southern Company Gas completed its lease inventory and determined its most significant leases involve real estate and fleet vehicles. In the first quarter 2019, the adoption of ASU 2016-02 resulted in recording lease liabilities and right-of-use assets on Southern Company Gas' balance sheet each totaling $86 million, with no impact on Southern Company Gas' statement of income.

~~FINANCIAL CONDITION AND LIQUIDITY~~

~~Overview~~

Southern Company Gas' financial condition remained stable at December 31, 2018. Southern Company Gas' cash requirements primarily consist of funding ongoing operations, common stock dividends, capital expenditures, investments in unconsolidated subsidiaries, and debt maturities. Capital expenditures and other investing activities include investments to meet projectedhave long-term ~~demand requirements, to maintain existing~~interstate natural gas ~~distribution systems as well as~~transportation agreements with SNG that are governed by the terms and conditions of SNG's natural gas tariff and are subject to update and expand these systems, and to comply with environmental regulations. Operating cash flows provide a substantial portion of Southern Company Gas' cash needs. For the three-year period from 2019 through 2021, Southern Company Gas' projected common stock dividends, capital expenditures, and debt maturities are expected to exceed operating cash flows. Southern Company Gas plans to finance future cash needs in excess of its operating cash flows primarily through external securities issuances, equity contributions from Southern Company, and borrowings from financial institutions. Southern Company Gas plans to use commercial paper to manage seasonal variations in operating cash flows and other working capital needs. Southern Company Gas intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See "~~Sources of Capital," "Financing Activities," and "Capital Requirements and Contractual Obligations" herein for additional information.~~

By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. At December 31, 2018, the amount of subsidiary retained earnings restricted to dividend totaled $814 million. 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.

Southern Company Gas' investments in the qualified pension plan decreased in value at December 31, 2018 as compared to December 31, 2017. There were no voluntary contributions to the qualified pension plan in 2018 and no mandatory contributions to its qualified pension plan are anticipated during 2019.FERC regulation. See Note ~~11 to the financial statements for additional information.~~

Net cash provided from operating activities in the successor year ended 2018 totaled $764 million, a decrease of $117 million from 2017. The decrease was primarily due to higher income tax payments as a result of net taxable gains from the Southern Company Gas Dispositions, partially offset by increased volumes of natural gas sold during 2018 as a result of colder weather compared to 2017. Net cash provided from operating activities totaled $881 million for 2017, primarily due to earnings and the timing of cash receipts for the sale of natural gas inventory and vendor payments. Net cash used for operating activities was $327 million for the successor period of July 1, 2016 through December 31, 2016, primarily due to a $125 million voluntary pension contribution, a $35 million payment for the settlement of an interest rate swap, and less cash due to the timing of collecting receivables and disbursing payables. Due to the seasonal nature of its business, Southern Company Gas typically reports negative cash flows from operating activities in the second half of the year. Net cash provided from operating activities was $1.1 billion for the predecessor period of January 1, 2016 through June 30, 2016, primarily due to low volumes of natural gas sales and changes in natural gas inventory as a result of warmer weather and the timing of recovery of related gas costs and weather normalization adjustments from customers.

Net cash provided from investing activities for the successor year ended 2018 totaled $1.0 billion and was primarily due to the $2.6 billion proceeds from the Southern Company Gas Dispositions, partially offset by gross property additions primarily related to utility capital expenditures and pre-approved rider and infrastructure investments recovered through replacement programs at gas distribution operations as well as capital contributed to equity method pipeline investments partially offset by capital returned from equity method pipeline investments. Net cash used for investing activities totaled $1.6 billion for the successor year ended 2017, which reflected $1.5 billion in capital expenditures primarily due to gross property additions for infrastructure replacement programs at gas distribution operations and $145 million in capital contributions to equity method pipeline investments, partially offset by $80 million in capital returned from equity method pipeline investments. Net cash used for investing activities was $2.1 billion for the successor period of July 1, 2016 through December 31, 2016, which reflected

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

$1.4 billion primarily related to Southern Company Gas' acquisition of the 50% interest in SNG, and $632 million in capital expenditures. Net cash used for investing activities was $556 million for the predecessor period of January 1, 2016 through June 30, 2016 which primarily related to capital expenditures. See Note 7 ~~to the financial statements under "Southern Company Gas" and Note 15 to the financial statements~~ under "Southern Company Gas – ~~Investment~~Equity Method Investments" for additional information. Transportation costs under these agreements in ~~SNG"~~2020, 2019, and 2018 were as follows:


	Alabama Power		Georgia Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	15	$	108	$	29	$	29
2019	17		99		28		31
2018	8		101		25		32


	Georgia Power		Southern Power
	(in millions)
2020	$	0	$	26
2019	4		64
2018	21		119

~~Net cash used~~The traditional electric operating companies each have agreements with Gulf Power. Alabama Power previously made transmission system upgrades to ensure firm delivery of energy under a non-affiliate PPA from the Central Alabama Generating Station, and, under a related tariff, received $11 million from Gulf Power in 2018. Gulf Power owns a 25% portion of Plant Scherer Unit 3. Georgia Power operates Plant Scherer Unit 3 and Gulf Power reimburses Georgia Power for ~~financing activities for~~its 25% proportionate share of the successor year ended 2018 of $1.8 billion included payments of common stock dividends to Southern Company, return of capital to Southern Company, redemptions of gas facility revenue bonds and senior notes, and repayments of commercial paper borrowings and long-term debt, partially offset by debt issuances and capital contributions from Southern Company. Net cash provided from financing activitiesrelated non-fuel expenses, which totaled ~~$741 million for 2017, primarily due to $850~~$8 million in ~~debt issuances, $262~~2018. Gulf Power also owns a 50% portion of Plant Daniel Units 1 and 2. Mississippi Power operates Plant Daniel and Gulf Power reimburses Mississippi Power for its proportionate share of all associated non-fuel operations and maintenance expenses, which totaled $31 million in net additional commercial paper borrowings, and $103 million in capital contributions from Southern Company, partially offset by $443 million in common stock dividend payments to Southern Company and $22 million in repayment of long-term debt. Net cash provided from financing activities was $2.4 billion for the successor period of July 1, 2016 through December 31, 2016, which reflected $1.1 billion of capital contributions from Southern Company, primarily used to fund Southern Company Gas' investment in SNG, $1.1 billion in net additional commercial paper borrowings, partially offset by $160 million for the purchase of the 15% noncontrolling ownership interest in SouthStar, and $900 million in proceeds from debt issuances, partially offset by $420 million in debt payments. Net cash used for financing activities was $558 million for the predecessor period of January 1, 2016 through June 30, 2016, primarily due to $896 million in net repayment of commercial paper borrowings and $125 million in repayment of long-term debt, partially offset by $600 million in debt issuances.2018. See Note ~~7 to the financial statements~~5 under ~~"Southern Company Gas"~~"Joint Ownership Agreements" and Note 15 ~~to the financial statements~~ under "Southern ~~Company Gas – Investment in SNG"~~Company" and "Alabama Power" for additional information.

~~Significant balance sheet changes at December 31, 2018 include $2.8 billion~~Alabama Power and ~~$403~~Georgia Power each have agreements with PowerSecure for equipment purchases and/or services related to utility infrastructure construction, distributed energy, and energy efficiency projects. Alabama Power's costs for these services were immaterial for 2020 and totaled $7 million and $24 million in ~~total assets~~2019 and ~~liabilities sold, respectively, associated~~2018, respectively. Georgia Power's costs for these equipment purchases and services totaled approximately $11 million in 2020 and were immaterial for the other periods presented.

Southern Power has several agreements with SCS for transmission services, which are billed to Southern Power based on the Southern Company ~~Gas Dispositions~~Open Access Transmission Tariff as ~~described~~filed with the FERC. Transmission services purchased by Southern Power from SCS totaled $15 million, $15 million, and $12 million for 2020, 2019, and 2018, respectively, and were charged to other operations and maintenance expenses in Southern Power's consolidated statements of income.

The traditional electric operating companies and Southern Power may jointly enter into various types of wholesale energy, natural gas, and certain other contracts, either directly or through SCS as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. See Note ~~15 to the financial statements herein~~14 under "Southern Company Gas." After adjusting for these changes, other significant balance sheet changes included an increase of $1.0 billion in total property, plant, and equipment primarily due to capital expenditures for infrastructure replacement programs, a decrease of $73 million in accumulated deferred income tax liabilities primarily due to the change in the federal corporate income tax rate, partially offset by tax depreciation related to infrastructure assets placed in service, as well as the impacts of State of Illinois tax legislation, and a decrease of $108 million in long-term debt (including securities due within one year), primarily due to $200 million redemption of gas facility revenue bonds and $155 million in repayments of long-term debt, partially offset by the issuance of $300 million of first mortgage bonds at Nicor Gas. Other significant balance sheet changes include a decrease of $868 million in notes payable primarily related to a decrease in commercial paper borrowings of $840 million at Southern Company Gas Capital and $28 million at Nicor Gas. See ~~FUTURE EARNINGS POTENTIAL~~ ~~– "Income Tax Matters" and~~ ~~FINANCIAL CONDITION AND LIQUIDITY~~ ~~– "Financing Activities" herein and Notes 8 and 10 to the financial statements~~"Contingent Features" for additional information.

~~Sources~~

II-134

Table of ~~Capital~~ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas plans~~and Subsidiary Companies 2020 Annual Report

Southern Power and the traditional electric operating companies generally settle amounts related to ~~obtain~~ the ~~funds to meet its future capital needs from sources similar to those used~~above transactions on a monthly basis in the ~~past, which were primarily from~~month following the performance of such services or the purchase or sale of electricity. See "Revenues – Southern Power" herein for additional information.

The traditional electric operating ~~cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from~~companies, Southern Company. However, the amount, type, and timing of any future financings, if needed, depend upon prevailing market conditions, regulatory approval, and other factors. With respect to the public offering of securities, Southern Company Gas (excluding its subsidiaries)Power, and Southern Company Gas ~~Capital file registration statements with~~provide incidental services to and receive such services from other Southern Company subsidiaries which are generally minor in duration and amount. Except as described herein, the ~~SEC under the Securities Act of 1933, as amended. The issuance of securities by Nicor Gas is generally subject to the approval of the Illinois Commission.~~

traditional electric operating companies, Southern Power, and Southern Company Gas ~~obtains separate financing without credit support~~neither provided nor received any material services to or from affiliates in any ~~affiliate~~year presented.

Regulatory Assets and Liabilities

In the event that a portion of a traditional electric operating company's or a natural gas distribution utility's operations is no longer subject to applicable accounting rules for rate regulation, such company would be required to write off to income or reclassify to AOCI related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the traditional electric operating company or the natural gas distribution utility would be required to determine if any impairment to other assets, including plant, exists and write down the assets, if impaired, to their fair values. All regulatory assets and liabilities are to be reflected in rates. See Note 2 for additional information including details of regulatory assets and liabilities reflected in the balance sheets for Southern Company, ~~system.~~the traditional electric operating companies, and Southern Company Gas.

Revenues

Traditional Electric Operating Companies

Wholesale capacity revenues from PPAs are recognized in amounts billable under the contract terms. Energy and other revenues are generally recognized as services are provided. The contracts for capacity and energy in a wholesale PPA have multiple performance obligations where the contract's total transaction price is allocated to each performance obligation based on the standalone selling price. The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, the traditional electric operating companies recognize revenue as the performance obligations are satisfied over time as electricity is delivered to the customer or as generation capacity is available to the customer.

Southern Power

II-135

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~system does not maintain~~and Subsidiary Companies 2020 Annual Report

are recognized on a ~~centralized cash~~straight-line basis over the term of the agreement. Energy revenues are recognized in the period the energy is delivered.

Southern Power's non-lease contracts commonly include capacity and energy which are considered separate performance obligations. In these contracts, the total transaction price is allocated to each performance obligation based on the standalone selling price. The standalone selling price is primarily determined by the price charged to customers for the specific goods or ~~money pool. Therefore, except~~services transferred with the performance obligations. Generally, Southern Power recognizes revenue as ~~described below, funds~~the performance obligations are satisfied over time, as electricity is delivered to the customer or as generation capacity is made available to the customer.

Southern Power generally has a right to consideration in an amount that corresponds directly with the value to the customer of the performance completed to date and may recognize revenue in the amount to which the entity has a right to invoice. Payment for goods and services rendered is typically due in the subsequent month following satisfaction of Southern Power's performance obligation.

When multiple contracts exist with the same counterparty, the revenues from each contract are accounted for as separate arrangements.

Southern Company Gas

Gas Distribution Operations

Southern Company Gas records revenues when goods or services are provided to customers. Those revenues are based on rates approved by the state regulatory agencies of the natural gas distribution utilities. Atlanta Gas Light operates in a deregulated natural gas market whereby Marketers, rather than a traditional utility, sell natural gas to end-use customers in Georgia and handle customer billing functions. As required by the Georgia PSC, Atlanta Gas Light bills Marketers in equal monthly installments for each residential, commercial, and industrial end-use customer's distribution costs as well as for capacity costs utilizing a seasonal rate design for the calculation of each residential end-use customer's annual straight-fixed-variable charge, which reflects the historic volumetric usage pattern for the entire residential class.

The majority of the revenues of Southern Company Gas are ~~not commingled~~generated from contracts with ~~funds of any other company in~~natural gas distribution customers. Revenues from this integrated service to deliver gas when and if called upon by the ~~Southern Company system.~~customer are recognized as a single performance obligation satisfied over time and are recognized at a tariff rate as gas is delivered to the customer during the month.

The standalone selling price is primarily determined by the price charged to customers for the specific goods or services transferred with the performance obligations. Generally, Southern Company Gas maintains commercial paper programs at Southern Company Gas Capital and Nicor Gas that consist of short-term, unsecured promissory notes. Nicor Gas' commercial paper program supports its working capital needsrecognizes revenue as ~~Nicor Gas~~the performance obligations are satisfied over time as natural gas is ~~not permitted to make money pool loans to affiliates. All of Southern Company Gas' other subsidiaries benefit from Southern Company Gas Capital's commercial paper program.~~

At December 31, 2018, Southern Company Gas' current liabilities exceeded current assets by $469 million, primarily as a result of $650 million in notes payable and $357 million of securities due within one year. Southern Company Gas' current liabilities frequently exceed current assets because of commercial paper borrowings used to fund daily operations, scheduled maturities of long-term debt, and significant seasonal fluctuations in cash needs.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~At December 31, 2018, Southern Company Gas had $64 million of cash and cash equivalents. Committed credit arrangements with banks at December 31, 2018 were as follows:~~

Company Expires 2022 Unused
(millions)
Southern Company Gas Capital^(a)
$ 1,400
$ 1,395
Nicor Gas 500
500
Total^(b)
$ 1,900
$ 1,895

~~(a)Southern Company Gas guarantees the obligations of Southern Company Gas Capital.~~

~~(b)Pursuant~~delivered to the ~~credit arrangement, the allocations between Southern Company Gas Capital~~customer. The performance obligations related to wholesale gas services are satisfied, and ~~Nicor Gas may be adjusted.~~

~~See Note 8~~revenue is recognized, at a point in time when natural gas is delivered to the ~~financial statements under "Bank Credit Arrangements" for additional information.~~

The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas (Facility) contains a covenant that limits the debt levels and contains a cross-acceleration provision to other indebtedness (including guarantee obligations) of the applicable company. Such cross-acceleration provision to other indebtedness would trigger an event of default of the applicable company if Southern Company Gas or Nicor Gas defaulted on indebtedness, the payment of which was then accelerated. At December 31, 2018, both companies were in compliance with such covenant. The Facility does not contain a material adverse change clause at the time of borrowings.

Subject to applicable market conditions, the applicable company expects to renew or replace the Facility as needed, prior to expiration. In connection therewith, the applicable company may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of unused credit with banks provides liquidity support to Southern Company Gas.customer.

Southern Company Gas has ~~substantial cash flow from operating activities and access~~elected to ~~capital markets, including~~recognize revenue for sales of gas using the ~~commercial paper programs, and financial institutions~~invoice practical expedient as it generally has a right to ~~meet liquidity needs. Southern Company Gas makes short-term borrowings primarily through commercial paper programs~~consideration in an amount that ~~have~~corresponds directly with the ~~liquidity support~~value to the customer of the ~~committed bank credit arrangements described above. Short-term borrowings are included in notes payable~~performance completed to date and that may be invoiced. Payment for goods and services rendered is typically due in the ~~balance sheets.~~

~~Table~~subsequent month following satisfaction of ~~ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Details of short-term borrowings were as follows:~~

Short-term Debt at the End of the Period
Short-term Debt During the Period^(*)
Amount
Outstanding Weighted Average Interest Rate Average
Amount Outstanding Weighted Average Interest Rate Maximum
Amount
Outstanding
(in millions) (in millions) (in millions)
Successor – December 31, 2018:
Commercial paper:
Southern Company Gas Capital $ 403
3.05 % $ 489
2.25 % $ 1,261
Nicor Gas 247
2.98 % 123
2.16 % 275
Short-term bank debt:
Southern Company Gas Capital —
— % 31
2.72 % 276
Total $ 650
3.03 % $ 643
2.25 %

Successor – December 31, 2017:
Commercial paper:
Southern Company Gas Capital $ 1,243
1.73 % $ 723
1.40 % $ 1,243
Nicor Gas 275
1.83 % 176
1.12 % 525
Total $ 1,518
1.75 % $ 899
1.35 %

Successor – December 31, 2016:
Commercial paper:
Southern Company Gas Capital $ 733
1.09 % $ 461
0.79 % $ 770
Nicor Gas 524
0.95 % 309
0.67 % 587
Total $ 1,257
1.03 % $ 770
0.74 %


~~(*)~~	~~Average and maximum amounts are based upon daily balances during the 12-month periods.~~

~~Southern Company Gas believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.~~

~~Financing Activities~~

~~The long-term debt on~~ Southern Company Gas' ~~balance sheets includes both principal and non-principal components. At December 31, 2018,~~performance obligation.

With the ~~non-principal components totaled $456 million, including the amount attributable to long-term debt due within one year, which consisted~~exception of ~~the unamortized portions of the fair value adjustment recorded in purchase accounting, debt premiums, debt discounts, and debt issuance costs.~~

In December 2016, Southern Company Gas executed intercompany promissory notes to further allocate interest expense to its reportable segments that previously remained in the "all other" segment. These intercompany promissory notes allow Southern Company Gas to calculate net income, which is its performance measure subsequent to the Merger, at the segment level that incorporates the full impact of interest costs.

Except as otherwise described herein, Southern Company Gas and its subsidiaries used the proceeds of debt issuances for their redemptions and maturities, to pay common stock dividends, to repay short-term indebtedness, for capital expenditures, and for general corporate purposes, including working capital.

In January 2018, Southern Company Gas issued a floating rate promissory note to Southern Company in an aggregate principal amount of $100 million bearing interest based on one-month LIBOR. In March 2018, Southern Company Gas repaid this promissory note.

Prior to its sale, in the second quarter 2018, Pivotal Utility Holdings caused $200 million aggregate principal amount of gas facility revenue bonds to be redeemed. Also in the second quarter 2018, Pivotal Utility Holdings, as borrower, and Southern Company Gas, as guarantor, entered into a $181 million short-term delayed draw floating rate bank term loan bearing interest

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~based on one-month LIBOR, which Pivotal Utility Holdings used to repay the gas facility revenue bonds. In July 2018, Pivotal Utility Holdings repaid this short-term loan.~~

~~Nicor Gas issued $300 million aggregate principal amount of first mortgage bonds in a private placement, of which $100 million was issued in August 2018 and $200 million was issued in November 2018.~~

~~In October 2018, Southern Company Gas Capital repaid at maturity $155 million aggregate principal amount of 3.50% Series B Senior Notes.~~

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company Gas plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

~~Credit Rating Risk~~

~~Southern Company Gas does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.~~

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change below BBB- and/or Baa3. These contracts are for physical gas purchases and sales and energy price risk management. The maximum potential collateral requirement under these contracts at December 31, 2018 was $30 million.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Company Gas to access capital markets and would be likely to impact the cost at which it does so.

On September 28, 2018, Fitch assigned a negative rating outlook to the ratings of Southern Company and certain of its subsidiaries (including Southern Company Gas, Southern Company Gas Capital, and Nicor Gas).

As a result of the Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the credit rating agencies to assess Southern Company and its subsidiaries, including Southern Company Gas, may be negatively impacted. Southern Company Gas and its regulated subsidiaries have taken actions to mitigate the resulting impacts, which, among other alternatives, include adjusting capital structure. Absent actions by Southern Company and its subsidiaries that fully mitigate the impacts, Southern Company Gas', Southern Company Gas Capital's, and Nicor Gas' credit ratings could be negatively affected. The Georgia PSC's May 15, 2018 approval of a stipulation for Atlanta Gas Light's annual rate adjustment maintained the previously authorized earnings band and increased the equity ratio to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. See Note 2 to the financial statements under "Southern Company Gas" for information on additional rate proceedings for Nicor Gas and Atlanta Gas Light, ~~expected to conclude in 2019.~~

~~Market Price Risk~~

~~Southern Company Gas is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms,~~ the natural gas distribution utilities have rate structures that include volumetric rate designs that allow the opportunity to recover certain costs based on gas usage. Revenues from sales and transportation services are recognized in the same period in which the related volumes are delivered to customers. Revenues from residential and certain commercial and industrial customers are recognized on the basis of ~~Southern Company Gas that sell natural~~scheduled meter readings. Additionally, unbilled revenues are recognized for estimated deliveries of gas ~~directly to end-use customers have limited exposure to market volatility of natural gas prices. To manage the volatility attributable~~not yet billed to these ~~exposures, Southern Company Gas nets~~customers, from the ~~exposures, where possible,~~last bill date to ~~take advantage~~the end of ~~natural offsets~~the accounting period. For other commercial and ~~enters into various derivative transactions~~industrial customers and for all wholesale customers, revenues are based on actual deliveries through the remaining exposures pursuant to Southern Company Gas' policies in areas such as counterparty exposure and risk management practices. Southern Company Gas uses derivatives to buy and sell natural gas as well asend of the period.

The tariffs for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.

~~Certain~~several of the natural gas distribution utilities include provisions which allow for the recognition of ~~Southern Company Gas manage fuel-hedging~~certain revenues prior to the time such revenues are billed to customers. These provisions are referred to as alternative revenue programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower adjusted operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price 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.

II-136

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas~~ and Subsidiary Companies ~~2018~~2020 Annual Report

~~Gas marketing services~~ and ~~wholesale gas services also actively manage storage positions through a variety of hedging transactions~~provide for the ~~purpose~~recognition of ~~managing exposures arising~~certain revenues prior to billing, as long as the amounts recognized will be collected from ~~changing natural gas prices.~~customers within 24 months of recognition. These ~~hedging instruments~~programs are ~~used~~as follows:

•Weather normalization adjustments – reduce customer bills when winter weather is colder than normal and increase customer bills when weather is warmer than normal and are included in the tariffs for Virginia Natural Gas, Chattanooga Gas, and, prior to ~~substantially protect economic margins (as spreads between wholesale~~its sale, Elizabethtown Gas;

•Revenue normalization mechanisms – mitigate the impact of conservation and ~~retail natural gas prices widen between periods)~~declining customer usage and ~~thereby minimize exposure~~are contained in the tariffs for Virginia Natural Gas, Chattanooga Gas, Nicor Gas (effective November 1, 2019), and, prior to ~~declining operating margins. Some~~its sale, Elkton Gas; and

•Revenue true-up adjustment – included within the provisions of ~~these economic hedge activities may not qualify, or may not be designated,~~the GRAM program in which Atlanta Gas Light participates as a short-term alternative to formal rate case filings, the revenue true-up feature provides for ~~hedge accounting treatment.~~ a positive (or negative) adjustment to record revenue in the amount of any variance to budgeted revenues, which are submitted and approved annually as a requirement of GRAM. Such adjustments are reflected in customer billings in a subsequent program year.

Wholesale Gas Services

Southern Company Gas ~~had no material change in market~~nets revenues from energy and risk ~~exposure for~~management activities with the ~~year ended December 31, 2018 when compared~~associated costs. Profits from sales between segments are eliminated and are recognized as goods or services sold to ~~the year ended December 31, 2017.~~

~~For the periods presented below, the~~end-use customers. Southern Company Gas records transactions that qualify as derivatives at fair value with changes in ~~net~~ fair value recognized in earnings in the period of ~~derivative contracts were~~change and characterized as ~~follows:~~unrealized gains or losses. Gains and losses on derivatives held for energy trading purposes are presented on a net basis in revenue.

Successor Predecessor
Year Ended December 31, 2018 Year Ended December 31, 2017 July 1, 2016 through December 31, 2016
January 1, 2016
through
June 30,
2016
(in millions) (in millions)
Contracts outstanding at beginning of period, assets (liabilities), net $ (106 ) $ 8
$ (54 ) $ 75
Contracts realized or otherwise settled 66
(1 ) 18
(77 )
Current period changes^(a)
(127 ) (113 ) 48
(82 )
Contracts outstanding at end of period, assets (liabilities), net (167 ) (106 ) 12
(84 )
Netting of cash collateral 277
193
62
120
Cash collateral and net fair value of contracts outstanding at end of period^(b)
$ 110
$ 87
$ 74
$ 36


~~(a)~~	~~Current period changes also include the changes in fair value of new contracts entered into during the period, if any.~~


~~(b)~~	Net fair value of derivative contracts outstanding excludes premium and intrinsic value associated with weather derivatives of $8 million and $11 million at December 31, 2018 and 2017, respectively, and includes premium and intrinsic value associated with weather derivatives of $4 million at December 31, 2016, and $5 million at June 30, 2016.

~~The net hedge volume of energy-related derivative contracts for natural gas positions at December 31, 2018 and 2017 were as follows:~~

2018 2017
mmBtu Volume
(in millions)
Commodity – Natural gas 120
300
Net Purchased / (Sold) Volume 120
300
Gas Marketing Services

Southern Company ~~Gas' derivative contracts are comprised of both long and short~~Gas recognizes revenues from natural gas ~~positions. A long position is a contract to purchase natural gas,~~sales and a short position is a contract to sell natural gas. The volume presented above represents the net of long natural gas positions of 4.16 billion mmBtu and short natural gas positions of 4.04 billion mmBtu at December 31, 2018 and the net of long natural gas positions of 3.51 billion mmBtu and short natural gas positions of 3.21 billion mmBtu at December 31, 2017.

Energy-related derivative contracts that are designated as regulatory hedges relate primarily to Southern Company Gas' fuel-hedging programs. Therefore, gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in cost of natural gas as the underlying gas is used in operations and ultimately recovered through the respective cost recovery clause. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges (which are mainly used to hedge anticipated purchases and sales), are initially deferred in OCI before being recognized in incometransportation services in the same period asin which the ~~hedged transaction. Gains~~related volumes are delivered to customers and ~~losses~~recognizes sales revenues from residential and certain commercial and industrial customers on ~~energy-related derivative contracts that are~~the basis of scheduled meter readings. Southern Company Gas also recognizes unbilled revenues for estimated deliveries of gas not ~~designated or fail~~yet billed to ~~qualify as hedges are recognized in~~these customers from the ~~statements of income as incurred.~~

~~Some energy-related derivative contracts require physical delivery as opposed~~most recent meter reading date to ~~financial settlement, and this type of derivative is both common and prevalent within~~ the natural gas industry. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual priceend of the ~~underlying goods being delivered.~~

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~accounting period. For other commercial and industrial customers and for all wholesale customers, revenues are based on actual deliveries during the period.

Southern Company Gas ~~and Subsidiary Companies 2018 Annual Report~~recognizes revenues on 12-month utility-bill management contracts as the lesser of cumulative earned or cumulative billed amounts.

Concentration of Credit Risk

Southern Company Gas uses OTC 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. See Note 13 to the financial statements for further discussion of fair value measurements.

~~The maturities of the energy-related derivative contracts at December 31, 2018 were as follows:~~

Fair Value Measurements
December 31, 2018
Maturity
Total
Fair Value Year 1 Years 2 & 3 Years 4 & 5
(in millions)
Level 1^(a)
$ (179 ) $ (59 ) $ (86 ) $ (34 )
Level 2^(b)
12
37
—
(25 )
Fair value of contracts outstanding at end of period^(c)
$ (167 ) $ (22 ) $ (86 ) $ (59 )


~~(a)~~	~~Valued using NYMEX futures prices.~~


~~(b)~~	Valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers.


~~(c)~~	~~Excludes cash collateral of $277 million as well as premium and associated intrinsic value associated with weather derivatives of $8 million at December 31, 2018.~~

~~Value at Risk (VaR)~~

~~VaR is the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability.~~ Southern Company Gas' VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR. Southern Company Gas' VaR is determined on a 95% confidence interval and a one-day holding period, which means that 95% of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. The open exposure of Southern Company Gas is managed in accordance with established policies that limit market risk and require daily reporting of potential financial exposure to senior management. Because Southern Company Gas generally manages physical gas assets and economically protects its positions by hedging in the futures markets, Southern Company Gas' open exposure is generally mitigated. Southern Company Gas employs daily risk testing, using both VaR and stress testing, to evaluate the risk of its positions.

~~For the periods presented below,~~ wholesale gas services business has a concentration of credit risk for services it provides to its counterparties. This credit risk is generally concentrated in 20 of its counterparties and is measured by 30-day receivable exposure plus forward exposure. Counterparty credit risk is evaluated using a S&P equivalent credit rating, which is determined by a process of converting the lower of the S&P or Moody's rating to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being equivalent to D/Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of its financial ratios. As of December 31, 2020, the top 20 counterparties represented 58%, or $234 million, of the total counterparty exposure and had ~~the following VaRs:~~a weighted average S&P equivalent rating of A-.

~~(*)~~

Increases in VaR at December 31, 2018 and 2017 were driven by significant natural gas price increases in Sequent's key markets. The natural gas price increase in 2018 was driven by an industry-wide lower-than-normal natural gas storage inventory position and colder-than-normal weather in the middle of fourth quarter 2018. The natural gas price increase in 2017 was driven by colder-than-normal weather. As weather and natural gas prices moderated subsequent to December 31, 2018 and 2017, VaR reduced to a level consistent with December 31, 2016.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Credit Risk~~

~~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 15 16 Marketers in ~~Georgia.~~Georgia (including SouthStar). 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 functions of the retail sale of gas include the purchase and sale of natural gas, customer service, billings, and collections. 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~~2 times a Marketer's highest month's estimated bill from Atlanta Gas Light.

Concentration of Revenue

Southern Company, Alabama Power, Georgia Power, Mississippi Power (with the exception of its full requirements cost-based MRA electric tariffs described below), and Southern Company Gas each have a diversified base of customers and no single customer or industry comprises 10% or more of each company's revenues.

II-137

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Mississippi Power provides service under long-term contracts with rural electric cooperative associations and a municipality located in southeastern Mississippi under full requirements cost-based MRA electric tariffs, which are subject to regulation by the FERC. The contracts with these wholesale customers represented 15.3% of Mississippi Power's total operating revenues in 2020 and are generally subject to 10-year rolling cancellation notices. Historically, these wholesale customers have acted as a group and any changes in contractual relationships for one customer are likely to be followed by the other wholesale customers.


	2020		2019		2018
Southern California Edison	9.4	%	6.8	%	6.2	%
Georgia Power	8.0	%	9.0	%	9.8	%
Duke Energy Corporation	6.7	%	N/A		6.8	%
Morgan Stanley Capital Group	N/A		4.9	%	N/A

Fuel Costs

Fuel costs for the traditional electric operating companies and Southern Power are expensed as the fuel is used. Fuel expense generally includes fuel transportation costs and the cost of purchased emissions allowances as they are used. For ~~2018,~~Alabama Power and Georgia Power, fuel expense also includes the ~~four largest Marketers based on customer count,~~amortization of the cost of nuclear fuel. For the traditional electric operating companies, fuel costs also include gains and/or losses from fuel-hedging programs as approved by their respective state PSCs.

Cost of Natural Gas

Excluding Atlanta Gas Light, which ~~includes SouthStar, accounted~~does not sell natural gas to end-use customers, Southern Company Gas charges its utility customers for ~~20%~~natural gas consumed using natural gas cost recovery mechanisms set by the applicable state regulatory agencies. Under these mechanisms, all prudently-incurred natural gas costs are passed through to customers without markup, subject to regulatory review. Southern Company Gas defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period such that no operating income is recognized related to these costs. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred and accrued natural gas costs are included in the balance sheets as regulatory assets and regulatory liabilities, respectively.

Southern Company Gas' ~~adjusted~~gas marketing services' customers are charged for actual or estimated natural gas consumed. Within cost of natural gas, Southern Company Gas also includes costs of lost and unaccounted for gas, adjustments to reduce the value of inventories to market value, and gains and losses associated with certain derivatives.

Income Taxes

The Registrants use the liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. In accordance with regulatory requirements, deferred federal ITCs for the traditional electric operating ~~margin~~companies are deferred and ~~25%~~amortized over the average life of the related property, with such amortization normally applied as a credit to reduce depreciation and amortization in the statements of income. Southern Power's and the natural gas distribution ~~operations' adjusted~~utilities' deferred federal ITCs, as well as certain state ITCs for Nicor Gas, are deferred and amortized to income tax expense over the life of the respective asset.

Under current tax law, certain projects at Southern Power related to the construction of renewable facilities are eligible for federal ITCs. Southern Power estimates eligible costs which, as they relate to acquisitions, may not be finalized until the allocation of the purchase price to assets has been finalized. Southern Power applies the deferred method to ITCs, whereby the ITCs are recorded as a deferred credit and amortized to income tax expense over the life of the respective asset. Furthermore, the tax basis of the asset is reduced by 50% of the ITCs received, resulting in a net deferred tax asset. Southern Power has elected to recognize the tax benefit of this basis difference as a reduction to income tax expense in the year in which the plant reaches commercial operation. State ITCs are recognized as an income tax benefit in the period in which the credits are generated. In addition, certain projects are eligible for federal and state PTCs, which are recognized as an income tax benefit based on KWH production.

Federal ITCs and PTCs, as well as state ITCs and other state tax credits available to reduce income taxes payable, were not fully utilized in 2020 and will be carried forward and utilized in future years. In addition, Southern Company is expected to have various state net operating ~~margin.~~loss (NOL) carryforwards for certain of its subsidiaries, including Mississippi Power and Southern Power, which would result in income tax benefits in the future, if utilized. See Note 10 under "Current and Deferred Income Taxes – Tax Credit Carryforwards" and " – Net Operating Loss Carryforwards" for additional information.

~~Several factors~~

II-138

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

The Registrants recognize tax positions that are ~~designed~~"more likely than not" of being sustained upon examination by the appropriate taxing authorities. See Note 10 under "Unrecognized Tax Benefits" for additional information.

Other Taxes

Southern Company Gas is taxed on its gas revenues by various governmental authorities, but is allowed to recover these taxes from its customers. Revenue taxes imposed on the natural gas distribution utilities are recorded at the amount charged to customers, which may include a small administrative fee, as operating revenues, and the related taxes imposed on Southern Company Gas are recorded as operating expenses on the statements of income. Revenue taxes included in operating expenses were $104 million, $114 million, and $111 million in 2020, 2019, and 2018, respectively.

Allowance for Funds Used During Construction and Interest Capitalized

The traditional electric operating companies and the natural gas distribution utilities record AFUDC, which represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently, AFUDC increases the revenue requirement and is recovered over the service life of the asset through a higher rate base and higher depreciation. The equity component of AFUDC is not taxable.

Interest related to financing the construction of new facilities at Southern Power and new facilities not included in the traditional electric operating companies' and Southern Company Gas' ~~risks from~~regulated rates is capitalized in accordance with standard interest capitalization requirements.

Total AFUDC and interest capitalized for the ~~increased concentration~~Registrants in 2020, 2019, and 2018 was as follows:


	Southern Company		Alabama Power		Georgia Power(*)		Mississippi Power		Southern Power		Southern Company Gas
	(in millions)
2020	$	230	$	61	$	138	$	1	$	11	$	18
2019	202		71		103		0		15		13
2018	210		84		94		0		17		14

(*)See Note 2 under "Georgia Power – Nuclear Construction" for information on the inclusion of ~~credit~~a portion of construction costs related to Plant Vogtle Units 3 and 4 in Georgia Power's rate base.

The average AFUDC composite rates for 2020, 2019, and 2018 for the traditional electric operating companies and the natural gas distribution utilities were as follows:


	2020		2019		2018
Alabama Power	8.1	%	8.4	%	8.3	%
Georgia Power(*)	6.9	%	6.9	%	7.3	%
Mississippi Power	5.4	%	7.3	%	3.3	%
Southern Company Gas:
Atlanta Gas Light	7.7	%	7.8	%	7.9	%
Chattanooga Gas	7.1	%	7.1	%	7.4	%
Nicor Gas	0.7	%	2.3	%	2.1	%

(*)Excludes AFUDC related to the construction of Plant Vogtle Units 3 and 4. See Note 2 under "Georgia Power – Nuclear Construction" for additional information.

Impairment of Long-Lived Assets

The Registrants evaluate long-lived assets and finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has ~~resulted from deregulation.~~occurred is based on either a specific regulatory disallowance, a sales transaction price that is less than the asset group's carrying value, or an estimate of undiscounted future cash flows attributable to the asset group, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by either the amount of regulatory disallowance or by estimating the fair value of the assets and recording a loss if the carrying value is greater than the

II-139

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment loss is required. Until the assets are disposed of, their estimated fair value is re-evaluated when circumstances or events change. See Note 3 under "Other Matters – Southern Company" and " – Southern Company Gas" and Note 15 under "Southern Company," "Southern Power," and "Southern Company Gas – Sale of Pivotal LNG and Atlantic Coast Pipeline" for information regarding impairment charges recorded during the periods presented.

Goodwill and Other Intangible Assets and Liabilities

Southern Power's intangible assets consist primarily of certain PPAs acquired, which are amortized over the term of the respective PPA. Southern Company Gas' goodwill and other intangible assets and liabilities primarily relate to its 2016 acquisition by Southern Company. In addition to these items, Southern Company's goodwill and other intangible assets also relate to its 2016 acquisition of PowerSecure.

Goodwill is not amortized, but is subject to an annual impairment test during the ~~security support described above, Atlanta~~fourth quarter of each year, or more frequently if impairment indicators arise, as discussed below. Southern Company and Southern Company Gas ~~Light bills intrastate delivery service to Marketers in advance rather than in arrears. Atlanta Gas Light accepts credit support~~each evaluated its goodwill in the ~~form~~fourth quarter 2020 and determined 0 impairment was required. If the impacts of the COVID-19 pandemic and related responses, including supply chain disruptions, reduced labor availability and/or productivity, and reduced economic activity, become significant to the operating results of PowerSecure and its businesses, a portion of its $263 million of goodwill may become impaired. The ultimate outcome of this matter cannot be determined at this time.

A goodwill impairment charge of $32 million was recorded in the second quarter 2019 in contemplation of the July 2019 sale of PowerSecure's utility infrastructure services business. In the third quarter 2019, impairment charges of $2 million and $3 million were recorded to goodwill and other intangible assets, net, respectively, in contemplation of the December 2019 sale of PowerSecure's lighting business. See Note 15 under "Southern Company" for additional information.

At December 31, 2020 and 2019, goodwill was as follows:


	Goodwill
	(in millions)
Southern Company	$	5,280
Southern Company Gas:
Gas distribution operations	$	4,034
Gas marketing services	981
Southern Company Gas total	$	5,015

II-140

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

At December 31, 2020 and 2019, other intangible assets were as follows:


	At December 31, 2020						At December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Other Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization		Other Intangible Assets, Net
	(in millions)						(in millions)
Southern Company
Other intangible assets subject to amortization:
Customer relationships	$	212	$	(135)	$	77	$	212	$	(116)	$	96
Trade names	64		(31)		33		64		(25)		39
Storage and transportation contracts	64		(64)		0		64		(62)		2
PPA fair value adjustments	390		(89)		301		390		(69)		321
Other	10		(9)		1		11		(8)		3
Total other intangible assets subject to amortization	$	740	$	(328)	$	412	$	741	$	(280)	$	461
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	75		0		75		75		0		75
Total other intangible assets	$	815	$	(328)	$	487	$	816	$	(280)	$	536

Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	390	$	(89)	$	301	$	390	$	(69)	$	321

Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services
Customer relationships	$	156	$	(119)	$	37	$	156	$	(104)	$	52
Trade names	26		(12)		14		26		(10)		16
Wholesale gas services
Storage and transportation contracts	64		(64)		0		64		(62)		2
Total other intangible assets subject to amortization	$	246	$	(195)	$	51	$	246	$	(176)	$	70

II-141

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Amortization associated with other intangible assets in 2020, 2019, and 2018 was as follows:


	2020		2019		2018
	(in millions)
Southern Company(a)	$	49	$	61	$	89
Southern Power(b)	20		19		25
Southern Company Gas:
Gas marketing services	$	17	$	23	$	32
Wholesale gas services(b)	2		8		20
Southern Company Gas total	$	19	$	31	$	52

(a)Includes $22 million, $27 million, and $45 million in 2020, 2019, and 2018, respectively, recorded as a reduction to operating revenues.

(b)Recorded as a reduction to operating revenues.

At December 31, 2020, the estimated amortization associated with other intangible assets for the next five years is as follows:


	2021		2022		2023		2024		2025
	(in millions)
Southern Company	$	43	$	39	$	37	$	35	$	32
Southern Power	20		20		20		20		20
Southern Company Gas	14		11		9		7		6

Intangible liabilities of $91 million recorded under acquisition accounting for transportation contracts at Southern Company Gas were fully amortized as of December 31, 2019.

Acquisition Accounting

Development Costs

For Southern Power, development costs are capitalized once a project is probable of completion, primarily based on a review of its economics and operational feasibility, as well as the status of power off-take agreements and regulatory approvals, if applicable. Southern Power's capitalized development costs are included in CWIP on the balance sheets. All of Southern Power's development costs incurred prior to the determination that a project is probable of completion are expensed as incurred and included in other operations and maintenance expense in the statements of income. If it is determined that a project is no longer probable of completion, any of Southern Power's capitalized development costs are expensed and included in other operations and maintenance expense in the statements of income.

Long-Term Service Agreements

II-142

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Payments made under the LTSAs for the performance of any planned inspections or unplanned capital maintenance are recorded in the statements of cash ~~deposits, letters~~flows as investing activities. Receipts of ~~credit/surety bonds~~major parts into materials and supplies inventory prior to planned inspections are treated as noncash transactions in the statements of cash flows. Any payments made prior to the work being performed are recorded as prepayments in other current assets and noncurrent assets on the balance sheets. At the time work is performed, an appropriate amount is accrued for future payments or transferred from ~~acceptable issuers,~~the prepayment and ~~corporate guarantees~~recorded as property, plant, and equipment or expensed.

Transmission Receivables/Prepayments

Cash and Cash Equivalents

For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less.

Restricted Cash

At December 31, 2020 and 2019, Southern Company Gas had $2 million and $3 million, respectively, of restricted cash held as collateral for workers' compensation, life insurance, and long-term disability insurance, which is included in cash, cash equivalents, and restricted cash on the statements of cash flows.

Storm Damage Reserves

Each traditional electric operating company maintains a reserve to cover or is allowed to defer and recover the cost of damages from ~~investment-grade entities.~~major storms to its transmission and distribution lines and, for Mississippi Power, the cost of uninsured damages to its generation facilities and other property. Alabama Power also has authority from the Alabama PSC to accrue certain additional amounts as circumstances warrant. Alabama Power recorded additional accruals of $100 million and $84 million in 2020 and 2019, respectively. In accordance with their respective state PSC orders, the traditional electric operating companies accrued the following amounts related to storm damage recovery in 2020, 2019, and 2018:


	Southern Company(a)(b)		Alabama Power(b)		Georgia Power		Mississippi Power
	(in millions)
2020	$	326	$	112	$	213	$	1
2019	170		139		30		1
2018	74		16		30		1

(a)Includes accruals at Gulf Power of $26.9 million in 2018. See Note 15 under "Southern Company" for information regarding the sale of Gulf Power.

(b)Includes $39 million applied in 2019 to Alabama Power's NDR from its remaining excess deferred income tax regulatory liability balance in accordance with an Alabama PSC order.

Leveraged Leases

At December 31, 2020 and 2019, a subsidiary of Southern Holdings had 4 leveraged lease agreements, with original terms ranging up to 45 years, which relate to energy generation, distribution, and transportation assets, including two international projects. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. Southern Company reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the effective tax rate, the residual value, the credit quality of the lessees, and the timing of expected tax cash flows. See Notes 3 and 15 under "Other Matters – Southern Company" and "Southern Company," respectively, for additional information on the leveraged lease investments, including impairment charges and completed and planned sales.

II-143

Table of Contents �� Index to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Company's net investment in leveraged leases consists of the following at December 31:


	2020(*)		2019
	(in millions)
Net rentals receivable	$	734	$	1,410
Unearned income	(178)		(622)
Investment in leveraged leases	556		788
Deferred taxes from leveraged leases	(7)		(238)
Net investment in leveraged leases	$	549	$	550

(*)Excludes the investment classified as held for sale at December 31, 2020. See Note 15 under "Assets Held for Sale" for additional information.

The following table provides a summary of the components of income related to leveraged lease investments. Income was impacted in 2020 and 2019 by the impairment charges discussed in Note 3 under "Other Matters – Southern Company."


	2020		2019		2018
	(in millions)
Pretax leveraged lease income (loss)	$	(180)	$	11	$	25
Income tax benefit (expense)	98		0		(6)
Net leveraged lease income (loss)	$	(82)	$	11	$	19

Materials and Supplies

Materials and supplies for the traditional electric operating companies generally includes the average cost of transmission, distribution, and generating plant materials. Materials and supplies for Southern Company Gas generally includes propane gas inventory, fleet fuel, and other materials and supplies. Materials and supplies for Southern Power generally includes the average cost of generating plant materials.

Fuel Inventory

Natural Gas for Sale

~~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~~majority of the pipeline storage services that it has under contract, along with a ~~Marketer fails to pay the interstate pipelines for the capacity, the interstate pipelines would likely seek repayment from~~corresponding amount of inventory. Atlanta Gas ~~Light.~~Light retains and manages a portion of its pipeline storage assets and related natural gas inventories for system balancing and to serve system demand.

~~Wholesale~~Nicor Gas' natural gas inventory is carried at cost on a LIFO basis. Inventory decrements occurring during the year that are restored prior to year end are charged to cost of natural gas at the estimated annual replacement cost. Inventory decrements that are not restored prior to year end are charged to cost of natural gas at the actual LIFO cost of the inventory layers liquidated. The cost of natural gas, including inventory costs, is recovered from customers under a purchased gas recovery mechanism adjusted for differences between actual costs and amounts billed; therefore, LIFO liquidations have no impact on Southern Company's or Southern Company Gas' net income. At December 31, 2020, the Nicor Gas ~~Services~~LIFO inventory balance was $178 million. Based on the average cost of gas purchased in December 2020, the estimated replacement cost of Nicor Gas' inventory at December 31, 2020 was $259 million.

II-144

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~Gas has established credit policies to determine~~ and ~~monitor the creditworthiness of counterparties, as well as the quality of pledged collateral.~~Subsidiary Companies 2020 Annual Report

Southern Company Gas' gas marketing services, wholesale gas services, and all other segments record inventory at LOCOM, with cost determined on a WACOG basis. For these segments, Southern Company Gas ~~also utilizes netting agreements whenever possible~~evaluates the weighted average cost of its natural gas inventories against market prices to ~~mitigate exposure~~determine whether any declines in market prices below the WACOG are other than temporary. For any declines considered to ~~counterparty credit risk. When~~be other than temporary, Southern Company Gas ~~is engaged in more than one outstanding derivative transaction with~~records LOCOM adjustments to cost of natural gas to reduce the ~~same counterparty~~value of its natural gas inventories to market value. LOCOM adjustments for wholesale gas services were $1 million, $21 million, and ~~also has a legally enforceable netting agreement with that counterparty, the "net" mark-to-market exposure represents the netting of the positive~~$10 million during 2020, 2019, and ~~negative exposures with that counterparty~~2018, respectively.

Energy Marketing Receivables and ~~a reasonable measure of~~ Payables

Southern Company Gas' ~~credit risk.~~wholesale gas services provides services to retail gas marketers, wholesale gas marketers, utility companies, and industrial customers. These counterparties utilize netting agreements that enable wholesale gas services to net receivables and payables by counterparty upon settlement. Southern Company Gas also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Netting agreements enable Southern Company Gas to net certain assets and liabilities by counterparty. Southern Company GasGas' wholesale gas services also nets across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, or owed to, wholesale gas services' counterparties are settled net, they are recorded on a gross basis in the balance sheets as energy marketing receivables and energy marketing payables.

Southern Company ~~Gas may require~~Gas' wholesale gas services has trade and credit contracts that contain minimum credit rating requirements. These credit rating requirements typically give counterparties the right to ~~pledge additional collateral when deemed necessary.~~suspend or terminate credit if Southern Company ~~Gas conducts~~Gas' credit ~~evaluations~~ratings are downgraded to non-investment grade status. Under such circumstances, Southern Company Gas' wholesale gas services would need to post collateral to continue transacting business with some of its counterparties. As of December 31, 2020 and ~~obtains appropriate internal approvals for~~2019, the required collateral in the event of a ~~counterparty's line~~credit rating downgrade was $5 million and $11 million, respectively.

Southern Company Gas' wholesale gas services uses established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Collateral or credit security is most often in the form of cash or letters of credit ~~before any~~from an investment-grade financial institution, but may also include cash or U.S. government securities held by a trustee. When more than one derivative transaction with the same counterparty is ~~executed. In most cases,~~outstanding and a legally enforceable netting agreement exists with that counterparty, the ~~counterparty must have an investment grade rating, which includes~~"net" mark-to-market exposure represents a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.

~~Certain~~reasonable measure of Southern Company Gas' ~~derivative instruments contain credit-risk-related or~~credit risk with that counterparty. Southern Company Gas' wholesale gas services also uses other ~~contingent features~~netting agreements with certain counterparties with whom it conducts significant transactions.

See "Concentration of Credit Risk" herein for additional information.

Provision for Uncollectible Accounts

The customers of the traditional electric operating companies and the natural gas distribution utilities are billed monthly. For the majority of receivables, a provision for uncollectible accounts is established based on historical collection experience and other factors. For the remaining receivables, if the company is aware of a specific customer's inability to pay, a provision for uncollectible accounts is recorded to reduce the receivable balance to the amount reasonably expected to be collected. If circumstances change, the estimate of the recoverability of accounts receivable could change as well. Circumstances that could ~~increase~~affect this estimate include, but are not limited to, customer credit issues, customer deposits, and general economic conditions. Customers' accounts are written off once they are deemed to be uncollectible. For all periods presented, uncollectible accounts averaged less than 1% of revenues for each Registrant.

Credit risk exposure at Nicor Gas is mitigated by a bad debt rider approved by the ~~payments~~Illinois Commission. The bad debt rider provides for ~~collateral it posts~~the recovery from (or refund to) customers of the difference between Nicor Gas' actual bad debt experience on an annual basis and the benchmark bad debt expense used to establish its base rates for the respective year.

See Note 2 for information regarding recovery of incremental bad debt expense related to the COVID-19 pandemic at certain of the traditional electric operating companies and the natural gas distribution utilities.

Financial Instruments

The traditional electric operating companies and Southern Power use derivative financial instruments to limit exposure to fluctuations in interest rates, the ~~normal course~~prices of ~~business when its~~certain fuel purchases, electricity purchases and sales, and occasionally foreign currency exchange rates. Southern Company Gas uses derivative financial instruments to limit exposure to fluctuations in natural gas prices, weather, interest rates, and commodity prices. All derivative financial instruments are recognized as either assets or liabilities on the balance sheets (included in ~~net liability positions. At December 31, 2018,~~"Other" or shown separately as "Risk Management Activities") and are measured at fair value. See Note 13 for ~~agreements with such features, Southern Company Gas' derivative instruments with liability~~additional information regarding fair ~~values totaled $5 million for which Southern Company Gas had no collateral posted with derivatives counterparties to satisfy these arrangements.~~

Southern Company Gas has a concentration of credit risk as measured by its 30-day receivable exposure plus forward exposure. At December 31, 2018, wholesale gas services' top 20 counterparties represented approximately 48%, or $298 million, of its total counterparty exposure and had a weighted average S&P equivalent credit rating of A-,value. Substantially all of ~~which is consistent with~~ the ~~prior year. The S&P equivalent credit rating is determined by~~traditional electric operating companies' and Southern Power's bulk energy purchases and sales contracts that meet the definition of a ~~process of converting~~derivative are excluded from fair value accounting requirements because they qualify for the ~~lower of~~"normal" scope exception, and are accounted for under the S&P or Moody's ratings to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being D / Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of the financial ratios of that counterparty. To arrive at the weighted average credit rating, each counterparty is assigned an internal ratio, which is multiplied by their credit exposure and summed for all counterparties. The sum is divided by the aggregate total counterparties' exposures, and this numeric value is then converted to a S&P equivalent.

II-145

Table of ContentsIndex to Financial Statements

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~The following table provides credit risk information related to Southern Company Gas' third-party natural gas contracts receivable and payable positions at December 31:~~

Gross Receivables Gross Payables
2018 2017 2018 2017
(in millions) (in millions)
Netting agreements in place:
Counterparty is investment grade $ 461
$ 342
$ 255
$ 202
Counterparty is non-investment grade 5
20
95
25
Counterparty has no external rating 314
226
505
315
No netting agreements in place:
Counterparty is investment grade 19
19
1
4
Counterparty has no external rating 2
—
—
—
Amount recorded in balance sheets $ 801
$ 607
$ 856
$ 546

~~Gas Marketing Services~~

~~Capital Requirements and Contractual Obligations~~

Southern Company Gas' capital investments are currently estimated to total $1.6 billion for 2019, $1.9 billion for 2020, $1.3 billion for 2021, $1.2 billion for 2022, and $1.3 billion for 2023. The regulatory infrastructure programs and other construction programs are subject to periodic review and revision, and actual costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in FERC rules and regulations; state regulatory agency approvals; changes in legislation; the cost and efficiency of labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

In addition, as discussed in Note 11 to the financial statements, Southern Company Gas provides postretirement benefits to certain eligible employees and funds trusts to the extent required by the applicable state regulatory agencies.

Funding requirements related to obligations associated with scheduled maturities of long-term debt, including the related interest; pipeline charges, storage capacity, and gas supply; operating leases; asset management agreements; financial derivative obligations; pension and other postretirement benefit plans; and other purchase commitments, primarily related to environmental remediation liabilities, are detailed in the contractual obligations table that follows. See Notes 1, 3, 8, 9, 11, and 14 to the financial statements for additional information.

~~Table of ContentsIndex to Financial Statements~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

~~Contractual Obligations~~

~~Contractual obligations at December 31, 2018 were as follows:~~

2019 2020-
2021 2022-
2023 After
2023 Total
(in millions)
Long-term debt^(a) —

Principal $ 350
$ 330
$ 446
$ 4,359
$ 5,485
Interest 244
453
422
3,242
4,361
Pipeline charges, storage capacity, and gas supply^(b)
781
1,104
901
1,871
4,657
Operating leases^(c)
18
31
23
34
106
Asset management agreements^(d)
10
8
—
—
18
Financial derivative obligations^(e)
583
217
109
—
909
Pension and other postretirement benefit plans^(f)
16
32
—
—
48
Purchase commitments —
Capital^(g)
1,591
3,231
2,496
—
7,318
Other^(h)
25
4
2
—
31
Total $ 3,618
$ 5,410
$ 4,399
$ 9,506
$ 22,933


~~(a)~~	Amounts are reflected based on final maturity dates. Southern Company Gas plans to continue, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit. Variable rate interest obligations are estimated based on rates at December 31, 2018, as reflected in the statements of capitalization.

~~(b)~~

Includes charges recoverable through a natural gas cost recovery mechanism, or alternatively billed to Marketers, and demand charges associated with Sequent. The gas supply balance includes amounts for Nicor Gas and SouthStar gas commodity purchase commitments of 47 million mmBtu at floating gas prices calculated using forward natural gas prices at December 31, 2018 and valued at $150 million. Southern Company Gas provides guarantees to certain gas suppliers for certain of its subsidiaries, including SouthStar, in support of payment obligations.

~~(c)~~

Certain operating leases have provisions for step rent or escalation payments and certain lease concessions are accounted for by recognizing the future minimum lease payments on a straight-line basis over the respective minimum lease terms. However, this accounting treatment does not affect the future annual operating lease cash obligations as shown herein. In terms of rental charges and duration of contracts, Southern Company Gas' most significant operating leases relate to real estate.


~~(d)~~	~~Represent fixed-fee minimum payments for Sequent's affiliated asset management agreements.~~


~~(e)~~	~~See Notes 1 and 14 to the financial statements for additional information.~~

~~(f)~~

Southern Company Gas forecasts contributions to the pension and other postretirement benefit plans over a three-year period. Southern Company Gas anticipates no mandatory contributions to the qualified pension plan during the next three years. Amounts presented represent estimated benefit payments for the nonqualified pension plans, estimated non-trust benefit payments for the other postretirement benefit plans, and estimated contributions to the other postretirement benefit plan trusts, all of which will be made from Southern Company Gas' corporate assets. See Note 11 to the financial statements for additional information related to the pension and other postretirement benefit plans, including estimated benefit payments. Certain benefit payments will be made through the related benefit plans. Other benefit payments will be made from Southern Company Gas' corporate assets.


~~(g)~~	~~Estimated capital expenditures are provided through 2023. At December 31, 2018, significant purchase commitments were outstanding in connection with infrastructure and other construction programs.~~


~~(h)~~	~~Includes contractual environmental remediation liabilities that are generally recoverable through base rates or rate rider mechanisms and LTSAs.~~

~~Table of ContentsIndex to Financial Statements~~


~~Item 7A.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each of the registrants in Item 7 herein and Note 1 to the financial statements under "Financial Instruments" in Item 8 herein. Also see Notes 13 and 14 to the financial statements in Item 8 herein.

~~Table of ContentsIndex to Financial Statements~~


~~Item 8.~~	~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

~~INDEX~~COMBINED NOTES TO ~~2018~~ FINANCIAL STATEMENTS



	~~Page~~
~~The Southern Company and Subsidiary Companies:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-216~~
~~Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-217~~
~~Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-218~~
~~Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-219~~
~~Consolidated Balance Sheets at December 31, 2018 and 2017~~	~~II-220~~
~~Consolidated Statements of Capitalization at December 31, 2018 and 2017~~	~~II-222~~
~~Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-224~~

~~Alabama Power:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-225~~
~~Statements of Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-226~~
~~Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-227~~
~~Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-228~~
~~Balance Sheets at December 31, 2018 and 2017~~	~~II-229~~
~~Statements of Capitalization at December 31, 2018 and 2017~~	~~II-231~~
~~Statements of Common Stockholder's Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-232~~

~~Georgia Power:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-233~~
~~Statements of Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-234~~
~~Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-235~~
~~Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-236~~
~~Balance Sheets at December 31, 2018 and 2017~~	~~II-237~~
~~Statements of Capitalization at December 31, 2018 and 2017~~	~~II-239~~
~~Statements of Common Stockholder's Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-240~~

~~Mississippi Power:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-241~~
~~Statements of Operations for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-242~~
~~Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-243~~
~~Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-244~~
~~Balance Sheets at December 31, 2018 and 2017~~	~~II-245~~
~~Statements of Capitalization at December 31, 2018 and 2017~~	~~II-247~~
~~Statements of Common Stockholder's Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-248~~

~~Table of ContentsIndex to Financial Statements~~



	~~Page~~
~~Southern Power and Subsidiary Companies:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-249~~
~~Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-250~~
~~Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-251~~
~~Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-252~~
~~Consolidated Balance Sheets at December 31, 2018 and 2017~~	~~II-253~~
~~Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-255~~

~~Southern Company Gas and Subsidiary Companies:~~
~~Report of Independent Registered Public Accounting Firm~~	~~II-256~~
~~Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-257~~
~~Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-258~~
~~Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-259~~
~~Consolidated Balance Sheets at December 31, 2018 and 2017~~	~~II-260~~
~~Consolidated Statements of Capitalization at December 31, 2018 and 2017~~	~~II-262~~
~~Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017, and 2016~~	~~II-263~~

~~Combined Notes to Financial Statements~~	~~II-264~~

~~Table of ContentsIndex to Financial Statements~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the stockholders and the Board of Directors of The Southern Company and Subsidiary Companies~~

~~Opinions on the Financial Statements and Internal Control over Financial Reporting~~

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of The Southern Company and subsidiary companies (Southern Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). We also have audited Southern Company's internal control over financial reporting as of December 31, 2018, based on criteria established in ~~Internal Control - Integrated Framework (2013)~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).~~

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Southern Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in ~~Internal Control – Integrated Framework (2013)~~ ~~issued by COSO.~~

~~Basis for Opinions~~

~~Definition and Limitations of Internal Control over Financial Reporting~~

~~/s/ Deloitte & Touche LLP~~

~~Atlanta, Georgia~~

~~February 19, 2019~~

~~We have served as Southern Company's auditor since 2002.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~ (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

2018
2017
2016
(in millions)
Operating Revenues:
Retail electric revenues $ 15,222
$ 15,330
$ 15,234
Wholesale electric revenues 2,516
2,426
1,926
Other electric revenues 664
681
698
Natural gas revenues 3,854
3,791
1,596
Other revenues 1,239
803
442
Total operating revenues 23,495
23,031
19,896
Operating Expenses:
Fuel 4,637
4,400
4,361
Purchased power 971
863
750
Cost of natural gas 1,539
1,601
613
Cost of other sales 806
513
260
Other operations and maintenance 5,889
5,739
5,382
Depreciation and amortization 3,131
3,010
2,502
Taxes other than income taxes 1,315
1,250
1,113
Estimated loss on plants under construction 1,097
3,362
428
Impairment charges 210
—
—
Gain on dispositions, net (291 ) (40 ) 1
Total operating expenses 19,304
20,698
15,410
Operating Income 4,191
2,333
4,486
Other Income and (Expense):
Allowance for equity funds used during construction 138
160
202
Earnings from equity method investments 148
106
59
Interest expense, net of amounts capitalized (1,842 ) (1,694 ) (1,317 )
Other income (expense), net 114
163
50
Total other income and (expense) (1,442 ) (1,265 ) (1,006 )
Earnings Before Income Taxes 2,749
1,068
3,480
Income taxes 449
142
951
Consolidated Net Income 2,300
926
2,529
Dividends on preferred and preference stock of subsidiaries 16
38
45
Net income attributable to noncontrolling interests 58
46
36
Consolidated Net Income Attributable to Southern Company $ 2,226
$ 842
$ 2,448
Common Stock Data:
Earnings per share —
Basic $ 2.18
$ 0.84
$ 2.57
Diluted 2.17
0.84
2.55
Average number of shares of common stock outstanding — (in millions)
Basic 1,020
1,000
951
Diluted 1,025
1,008
958
accrual method. Derivative contracts that qualify as cash flow hedges of anticipated transactions or are recoverable through the traditional electric operating companies' and the natural gas distribution utilities' fuel-hedging programs result in the deferral of related gains and losses in AOCI or regulatory assets and liabilities, respectively, until the hedged transactions occur. Other derivative contracts that qualify as fair value hedges are marked to market through current period income and are recorded on a net basis in the statements of income. Cash flows from derivatives are classified on the statements of cash flows in the same category as the hedged item. See Note 14 for additional information regarding derivatives.

The ~~accompanying notes~~Registrants offset fair value amounts recognized for multiple derivative instruments executed with the same counterparty under netting arrangements. The Registrants had 0 outstanding collateral repayment obligations or rights to reclaim collateral arising from derivative instruments recognized at December 31, 2020.

The Registrants are exposed to potential losses related to financial instruments in the event of counterparties' nonperformance. The Registrants have established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate their exposure to counterparty credit risk.

Southern Company Gas

Southern Company Gas enters into weather derivative contracts as economic hedges of natural gas revenues in the event of warmer-than-normal weather in the Heating Season. Exchange-traded options are carried at fair value, with changes reflected in natural gas revenues. Non-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are also reflected in natural gas revenues in the statements of income.

Wholesale gas services purchases natural gas for storage when the current market price paid to buy and transport natural gas plus the cost to store and finance the natural gas is less than the market price that can be received in the future, resulting in positive net natural gas revenues. NYMEX futures and OTC contracts are used to sell natural gas at that future price to substantially protect the natural gas revenues that will ultimately be realized when the stored natural gas is sold. Southern Company Gas enters into transactions to secure transportation capacity between delivery points in order to serve its customers and various markets. NYMEX futures and OTC contracts are used to capture the price differential or spread between the locations served by the capacity in order to substantially protect the natural gas revenues that will ultimately be realized when the physical flow of natural gas between delivery points occurs. These contracts generally meet the definition of derivatives and are carried at fair value on the balance sheets, with changes in fair value recorded in natural gas revenues on the statements of income in the period of change. These contracts are not designated as hedges for accounting purposes.

The purchase, transportation, storage, and sale of natural gas are accounted for on a weighted average cost or accrual basis, as appropriate, rather than on the fair value basis utilized for the derivatives used to mitigate the natural gas price risk associated with the storage and transportation portfolio. Monthly demand charges are incurred for the contracted storage and transportation capacity and payments associated with asset management agreements, and these demand charges and payments are recognized on the statements of income in the period they are incurred. This difference in accounting methods can result in volatility in reported earnings, even though the economic margin is substantially unchanged from the dates the transactions were consummated.

Comprehensive Income

The objective of comprehensive income is to report a measure of all changes in common stock equity of an ~~integral part~~enterprise that result from transactions and other economic events of ~~these consolidated financial statements.~~the period other than transactions with owners. Comprehensive income consists of net income attributable to the Registrant, changes in the fair value of qualifying cash flow hedges, and reclassifications for amounts included in net income. Comprehensive income also consists of certain changes in pension and other postretirement benefit plans for Southern Company, Southern Power, and Southern Company Gas.

II-146

Table of ContentsIndex to Financial Statements

~~CONSOLIDATED~~COMBINED NOTES TO FINANCIAL STATEMENTS ~~OF COMPREHENSIVE INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~(continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

AOCI (loss) balances, net of tax effects, for Southern Company, Southern Power, and Southern Company Gas were as follows:

2018
2017
2016
(in millions)
Consolidated Net Income $ 2,300
$ 926
$ 2,529
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(16), $34, and $(84), respectively (47 ) 57
(136 )
Reclassification adjustment for amounts included in net income,
net of tax of $24, $(37), and $43, respectively 72
(60 ) 69
Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of $(2), $6, and $10,
respectively (5 ) 17
13
Reclassification adjustment for amounts included in net income,
net of tax of $5, $(6), and $3, respectively 6
(23 ) 4
Total other comprehensive income (loss) 26
(9 ) (50 )
Dividends on preferred and preference stock of subsidiaries 16
38
45
Comprehensive income attributable to noncontrolling interests 58
46
36
Consolidated Comprehensive Income Attributable to Southern Company $ 2,252
$ 833
$ 2,398


	Qualifying Hedges		Pension and Other Postretirement Benefit Plans		Accumulated Other Comprehensive Income (Loss)
	(in millions)
Southern Company
Balance at December 31, 2019	$	(179)	$	(142)	$	(321)
Current period change	(30)		(45)		(75)
Balance at December 31, 2020(*)	$	(209)	$	(187)	$	(395)

Southern Power
Balance at December 31, 2019	$	11	$	(37)	$	(26)
Current period change	(32)		(10)		(42)
Balance at December 31, 2020(*)	$	(21)	$	(47)	$	(67)

Southern Company Gas
Balance at December 31, 2019	$	(6)	$	13	$	7
Current period change	(14)		(15)		(29)
Balance at December 31, 2020	$	(20)	$	(2)	$	(22)

(*)May not add due to rounding.

Variable Interest Entities

The ~~accompanying notes~~Registrants may hold ownership interests in a number of business ventures with varying ownership structures. Partnership interests and other variable interests are ~~an integral part~~evaluated to determine if each entity is a VIE. The primary beneficiary of ~~these consolidated financial statements.~~a VIE is required to consolidate the VIE when 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. See Note 7 for additional information regarding VIEs.

II-147

Table of ContentsIndex to Financial Statements

~~CONSOLIDATED~~COMBINED NOTES TO FINANCIAL STATEMENTS ~~OF CASH FLOWS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~(continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

2. REGULATORY MATTERS

Regulatory Assets and Liabilities

Details of regulatory assets and (liabilities) reflected in the balance sheets at December 31, 2020 and 2019 are provided in the following tables:


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2020
AROs(a)(s)	$	5,147	$	1,470	$	3,457	$	212	$	0
Retiree benefit plans(b)(s)	4,958		1,265		1,647		238		187
Remaining net book value of retired assets(c)	1,183		632		527		24		0
Deferred income tax charges(d)	801		235		531		32		0
Environmental remediation(e)(s)	310		0		41		0		269
Loss on reacquired debt(f)	304		47		248		6		3
Storm damage(g)	262		0		262		0		0
Vacation pay(h)(s)	207		80		104		10		13
Under recovered regulatory clause revenues(i)	185		58		0		52		75
Regulatory clauses(j)	142		142		0		0		0
Nuclear outage(k)	101		61		40		0		0
Long-term debt fair value adjustment(l)	92		0		0		0		92
Kemper County energy facility assets, net(m)	50		0		0		50		0
Plant Daniel Units 3 and 4(n)	32		0		0		32		0

Other regulatory assets(o)	205		52		68		4		81
Deferred income tax credits(d)	(6,016)		(2,016)		(2,805)		(320)		(847)
Other cost of removal obligations(a)	(1,999)		(335)		212		(194)		(1,649)
Over recovered regulatory clause revenues(i)	(185)		(46)		(44)		0		(95)
Storm/property damage reserves(p)	(81)		(77)		0		(4)		0
Customer refunds(q)	(56)		(50)		(6)		0		0
Other regulatory liabilities(r)	(149)		(37)		(30)		(6)		(54)
Total regulatory assets (liabilities), net	$	5,493	$	1,481	$	4,252	$	136	$	(1,925)

II-148

2018
2017
2016
(in millions)
Operating Activities:
Consolidated net income $ 2,300
$ 926
$ 2,529
Adjustments to reconcile consolidated net income
to net cash provided from operating activities —
Depreciation and amortization, total 3,549
3,457
2,923
Deferred income taxes 94
166
(127 )
Collateral deposits 17
(4 ) (102 )
Allowance for equity funds used during construction (138 ) (160 ) (202 )
Pension and postretirement funding (4 ) (2 ) (1,029 )
Settlement of asset retirement obligations (244 ) (177 ) (171 )
Stock based compensation expense 125
109
121
Hedge settlements (10 ) 6
(233 )
Estimated loss on plants under construction 1,093
3,179
428
Impairment charges 210
—
—
Gain on dispositions, net (301 ) (42 ) (2 )
Other, net (22 ) (112 ) (219 )
Changes in certain current assets and liabilities —
-Receivables (426 ) (202 ) (544 )
-Fossil fuel for generation 123
36
178
-Natural gas for sale 49
36
(226 )
-Other current assets (127 ) (143 ) (206 )
-Accounts payable 291
(280 ) 301
-Accrued taxes 267
(142 ) 1,456
-Retail fuel cost over recovery 36
(212 ) (231 )
-Other current liabilities 63
(45 ) 250
Net cash provided from operating activities 6,945
6,394
4,894
Investing Activities:
Business acquisitions, net of cash acquired (65 ) (1,054 ) (10,680 )
Property additions (8,001 ) (7,423 ) (7,310 )
Proceeds pursuant to the Toshiba Guarantee, net of joint owner portion —
1,682
—
Nuclear decommissioning trust fund purchases (1,117 ) (811 ) (1,160 )
Nuclear decommissioning trust fund sales 1,111
805
1,154
Proceeds from dispositions 2,956
97
15
Cost of removal, net of salvage (388 ) (313 ) (245 )
Change in construction payables, net 50
259
(121 )
Investment in unconsolidated subsidiaries (114 ) (152 ) (1,444 )
Payments pursuant to LTSAs (186 ) (227 ) (134 )
Other investing activities (6 ) (53 ) (122 )
Net cash used for investing activities (5,760 ) (7,190 ) (20,047 )
Financing Activities:
Increase (decrease) in notes payable, net (774 ) (401 ) 1,228
Proceeds —
Long-term debt 2,478
5,858
16,368
Common stock 1,090
793
3,758
Preferred stock —
250
—
Short-term borrowings 3,150
1,259
—
Redemptions and repurchases —
Long-term debt (5,533 ) (2,930 ) (3,145 )
Preferred and preference stock (33 ) (658 ) —
Short-term borrowings (1,900 ) (659 ) (478 )
Distributions to noncontrolling interests (153 ) (119 ) (72 )
Capital contributions from noncontrolling interests 2,551
80
682
Payment of common stock dividends (2,425 ) (2,300 ) (2,104 )
Other financing activities (264 ) (222 ) (512 )
Net cash provided from (used for) financing activities (1,813 ) 951
15,725
Net Change in Cash, Cash Equivalents, and Restricted Cash (628 ) 155
572
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 2,147
1,992
1,420
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 1,519
$ 2,147
$ 1,992
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $72, $89, and $128 capitalized, respectively) $ 1,794
$ 1,676
$ 1,066
Income taxes (net of refunds) 172
(410 ) (148 )
Noncash transactions — Accrued property additions at year-end 1,103
985
1,262

~~The accompanying notes are an integral part of these consolidated financial statements.~~

Table of ContentsIndex to Financial Statements

~~CONSOLIDATED BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 1,396
$ 2,130
Receivables —
Customer accounts receivable 1,726
1,806
Energy marketing receivable 801
607
Unbilled revenues 654
810
Under recovered fuel clause revenues 115
171
Other accounts and notes receivable 813
698
Accumulated provision for uncollectible accounts (50 ) (44 )
Materials and supplies 1,465
1,438
Fossil fuel for generation 405
594
Natural gas for sale 524
595
Prepaid expenses 432
452
Assets from risk management activities, net of collateral 222
137
Other regulatory assets, current 525
604
Assets held for sale, current 393
12
Other current assets 162
62
Total current assets 9,583
10,072
Property, Plant, and Equipment:
In service 103,706
103,542
Less: Accumulated depreciation 31,038
31,457
Plant in service, net of depreciation 72,668
72,085
Nuclear fuel, at amortized cost 875
883
Construction work in progress 7,254
6,904
Total property, plant, and equipment 80,797
79,872
Other Property and Investments:
Goodwill 5,315

6,268
Equity investments in unconsolidated subsidiaries 1,580

1,513
Other intangible assets, net of amortization of $235 and $186
at December 31, 2018 and December 31, 2017, respectively 613
873
Nuclear decommissioning trusts, at fair value 1,721
1,832
Leveraged leases 798
775
Miscellaneous property and investments 269
249
Total other property and investments 10,296
11,510
Deferred Charges and Other Assets:
Deferred charges related to income taxes 794
825
Unamortized loss on reacquired debt 323
206
Other regulatory assets 8,308
6,943
Assets held for sale 5,350
—
Other deferred charges and assets 1,463
1,577
Total deferred charges and other assets 16,238
9,551
Total Assets $ 116,914
$ 111,005


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2019
Retiree benefit plans(b)(s)	$	4,423	$	1,131	$	1,516	$	213	$	167
AROs(a)(s)	4,381		1,043		3,119		210		0
Remaining net book value of retired assets(c)	1,275		649		596		30		0
Deferred income tax charges(d)	803		245		523		33		0
Storm damage(g)	410		0		410		0		0
Environmental remediation(e)(s)	349		0		52		0		296
Loss on reacquired debt(f)	323		52		262		6		4
Vacation pay(h)(s)	186		72		93		9		11
Under recovered regulatory clause revenues(i)	159		40		0		47		72
Regulatory clauses(j)	142		142		0		0		0
Long-term debt fair value adjustment(l)	107		0		0		0		107
Nuclear outage(k)	105		78		27		0		0
Fuel-hedging (realized and unrealized) losses(t)	102		22		53		27		0
Kemper County energy facility assets, net(m)	61		0		0		61		0
Plant Daniel Units 3 and 4(n)	34		0		0		34		0
Other regulatory assets(o)	127		45		23		6		53
Deferred income tax credits(d)	(6,301)		(1,960)		(3,078)		(358)		(874)
Other cost of removal obligations(a)	(2,084)		(412)		156		(189)		(1,606)
Customer refunds(q)	(285)		(56)		(229)		0		0
Over recovered regulatory clause revenues(i)	(205)		(112)		(10)		0		(82)
Storm/property damage reserves(p)	(204)		(150)		0		(55)		0
Other regulatory liabilities(r)	(70)		(19)		(6)		(10)		(22)
Total regulatory assets (liabilities), net	$	3,838	$	810	$	3,507	$	64	$	(1,874)

Unless otherwise noted, the following recovery and amortization periods for these regulatory assets and (liabilities) have been approved by the respective state PSC or regulatory agency:

Georgia Power: Net book values of Plant Hammond Units 1 through 4 and Plant Branch Units 2 through 4 (totaling $503 million at December 31, 2020) are being amortized over remaining periods of between two and 15 years (between 2022 and 2035) and the net book values of Plant McIntosh Unit 1 and Plant Mitchell Unit 3 (totaling $24 million at December 31, 2020) are being amortized through 2022.

Mississippi Power: Represents net book value associated with Plant Watson and Plant Greene County. The ~~accompanying notes~~retail and wholesale portions totaling approximately $11 million and $13 million at December 31, 2020, respectively, are ~~an integral part~~being amortized over a four-year period through 2024 and a 10-year period through 2030, respectively. See "Mississippi Power – Environmental Compliance Overview Plan" herein for additional information.

(d)Deferred income tax charges are recovered and deferred income tax credits are amortized over the related property lives, which may range up to 53 years for Alabama Power, 60 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. See Note 10 for additional information. Included in the deferred income tax charges are amounts ($8 million, $9 million, and $1 million for Alabama Power, Georgia Power, and Mississippi Power, respectively, at December 31, 2020) for the retiree Medicare drug subsidy, which are being recovered and amortized through 2027, 2022, and 2024 for Alabama Power, Georgia Power, and Mississippi Power, respectively. As a result of the Tax Reform Legislation, these ~~consolidated financial statements.~~accounts include certain deferred income tax assets and liabilities not subject to normalization, as described further below:

Alabama Power: Related amounts are being recovered and amortized ratably over the related property lives.

II-149

Table of ContentsIndex to Financial Statements

~~CONSOLIDATED BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Mississippi Power: Related amounts at December 31, 2020 include $74 million of deferred income tax liabilities, consisting of the retail portion of $66 million being amortized over three years (through 2023) and the wholesale portion of $9 million being amortized over two years (through 2021). See "Mississippi Power – 2019 Base Rate Case" and " – Municipal and Rural Associations Tariff" herein for additional information.

(g)Georgia Power is recovering approximately $213 million annually for storm damage. See "Georgia Power – Storm Damage Recovery" herein and Note 1 under "Storm Damage Reserves" for additional information.

(h)Recorded as earned by employees and recovered as paid, generally within one year. Includes both vacation and banked holiday pay, if applicable.

Georgia Power: Balances are recorded monthly and expected to be recovered or returned within two years. See "Georgia Power – Rate Plans" herein for additional information.

(j)Will be amortized concurrently with the effective date of Alabama Power's next depreciation study, which is expected to occur no later than 2023.

(l)Recovered over the remaining lives of the original debt issuances at acquisition, which range up to 18 years at December 31, 2020.

(p)Amortized as related expenses are incurred. See "Alabama Power – Rate NDR" and "Mississippi Power – System Restoration Rider" herein for additional information.

(q)Primarily includes approximately $50 million and $53 million at December 31, 2020 and 2019, respectively, for Alabama Power and $110 million at December 31, 2019 for Georgia Power as a result of each company exceeding its allowed retail return range. Georgia Power's December 31, 2019 balance also includes approximately $105 million pursuant to the Georgia Power Tax Reform Settlement Agreement. Georgia Power's balances also include immaterial amounts related to refunds for transmission service customers. See "Alabama Power" and "Georgia Power – Rate Plans" herein for additional information.

(r)Comprised of numerous immaterial components with remaining amortization periods generally not exceeding 17 years for Alabama Power, 12 years for Georgia Power, three years for Mississippi Power, and 20 years for Southern Company Gas at December 31, 2020.

(s)Generally not earning a return as they are excluded from rate base or are offset in rate base by a corresponding asset or liability.

Alabama Power

II-150

Liabilities and Stockholders' Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 3,198
$ 3,892
Notes payable 2,915
2,439
Energy marketing trade payables 856
546
Accounts payable 2,580
2,530
Customer deposits 522
542
Accrued taxes 656
636
Accrued interest 472
488
Accrued compensation 1,030
959
Asset retirement obligations, current 404
351
Other regulatory liabilities, current 376
337
Liabilities held for sale, current 425
—
Other current liabilities 852
874
Total current liabilities 14,286
13,594
Long-Term Debt (See accompanying statements)
40,736
44,462
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 6,558
6,842
Deferred credits related to income taxes 6,460
7,256
Accumulated deferred ITCs 2,372
2,267
Employee benefit obligations 2,147
2,256
Asset retirement obligations 8,990
4,473
Accrued environmental remediation 268
389
Other cost of removal obligations 2,297
2,684
Other regulatory liabilities 169
239
Liabilities held for sale 2,836
—
Other deferred credits and liabilities 465
691
Total deferred credits and other liabilities 32,562
27,097
Total Liabilities 87,584
85,153
Redeemable Preferred Stock of Subsidiaries (See accompanying statements)
291
324
Total Stockholders' Equity (See accompanying statements)
29,039
25,528
Total Liabilities and Stockholders' Equity $ 116,914
$ 111,005
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these consolidated financial statements.~~

Table of ContentsIndex to Financial Statements

~~CONSOLIDATED~~COMBINED NOTES TO FINANCIAL STATEMENTS ~~OF CAPITALIZATION~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~(continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Petition for Certificate of Convenience and Necessity

On August 14, 2020, the Alabama PSC issued its order regarding Alabama Power's September 2019 petition for a CCN, which authorized Alabama Power to (i) construct an approximately 720-MW combined cycle facility at Alabama Power's Plant Barry (Plant Barry Unit 8) that is expected to be placed in service by the end of 2023, (ii) complete the acquisition of the Central Alabama Generating Station, which occurred on August 31, 2020, (iii) purchase approximately 240 MWs of combined cycle generation under a long-term PPA, which began on September 1, 2020, and (iv) pursue up to approximately 200 MWs of cost-effective demand-side management and distributed energy resource programs. Alabama Power's petition for a CCN was predicated on the results of Alabama Power's 2019 IRP provided to the Alabama PSC, which identified an approximately 2,400-MW resource need for Alabama Power, driven by the need for additional winter reserve capacity. See Note 15 under "Alabama Power" for additional information on the acquisition of the Central Alabama Generating Station.

The Alabama PSC authorized the recovery of actual costs for the construction of Plant Barry Unit 8 up to 5% above the estimated in-service cost of $652 million. In so doing, it recognized the potential for developments that could cause the project costs to exceed the capped amount, in which case Alabama Power would provide documentation to the Alabama PSC to explain and justify potential recovery of the additional costs. At December 31, 2020, project expenditures associated with Plant Barry Unit 8 included in CWIP totaled approximately $66 million.

The Alabama PSC further directed that the proposed solar generation of approximately 400 MWs, coupled with battery energy storage systems (solar/battery systems), be evaluated under an existing Renewable Generation Certificate (RGC) issued by the Alabama PSC in September 2015. The contracts proposed in the CCN petition expired on July 31, 2020. Any future requests for solar/battery systems will be evaluated under the RGC process.

Alabama Power expects to recover costs associated with Plant Barry Unit 8 pursuant to its Rate CNP New Plant. Alabama Power is recovering all costs associated with the Central Alabama Generating Station through the inclusion in Rate RSE of revenues from the existing power sales agreement and, on expiration of that agreement, expects to recover costs pursuant to Rate CNP New Plant. The recovery of costs associated with laws, regulations, and other such mandates directed at the utility industry are expected to be recovered through Rate CNP Compliance. Alabama Power expects to recover the capacity-related costs associated with the PPAs through its Rate CNP PPA. In addition, fuel and energy-related costs are expected to be recovered through Rate ECR. Any remaining costs associated with Plant Barry Unit 8 and the acquisition of the Central Alabama Generating Station are expected to be recovered through Rate RSE.

The ultimate outcome of these matters cannot be determined at this time.

Rate RSE

II-151

2018
2017
2018
2017
(in millions) (percent of total)
Long-Term Debt:
Long-term debt payable to affiliated trusts —
Variable rate (5.50% at 12/31/18) due 2042 $ 206
$ 206

Long-term senior notes and debt —
Maturity Interest Rates
2018 1.50% to 5.40% —
2,352

2019 1.85% to 5.55% 2,948
3,074

2020 2.00% to 4.75% 2,271
2,273

2021 2.35% to 9.10% 2,638
2,643

2022 1.00% to 8.70% 1,983
2,016

2023 2.45% to 5.75% 2,290
2,290

2025 through 2048 1.63% to 7.30% 19,895
19,902

Variable rates (2.29% to 3.05% at 12/31/17) due 2018 —
1,420

Variable rates (3.10% to 3.50% at 12/31/18) due 2020 1,875
825

Variable rates (3.34% to 3.91% at 12/31/18) due 2021 125
25

Total long-term senior notes and debt 34,025
36,820

Other long-term debt —
Pollution control revenue bonds —
Maturity Interest Rates
2019 4.55% 25
25

2022 2.10% to 2.35% 90
90

2023 1.15% to 2.60% 33
33

2025 through 2049 1.40% to 5.15% 1,112
1,346

Variable rates (1.77% to 2.23% at 12/31/18) due 2019 148
148

Variable rates (1.76% to 1.87% at 12/31/18) due 2021 65
65

Variable rates (1.76% at 12/31/18) due 2022 4
4

Variable rates (1.70% to 1.87% at 12/31/18) due 2024 to 2053 1,417
1,585

Plant Daniel revenue bonds (7.13%) due 2021 270
270

Gas facility revenue bonds —
Variable rate (1.71% at 12/31/17) due 2022 —
47

Variable rate (1.71% at 12/31/17) due 2024 to 2033 —
154

FFB loans —
2.57% to 3.86% due 2020 44
44

2.57% to 3.86% due 2021 44
44

2.57% to 3.86% due 2022 44
44

2.57% to 3.86% due 2023 44
44

2.57% to 3.86% due 2024 to 2044 2,449
2,449

First mortgage bonds —
4.70% due 2019 50
50

5.80% due 2023 50
50

2.66% to 6.58% due 2026 to 2058 1,225
925

Junior subordinated notes (5.00% to 6.25%) due 2057 to 2077 3,570
3,570

Total other long-term debt 10,684
10,987

Unamortized fair value adjustment of long-term debt 474
525

Capitalized lease obligations 197
204

Unamortized debt premium 36
44

Unamortized debt discount (194 ) (206 )
Unamortized debt issuance expense (208 ) (226 )
Total long-term debt (annual interest requirement — $1.7 billion) 45,220
48,354

Less:
Amount due within one year 3,198
3,892

Amount held for sale 1,286
—

Long-term debt excluding amounts due within one year and held for sale 40,736
44,462
58.1 % 63.2 %

Table of ContentsIndex to Financial Statements

CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 2018 and 2017
Southern Company and Subsidiary Companies 2018 Annual Report
2018
2017
2018
2017
(in millions) (percent of total)
Redeemable Preferred Stock of Subsidiaries:
Cumulative preferred stock
$100 par or stated value — 4.20% to 5.44%
Authorized — 20 million shares
Outstanding — 2018: 475,115 shares
                — 2017: 809,325 shares 48
81

$1 par value — 5.83%
Authorized — 28 million shares
Outstanding — 10,000,000 shares 243
243

Total redeemable preferred stock of subsidiaries

(annual dividend requirement — $15 million) 291
324
0.4
0.5
Common Stockholders' Equity:
Common stock, par value $5 per share — 5,164
5,038

Authorized — 1.5 billion shares
Issued — 2018: 1.0 billion shares
  — 2017: 1.0 billion shares
Treasury — 2018: 1.0 million shares
      — 2017: 0.9 million shares
Paid-in capital 11,094
10,469

Treasury, at cost (38 ) (36 )
Retained earnings 8,706
8,885

Accumulated other comprehensive loss (203 ) (189 )
Total common stockholders' equity 24,723
24,167
35.3
34.4
Noncontrolling interests 4,316
1,361
6.2
1.9
Total stockholders' equity 29,039
25,528

Total Capitalization $ 70,066
$ 70,314
100.0 % 100.0 %

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED~~COMBINED NOTES TO FINANCIAL STATEMENTS ~~OF STOCKHOLDERS' EQUITY~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~(continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Southern Company Common Stockholders' Equity
Number of Common Shares Common Stock
Accumulated
Other
Comprehensive Income
(Loss)

Preferred
and Preference Stock of Subsidiaries

Noncontrolling
Interests^(a)

Issued Treasury Par Value Paid-In Capital Treasury Retained Earnings Total
(in thousands) (in millions)
Balance at December 31, 2015 915,073
(3,352 ) $ 4,572
$ 6,282
$ (142 ) $ 10,010
$ (130 ) $ 609
$ 781
$ 21,982
Consolidated net income attributable
   to Southern Company
—
—
—
—
—
2,448
—
—
—
2,448
Other comprehensive income (loss) —
—
—
—
—
—
(50 ) —
—
(50 )
Stock issued 76,140
2,599
380
3,263
115
—
—
—
—
3,758
Stock-based compensation —
—
—
120
—
—
—
—
—
120
Cash dividends of $2.2225 per share —
—
—
—
—
(2,104 ) —
—
—
(2,104 )
Contributions from
   noncontrolling interests
—
—
—
—
—
—
—
—
618
618
Distributions to
   noncontrolling interests
—
—
—
—
—
—
—
—
(57 ) (57 )
Purchase of membership interests
from noncontrolling interests —
—
—
—
—
—
—
—
(129 ) (129 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
—
—
32
32
Other —
(66 ) —
(4 ) (4 ) 2
—
—
—
(6 )
Balance at December 31, 2016 991,213
(819 ) 4,952
9,661
(31 ) 10,356
(180 ) 609
1,245
26,612
Consolidated net income attributable
   to Southern Company
—
—
—
—
—
842
—
—
—
842
Other comprehensive income (loss) —
—
—
—
—
—
(9 ) —
—
(9 )
Stock issued 17,319
—
86
707
—
—
—
—
—
793
Stock-based compensation —
—
—
105
—
—
—
—
—
105
Cash dividends of $2.3000 per share —
—
—
—
—
(2,300 ) —
—
—
(2,300 )
Preferred and preference stock
redemptions —
—
—
—
—
—
—
(609 ) —
(609 )
Contributions from
   noncontrolling interests
—
—
—
—
—
—
—
—
79
79
Distributions to
   noncontrolling interests
—
—
—
—
—
—
—
—
(122 ) (122 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
—
—
44
44
Reclassification from redeemable
noncontrolling interests —
��
—
—
—
—
—
—
114
114
Other —
(110 ) —
(4 ) (5 ) (13 ) —
—
1
(21 )
Balance at December 31, 2017 1,008,532
(929 ) 5,038
10,469
(36 ) 8,885
(189 ) —
1,361
25,528
Consolidated net income attributable
   to Southern Company
—
—
—
—
—
2,226
—
—
—
2,226
Other comprehensive income (loss) —
—
—
—
—
—
26
—
—
26
Stock issued 26,209
—
126
964
—
—
—
—
—
1,090
Stock-based compensation —
—
—
84
—
—
—
—
—
84
Cash dividends of $2.3800 per share —
—
—
—
—
(2,425 ) —
—
—
(2,425 )
Contributions from
   noncontrolling interests
—
—
—
—
—
—
—
—
1,372
1,372
Distributions to
   noncontrolling interests
—
—
—
—
—
—
—
—
(164 ) (164 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
—
—
58
58
Sale of noncontrolling interests —
—
—
(417 ) —
—
—
—
1,690
1,273
Other —
(24 ) —
(6 ) (2 ) 20
(40 ) —
(1 ) (29 )
Balance at December 31, 2018 1,034,741
(953 ) $ 5,164
$ 11,094
$ (38 ) $ 8,706
$ (203 ) $ —
$ 4,316
$ 29,039
allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.



~~(a)~~	~~Excludes redeemable noncontrolling interests. See Note 7 to the financial statements under "Noncontrolling Interests" for additional information.~~

At December 31, 2018, Alabama Power's retail return exceeded the allowed WCER range, which resulted in Alabama Power establishing a regulatory liability of $109 million for Rate RSE refunds. In accordance with an Alabama PSC order issued in February 2019, Alabama Power applied $78 million to reduce the Rate ECR under recovered balance and the remaining $31 million was refunded to customers through bill credits starting in July 2019. At December 31, 2019 and 2020, Alabama Power's WCER exceeded 6.15%, resulting in Alabama Power establishing a current regulatory liability of $53 million and $50 million, respectively, for Rate RSE refunds. In April 2020, the regulatory liability at December 31, 2019 was refunded to customers through bill credits. The ~~accompanying notes~~$50 million regulatory liability at December 31, 2020 will be refunded to customers through bill credits in April 2021.

On December 1, 2020, Alabama Power made its required annual Rate RSE submission to the Alabama PSC of projected data for calendar year 2021, resulting in an ~~integral part~~increase of 4.09%, or approximately $228 million annually, that became effective for the billing month of January 2021.

Rate CNP New Plant

Rate CNP New Plant allows for recovery of Alabama Power's retail costs associated with newly developed or acquired certificated generating facilities placed into retail service. No adjustments to Rate CNP New Plant occurred during the period 2018 through 2020. See "Petition for Certificate of Convenience and Necessity" herein for additional information.

Rate CNP PPA

Rate CNP PPA allows for the recovery of Alabama Power's retail costs associated with certificated PPAs. Revenues for Rate CNP PPA, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will have no significant effect on Southern Company's or Alabama Power's revenues or net income but will affect annual cash flow. No adjustments to Rate CNP PPA occurred during the period 2018 through 2020 and no adjustment is expected for 2021. At December 31, 2020 and 2019, Alabama Power had an under recovered Rate CNP PPA balance of $58 million and $40 million, respectively, which is included in other regulatory assets, deferred on the balance sheet.

Rate CNP Compliance

Rate CNP Compliance allows for the recovery of Alabama Power's retail costs associated with laws, regulations, and other such mandates directed at the utility industry involving the environment, security, reliability, safety, sustainability, or similar considerations impacting Alabama Power's facilities or operations. Rate CNP Compliance is based on forward-looking information and provides for the recovery of these ~~consolidated~~costs pursuant to factors that are calculated and submitted to the Alabama PSC by December 1 with rates effective for the following calendar year. Compliance costs to be recovered include operations and maintenance expenses, depreciation, and a return on certain invested capital. Revenues for Rate CNP Compliance, as recorded on the financial ~~statements.~~statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates.

II-152

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~At December 31, 2020, Alabama Power had an over recovered Rate CNP Compliance balance of $28 million included in other regulatory liabilities, current on the balance sheet. At December 31, 2019, Alabama Power had an over recovered Rate CNP Compliance balance of $62 million, of which $55 million is included in other regulatory liabilities, current and $7 million is included in other regulatory liabilities, deferred on the balance sheet.

~~To the stockholders~~Rate ECR

Rate ECR recovers Alabama Power's retail energy costs based on an estimate of future energy costs and the ~~Board of Directors of~~current over or under recovered balance. Revenues recognized under Rate ECR and recorded on the financial statements are adjusted for the difference in actual recoverable fuel costs and amounts billed in current regulated rates. The difference in the recoverable fuel costs and amounts billed gives rise to the over or under recovered amounts recorded as regulatory assets or liabilities. Alabama Power, ~~Company~~along with the Alabama PSC, continually monitors the over or under recovered cost balance to determine whether an adjustment to billing rates is required. Changes in the Rate ECR factor have no significant effect on Southern Company's or Alabama Power's net income but will impact operating cash flows. The Alabama PSC may approve billing rates under Rate ECR of up to 5.910 cents per KWH.

~~Opinion~~In May 2018, the Alabama PSC approved an increase to Rate ECR from 2.015 cents per KWH to 2.353 cents per KWH effective July 2018 through December 2018. In December 2018, the Alabama PSC issued a consent order to leave this rate in effect through December 31, 2019.

In October 2020, Alabama Power reduced its over-collected fuel balance by $94.3 million in accordance with an August 7, 2020 Alabama PSC order authorizing Alabama Power to reduce its over-collected fuel balance by $100 million and return that amount to customers in the form of bill credits, with any undistributed amount remaining in the regulatory liability for the benefit of customers.

Tax Reform Accounting Order

II-153

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Software Accounting Order

Plant Greene County

Rate NDR

The second component of the Rate NDR charge is intended to allow recovery of any existing deferred storm-related operations and maintenance costs and any future reserve deficits over a 24-month period. The Alabama PSC order gives Alabama Power authority to record a deficit balance in the NDR when costs of storm damage exceed any established reserve balance. Absent further Alabama PSC approval, the maximum total Rate NDR charge consisting of both components is $10 per month per non-residential customer account and $5 per month per residential customer account. Alabama Power has the authority, based on an order from the Alabama PSC, to accrue certain additional amounts as circumstances warrant. The order allows for reliability-related expenditures to be charged against the additional accruals when the NDR balance exceeds $75 million. Alabama Power may designate a portion of the NDR to reliability-related expenditures as a part of an annual budget process for the following year or during the current year for identified unbudgeted reliability-related expenditures that are incurred. Accruals that have ~~audited~~not been designated can be used to offset storm charges. Additional accruals to the ~~accompanying~~NDR enhance Alabama Power's ability to mitigate the financial effects of future natural disasters, promote system reliability, and offset costs retail customers would otherwise bear. Alabama Power made additional accruals of $100 million and $84 million in 2020 and 2019, respectively. There were 0 such accruals in 2018.

As discussed herein under "Tax Reform Accounting Order," in accordance with an Alabama PSC order issued in December 2019, Alabama Power also applied the remaining excess deferred income tax regulatory liability balance of approximately $39 million to increase the balance in the NDR, resulting in an accumulated balance of $150 million at December 31, 2019. Of this amount, Alabama Power designated $37 million to be applied to budgeted reliability-related expenditures for 2020, which was included in other regulatory liabilities, current and was utilized in 2020. The remaining NDR balance of $113 million was included in other regulatory liabilities, deferred on the balance sheet.

II-154

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Environmental Accounting Order

Georgia Power

Rate Plans

2019 ARP


Tariff	2020		2021
	(in millions)
Traditional base	$	0	$	120
ECCR(*)	318		2
DSM	12		(15)
MFF	12		4
Total	$	342	$	111

(*) Effective January 1, 2020, CCR AROs are being recovered through the ECCR tariff.

II-155

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

2013 ARP

Deferral of Incremental COVID-19 Costs

Fuel Cost Recovery

II-156

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

December 31, 2019, Georgia Power's over recovered fuel balance totaled $73 million and is included in other deferred credits and liabilities on Southern Company's and Georgia Power's balance sheets.

Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's or Georgia Power's revenues or net income but will affect operating cash flows.

Storm Damage Recovery

Georgia Power defers and recovers certain costs related to damages from major storms as mandated by the Georgia PSC. Beginning January 1, 2020, Georgia Power is recovering $213 million annually under the 2019 ARP. At December 31, 2020 and 2019, the balance in the regulatory asset related to storm damage was $262 million and $410 million, respectively, with $213 million for each year included in other regulatory assets, current on Southern Company's balance sheets and regulatory assets – storm damage on Georgia Power's balance sheets and $49 million and $197 million, respectively, included in other regulatory assets, deferred on Southern Company's and Georgia Power's balance sheets. During October 2020, Tropical Storm Zeta caused significant damage to Georgia Power's transmission and distribution facilities. The incremental restoration costs related to this tropical storm deferred in the regulatory asset for storm damage totaled approximately $50 million. The rate of ~~capitalization~~storm damage cost recovery is expected to be adjusted in future regulatory proceedings as necessary. As a result of ~~Alabama~~this regulatory treatment, costs related to storms are not expected to have a material impact on Southern Company's or Georgia Power's financial statements.

Nuclear Construction

In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4, in which Georgia Power holds a 45.7% ownership interest. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the 2 AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement.

II-157

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company ~~(Alabama Power) (a wholly-owned subsidiary~~and Subsidiary Companies 2020 Annual Report

Cost and Schedule

Georgia Power's approximate proportionate share of ~~The~~the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 by the expected in-service dates of November 2021 and November 2022, respectively, is as follows:


	(in billions)
Base project capital cost forecast(a)(b)	$	8.5
Construction contingency estimate	0.2
Total project capital cost forecast(a)(b)	8.7
Net investment as of December 31, 2020(b)	(7.2)
Remaining estimate to complete(a)	$	1.5

(a)Excludes financing costs expected to be capitalized through AFUDC of approximately $246 million, of which $93 million had been accrued through December 31, 2020.

(b)Net of $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and approximately $188 million in related customer refunds.

As part of its ongoing processes, Southern ~~Company)~~Nuclear continues to evaluate cost and schedule forecasts on a regular basis to incorporate current information available, particularly in the areas of engineering support, commodity installation, system turnovers and related test results, and workforce statistics. Southern Nuclear has established aggressive target values for monthly construction production and system turnover activities as part of a strategy that was designed to maintain margin to the regulatory-approved in-service dates of November 2021 for Unit 3 and November 2022 for Unit 4.

As of June 30, 2020, assignments of contingency exceeded the remaining balance of the $366 million construction contingency originally established in the second quarter 2018 by approximately $34 million and Georgia Power established $115 million of additional construction contingency. During the third and fourth quarters 2020, this construction contingency, plus an additional $5 million, was fully assigned to the base capital cost forecast. Assignment of contingency during 2020 addressed cost risks related to construction productivity, including the April 2020 reduction in workforce designed to mitigate impacts of the COVID-19 pandemic described below; other COVID-19 impacts; craft labor incentives; additional resources for supervision, field support, project management, initial test program, start-up, engineering support, and operations and maintenance support; subcontracts; and procurement, among other factors. These factors continue to represent further potential cost risk to the project; therefore, Georgia Power established $171 million of additional construction contingency as of December 31, ~~2018 and 2017,~~2020.

After considering the ~~related statements~~significant level of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Alabama Power as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

~~Basis for Opinion~~

~~We conducted our audits in accordance with the standards of the PCAOB. Those standards require~~uncertainty that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Alabama Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Alabama Power's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceexists regarding the ~~amounts and disclosures in~~future recoverability of these costs since the ~~financial statements. Our audits also included evaluating~~ultimate outcome of these matters is subject to the ~~accounting principles used and significant estimates made~~outcome of future assessments by management, as well as ~~evaluating~~Georgia PSC decisions in future regulatory proceedings, Georgia Power recorded total pre-tax charges to income of $149 million ($111 million after tax) and $176 million ($131 million after tax) for the ~~overall presentation~~increases in the total project capital cost forecast as of June 30, 2020 and December 31, 2020, respectively. As and when these amounts are spent, Georgia Power may request the Georgia PSC to evaluate those expenditures for rate recovery.

In mid-March 2020, Southern Nuclear began implementing policies and procedures designed to mitigate the risk of transmission of COVID-19 at the construction site, including worker distancing measures, isolating individuals who have tested positive for COVID-19, are showing symptoms consistent with COVID-19, are being tested for COVID-19, or have been in close contact with such persons, requiring self-quarantine, and adopting additional precautionary measures. In April 2020, Georgia Power, acting for itself and as agent for the other Vogtle Owners, announced a reduction in workforce at Plant Vogtle Units 3 and 4 and began reducing the then-existing site workforce by approximately 20%. This reduction in workforce was a mitigation action intended to address the impact of the ~~financial statements. We believe~~COVID-19 pandemic on the Plant Vogtle Units 3 and 4 workforce and construction site, including challenges with labor productivity that ~~our audits provide~~were exacerbated by the impact of the COVID-19 pandemic, by increasing productivity of the remaining workforce and reducing workforce fatigue and absenteeism. Further, it was also intended to allow for increased social distancing by the workforce and facilitate compliance with the recommendations from the Centers for Disease Control and Prevention. The April 2020 workforce reduction did reduce absenteeism, providing an improvement in operational efficiency and allowing for increased social distancing. Since April 2020, the number of active cases at the site has fluctuated and has continued to impact productivity levels and pace of activity completion.

The lower productivity levels and slower pace of activity completion contributed to a ~~reasonable basis~~backlog to the aggressive site work plan established at the beginning of 2020. To address these issues, in July 2020, Southern Nuclear updated its aggressive site work plan for ~~our opinion.~~both Unit 3 and Unit 4; however, through October 2020, the project continued to face challenges in meeting the updated

~~/s/ Deloitte & Touche LLP~~

~~Birmingham, Alabama~~

~~February 19, 2019~~

~~We have served as Alabama Power's auditor since 2002.~~

II-158

Table of ContentsIndex to Financial Statements

~~STATEMENTS OF INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Alabama Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Revenues:
Retail revenues $ 5,367
$ 5,458
$ 5,322
Wholesale revenues, non-affiliates 279
276
283
Wholesale revenues, affiliates 119
97
69
Other revenues 267
208
215
Total operating revenues 6,032
6,039
5,889
Operating Expenses:
Fuel 1,301
1,225
1,297
Purchased power, non-affiliates 216
170
166
Purchased power, affiliates 216
158
168
Other operations and maintenance 1,669
1,709
1,557
Depreciation and amortization 764
736
703
Taxes other than income taxes 389
384
380
Total operating expenses 4,555
4,382
4,271
Operating Income 1,477
1,657
1,618
Other Income and (Expense):
Allowance for equity funds used during construction 62
39
28
Interest expense, net of amounts capitalized (323 ) (305 ) (302 )
Other income (expense), net 20
43
26
Total other income and (expense) (241 ) (223 ) (248 )
Earnings Before Income Taxes 1,236
1,434
1,370
Income taxes 291
568
531
Net Income 945
866
839
Dividends on Preferred and Preference Stock 15
18
17
Net Income After Dividends on Preferred and Preference Stock $ 930
$ 848
$ 822

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMPREHENSIVE INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Alabama Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Net Income $ 945
$ 866
$ 839
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $-, $(1), and $(1), respectively —
1
(2 )
Reclassification adjustment for amounts included in net income,
net of tax of $2, $2, and $2, respectively 4
3
4
Total other comprehensive income (loss) 4
4
2
Comprehensive Income $ 949
$ 870
$ 841

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CASH FLOWS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Alabama Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Activities:
Net income $ 945
$ 866
$ 839
Adjustments to reconcile net income
to net cash provided from operating activities —
Depreciation and amortization, total 917
888
844
Deferred income taxes 174
409
407
Allowance for equity funds used during construction (62 ) (39 ) (28 )
Pension and postretirement funding (4 ) (2 ) (133 )
Settlement of asset retirement obligations (55 ) (26 ) (25 )
Other, net (1 ) 13
(77 )
Changes in certain current assets and liabilities —
-Receivables (149 ) (168 ) 94
-Prepayments (2 ) (2 ) 1
-Materials and supplies (82 ) (34 ) (38 )
-Other current assets 30
20
38
-Accounts payable 24
71
73
-Accrued taxes 10
(84 ) 93
-Accrued compensation 8
(2 ) 12
-Retail fuel cost over recovery —
(76 ) (162 )
-Other current liabilities 128
3
11
Net cash provided from operating activities 1,881
1,837
1,949
Investing Activities:
Property additions (2,158 ) (1,882 ) (1,272 )
Nuclear decommissioning trust fund purchases (279 ) (237 ) (352 )
Nuclear decommissioning trust fund sales 278
237
351
Cost of removal net of salvage (130 ) (112 ) (94 )
Change in construction payables 26
161
(37 )
Other investing activities (26 ) (43 ) (34 )
Net cash used for investing activities (2,289 ) (1,876 ) (1,438 )
Financing Activities:
Proceeds —
Senior notes 500
1,100
400
Preferred stock —
250
—
Pollution control revenue bonds 120
—
—
Other long-term debt —
—
45
Capital contributions from parent company 511
361
260
Redemptions and repurchases —
Senior notes —
(525 ) (200 )
Preferred and preference stock —
(238 ) —
Pollution control revenue bonds (120 ) (36 ) —
Payment of common stock dividends (801 ) (714 ) (765 )
Other financing activities (33 ) (35 ) (25 )
Net cash provided from (used for) financing activities 177
163
(285 )
Net Change in Cash, Cash Equivalents, and Restricted Cash (231 ) 124
226
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 544
420
194
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 313
$ 544
$ 420
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $22, $15, and $11 capitalized, respectively) $ 284
$ 285
$ 277
Income taxes (net of refunds) 106
236
(108 )
Noncash transactions — Accrued property additions at year-end 272
245
84

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Alabama Power Company 2018 Annual Report~~

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 313
$ 544
Receivables —
Customer accounts receivable 403
355
Unbilled revenues 150
162
Affiliated 94
43
Other accounts and notes receivable 51
55
Accumulated provision for uncollectible accounts (10 ) (9 )
Fossil fuel stock 141
184
Materials and supplies 546
458
Prepaid expenses 66
85
Other regulatory assets, current 137
124
Other current assets 18
5
Total current assets 1,909
2,006
Property, Plant, and Equipment:
In service 30,402
27,326
Less: Accumulated provision for depreciation 9,988
9,563
Plant in service, net of depreciation 20,414
17,763
Nuclear fuel, at amortized cost 324
339
Construction work in progress 1,113
908
Total property, plant, and equipment 21,851
19,010
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 65
67
Nuclear decommissioning trusts, at fair value 847
903
Miscellaneous property and investments 127
124
Total other property and investments 1,039
1,094
Deferred Charges and Other Assets:
Deferred charges related to income taxes 240
239
Deferred under recovered regulatory clause revenues 116
54
Other regulatory assets, deferred 1,386
1,272
Other deferred charges and assets 189
189
Total deferred charges and other assets 1,931
1,754
Total Assets $ 26,730
$ 23,864

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

~~At December 31, 2018 and 2017~~

~~Alabama Power Company 2018 Annual Report~~

Liabilities and Stockholder's Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 201
$ —
Accounts payable —
Affiliated 364
327
Other 614
585
Customer deposits 96
92
Accrued taxes 44
54
Accrued interest 89
77
Accrued compensation 227
205
Asset retirement obligations, current 163
7
Other current liabilities 161
53
Total current liabilities 1,959
1,400
Long-Term Debt (See accompanying statements)
7,923
7,628
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,962
2,760
Deferred credits related to income taxes 2,027
2,082
Accumulated deferred ITCs 106
112
Employee benefit obligations 314
304
Asset retirement obligations 3,047
1,702
Other cost of removal obligations 497
609
Other regulatory liabilities, deferred 69
84
Other deferred credits and liabilities 58
63
Total deferred credits and other liabilities 9,080
7,716
Total Liabilities 18,962
16,744
Redeemable Preferred Stock (See accompanying statements)
291
291
Common Stockholder's Equity (See accompanying statements)
7,477
6,829
Total Liabilities and Stockholder's Equity $ 26,730
$ 23,864
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CAPITALIZATION~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Alabama Power Company 2018 Annual Report~~

2018
2017
2018
2017
(in millions) (percent of total)
Long-Term Debt:
Long-term debt payable to affiliated trusts —
Variable rate (5.50% at 12/31/18) due 2042 $ 206
$ 206

Long-term notes payable —
5.125% due 2019 200
200

3.375% due 2020 250
250

2.38% to 3.95% due 2021 220
220

2.45% to 5.875% due 2022 750
750

3.55% due 2023 300
300

2.80% to 6.125% due 2025-2048 5,175
4,675

Variable rates (3.70% to 3.91% at 12/31/18) due 2021 25
25

Total long-term notes payable 6,920
6,420

Other long-term debt —
Pollution control revenue bonds —
1.625% to 2.90% due 2034 207
207

Variable rates (1.76% to 1.87% at 12/31/18) due 2021 65
65

Variable rates (1.70% to 1.80% at 12/31/18) due 2024-2038 788
788

Total other long-term debt 1,060
1,060

Capitalized lease obligations 4
4

Unamortized debt premium (discount), net (12 ) (11 )
Unamortized debt issuance expense (54 ) (51 )
Total long-term debt (annual interest requirement — $330 million) 8,124
7,628

Less amount due within one year 201
—

Long-term debt excluding amount due within one year 7,923
7,628
50.4 % 51.7 %
Redeemable Preferred Stock:
Cumulative redeemable preferred stock
$100 par or stated value — 4.20% to 4.92%
Authorized — 3,850,000 shares
Outstanding — 475,115 shares 48
48

$1 par value — 5.00%
Authorized — 27,500,000 shares
Outstanding — 10,000,000 shares: $25 stated value 243
243

Total redeemable preferred stock
(annual dividend requirement — $15 million) 291
291
1.9
2.0
Common Stockholder's Equity:
Common stock, par value $40 per share —
Authorized — 40,000,000 shares
Outstanding — 30,537,500 shares 1,222
1,222

Paid-in capital 3,508
2,986

Retained earnings 2,775
2,647

Accumulated other comprehensive loss (28 ) (26 )
Total common stockholder's equity 7,477
6,829
47.7
46.3
Total Capitalization $ 15,691
$ 14,748
100.0 % 100.0 %

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMMON STOCKHOLDER'S EQUITY~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Alabama Power Company 2018 Annual Report~~

Number of
Common
Shares
Issued

Common
Stock

Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)
Total
(in millions)
Balance at December 31, 2015 31
$ 1,222
$ 2,341
$ 2,461
$ (32 ) $ 5,992
Net income after dividends on
preferred and preference stock —
—
—
822
—
822
Capital contributions from parent company —
—
272
—
—
272
Other comprehensive income (loss) —
—
—
—
2
2
Cash dividends on common stock —
—
—
(765 ) —
(765 )
Balance at December 31, 2016 31
1,222
2,613
2,518
(30 ) 6,323
Net income after dividends on
preferred and preference stock —
—
—
848
—
848
Capital contributions from parent company —
—
373
—
—
373
Other comprehensive income (loss) —
—
—
—
4
4
Cash dividends on common stock —
—
—
(714 ) —
(714 )
Other —
—
—
(5 ) —
(5 )
Balance at December 31, 2017 31
1,222
2,986
2,647
(26 ) 6,829
Net income after dividends on
preferred and preference stock —
—
—
930
—
930
Capital contributions from parent company —
—
522
—
—
522
Other comprehensive income (loss) —
—
—
—
4
4
Cash dividends on common stock —
—
—
(801 ) —
(801 )
Other —
—
—
(1 ) (6 ) (7 )
Balance at December 31, 2018 31
$ 1,222
$ 3,508
$ 2,775
$ (28 ) $ 7,477

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the stockholder and the Board of Directors of Georgia Power Company~~

~~Opinion on the Financial Statements~~

We have audited the accompanying balance sheets and statements of capitalization of Georgia Power Company (Georgia Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2018 and 2017, the related statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Georgia Power as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

~~Basis for Opinion~~

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Georgia Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Georgia Power's internal control over financial reporting. Accordingly, we express no such opinion.

~~/s/ Deloitte & Touche LLP~~

~~Atlanta, Georgia~~

~~February 19, 2019~~

~~We have served as Georgia Power's auditor since 2002.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Georgia Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Revenues:
Retail revenues $ 7,752
$ 7,738
$ 7,772
Wholesale revenues, non-affiliates 163
163
175
Wholesale revenues, affiliates 24
26
42
Other revenues 481
383
394
Total operating revenues 8,420
8,310
8,383
Operating Expenses:
Fuel 1,698
1,671
1,807
Purchased power, non-affiliates 430
416
361
Purchased power, affiliates 723
622
518
Other operations and maintenance 1,860
1,724
2,003
Depreciation and amortization 923
895
855
Taxes other than income taxes 437
409
405
Estimated loss on Plant Vogtle Units 3 and 4 1,060
—
—
Total operating expenses 7,131
5,737
5,949
Operating Income 1,289
2,573
2,434
Other Income and (Expense):
Interest expense, net of amounts capitalized (397 ) (419 ) (388 )
Other income (expense), net 115
104
81
Total other income and (expense) (282 ) (315 ) (307 )
Earnings Before Income Taxes 1,007
2,258
2,127
Income taxes 214
830
780
Net Income 793
1,428
1,347
Dividends on Preferred and Preference Stock —
14
17
Net Income After Dividends on Preferred and Preference Stock $ 793
$ 1,414
$ 1,330

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMPREHENSIVE INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Georgia Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Net Income $ 793
$ 1,428
$ 1,347
Other comprehensive income (loss):
Qualifying hedges:
Reclassification adjustment for amounts included in net income,
net of tax of $1, $1, and $2, respectively 3
3
2
Total other comprehensive income (loss) 3
3
2
Comprehensive Income $ 796
$ 1,431
$ 1,349

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CASH FLOWS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Georgia Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Activities:
Net income $ 793
$ 1,428
$ 1,347
Adjustments to reconcile net income
to net cash provided from operating activities —
Depreciation and amortization, total 1,142
1,100
1,063
Deferred income taxes (260 ) 458
383
Pension, postretirement, and other employee benefits (75 ) (68 ) (33 )
Pension and postretirement funding —
—
(287 )
Settlement of asset retirement obligations (116 ) (120 ) (123 )
Other deferred charges — affiliated —
—
(111 )
Estimated loss on Plant Vogtle Units 3 and 4 1,060
—
—
Other, net (21 ) (83 ) (25 )
Changes in certain current assets and liabilities —
-Receivables 8
(256 ) 60
-Fossil fuel stock 83
(16 ) 104
-Prepaid income taxes 152
(168 ) —
-Other current assets (43 ) (28 ) (38 )
-Accounts payable 95
(219 ) (42 )
-Accrued taxes 58
1
131
-Retail fuel cost over recovery —
(84 ) (32 )
-Other current liabilities (107 ) (33 ) 28
Net cash provided from operating activities 2,769
1,912
2,425
Investing Activities:
Property additions (3,116 ) (2,704 ) (2,223 )
Proceeds pursuant to the Toshiba Guarantee, net of joint owner portion —
1,682
—
Nuclear decommissioning trust fund purchases (839 ) (574 ) (808 )
Nuclear decommissioning trust fund sales 833
568
803
Cost of removal, net of salvage (107 ) (100 ) (83 )
Change in construction payables, net of joint owner portion 68
223
(35 )
Payments pursuant to LTSAs (54 ) (64 ) (34 )
Proceeds from asset dispositions 138
96
10
Other investing activities (32 ) (39 ) 23
Net cash used for investing activities (3,109 ) (912 ) (2,347 )
Financing Activities:
Increase (decrease) in notes payable, net 294
(391 ) 234
Proceeds —
Capital contributions from parent company 2,985
431
594
Senior notes —
1,350
650
Short-term borrowings —
700
—
Other long-term debt —
370
—
FFB loan —
—
425
Pollution control revenue bonds issuances and remarketings 108
65
—
Redemptions and repurchases —
Senior notes (1,500 ) (450 ) (700 )
Pollution control revenue bonds (469 ) (65 ) (4 )
Short-term borrowings (150 ) (550 ) —
Preferred and preference stock —
(270 ) —
Other long-term debt (100 ) —
—
Payment of common stock dividends (1,396 ) (1,281 ) (1,305 )
Premiums on redemption and repurchases of senior notes (152 ) —
—
Other financing activities (20 ) (60 ) (36 )
Net cash used for financing activities (400 ) (151 ) (142 )
Net Change in Cash, Cash Equivalents, and Restricted Cash (740 ) 849
(64 )
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 852
3
67
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 112
$ 852
$ 3
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $26, $23, and $20 capitalized, respectively) $ 408
$ 386
$ 375
Income taxes (net of refunds) 300
496
170
Noncash transactions — Accrued property additions at year-end 683
550
336

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Georgia Power Company 2018 Annual Report~~

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 4
$ 852
Restricted cash 108
—
Receivables —
Customer accounts receivable 591
544
Unbilled revenues 208
255
Under recovered fuel clause revenues 115
165
Joint owner accounts receivable 170
262
Affiliated 39
24
Other accounts and notes receivable 80
76
Accumulated provision for uncollectible accounts (2 ) (3 )
Fossil fuel stock 231
314
Materials and supplies 519
504
Prepaid expenses 142
216
Other regulatory assets, current 199
205
Other current assets 70
14
Total current assets 2,474
3,428
Property, Plant, and Equipment:
In service 37,675
34,861
Less: Accumulated provision for depreciation 12,096
11,704
Plant in service, net of depreciation 25,579
23,157
Nuclear fuel, at amortized cost 550
544
Construction work in progress 4,833
4,613
Total property, plant, and equipment 30,962
28,314
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 51
53
Nuclear decommissioning trusts, at fair value 873
929
Miscellaneous property and investments 72
59
Total other property and investments 996
1,041
Deferred Charges and Other Assets:
Deferred charges related to income taxes 517
516
Other regulatory assets, deferred 4,902
2,932
Other deferred charges and assets 514
548
Total deferred charges and other assets 5,933
3,996
Total Assets $ 40,365
$ 36,779

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Georgia Power Company 2018 Annual Report~~

Liabilities and Stockholder's Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 617
$ 857
Notes payable 294
150
Accounts payable —
Affiliated 575
493
Other 890
834
Customer deposits 276
270
Accrued taxes 377
344
Accrued interest 105
123
Accrued compensation 221
219
Asset retirement obligations, current 202
270
Other regulatory liabilities, current 169
191
Other current liabilities 183
198
Total current liabilities 3,909
3,949
Long-Term Debt (See accompanying statements)
9,364
11,073
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 3,062
3,175
Deferred credits related to income taxes 3,080
3,248
Accumulated deferred ITCs 262
248
Employee benefit obligations 599
659
Asset retirement obligations, deferred 5,627
2,368
Other deferred credits and liabilities 139
128
Total deferred credits and other liabilities 12,769
9,826
Total Liabilities 26,042
24,848
Common Stockholder's Equity (See accompanying statements)
14,323
11,931
Total Liabilities and Stockholder's Equity $ 40,365
$ 36,779
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CAPITALIZATION~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Georgia Power Company 2018 Annual Report~~

2018
2017
2018
2017
(in millions) (percent of total)
Long-Term Debt:
Long-term notes payable —
1.95% to 5.40% due 2018 $ —
$ 747

4.25% due 2019 498
499

2.00% due 2020 950
950

2.40% due 2021 325
325

2.85% due 2022 400
400

5.75% due 2023 100
100

3.25% to 5.95% due 2026-2043 3,325
4,075

Variable rate (2.29% at 12/31/17) due 2018 —
100

Total long-term notes payable 5,598
7,196

Other long-term debt —
Pollution control revenue bonds —
2.35% due 2022 53
53

1.55% to 4.00% due 2025-2049 748
940

Variable rate (1.77% to 1.78% at 12/31/18) due 2019 108
108

Variable rates (1.70% to 1.83% at 12/31/18) due 2026-2052 551
720

FFB loans —
2.57% to 3.86% due 2020 44
44

2.57% to 3.86% due 2021 44
44

2.57% to 3.86% due 2022 44
44

2.57% to 3.86% due 2023 44
44

2.57% to 3.86% due 2024-2044 2,449
2,449

Junior subordinated note (5.00%) due 2077 270
270

Total other long-term debt 4,355
4,716

Capitalized lease obligations 142
154

Unamortized debt premium (discount), net (6 ) (12 )
Unamortized debt issuance expense (108 ) (124 )
Total long-term debt (annual interest requirement — $356 million) 9,981
11,930

Less amount due within one year 617
857

Long-term debt excluding amount due within one year 9,364
11,073
39.5 % 48.1 %
Common Stockholder's Equity:
Common stock, without par value —
Authorized — 20,000,000 shares
Outstanding — 9,261,500 shares 398
398

Paid-in capital 10,322
7,328

Retained earnings 3,612
4,215

Accumulated other comprehensive loss (9 ) (10 )
Total common stockholder's equity 14,323
11,931
60.5
51.9
Total Capitalization $ 23,687
$ 23,004
100.0 % 100.0 %

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMMON STOCKHOLDER'S EQUITY~~

~~For the Years Ended December 31, 2018, 2017, and 2016~~

~~Georgia Power Company 2018 Annual Report~~

Number of Common Shares Issued Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total
(in millions)
Balance at December 31, 2015 9
$ 398
$ 6,275
$ 4,061
$ (15 ) $ 10,719
Net income after dividends on
preferred and preference stock —
—
—
1,330
—
1,330
Capital contributions from parent company —
—
610
—
—
610
Other comprehensive income (loss) —
—
—
—
2
2
Cash dividends on common stock —
—
—
(1,305 ) —
(1,305 )
Balance at December 31, 2016 9
398
6,885
4,086
(13 ) 11,356
Net income after dividends on
preferred and preference stock —
—
—
1,414
—
1,414
Capital contributions from parent company —
—
443
—
—
443
Other comprehensive income (loss) —
—
—
—
3
3
Cash dividends on common stock —
—
—
(1,281 ) —
(1,281 )
Other —
—
—
(4 ) —
(4 )
Balance at December 31, 2017 9
398
7,328
4,215
(10 ) 11,931
Net income after dividends on
preferred and preference stock —
—
—
793
—
793
Capital contributions from parent company —
—
2,994
—
—
2,994
Other comprehensive income (loss) —
—
—
—
3
3
Cash dividends on common stock —
—
—
(1,396 ) —
(1,396 )
Other —
—
—
—
(2 ) (2 )
Balance at December 31, 2018 9
$ 398
$ 10,322
$ 3,612
$ (9 ) $ 14,323

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the stockholder and the Board of Directors of Mississippi Power Company~~

~~Opinion on the Financial Statements~~

We have audited the accompanying balance sheets and statements of capitalization of Mississippi Power Company (Mississippi Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2018 and 2017, the related statements of operations, comprehensive income (loss), common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Mississippi Power as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

~~Basis for Opinion~~

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Mississippi Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Mississippi Power's internal control over financial reporting. Accordingly, we express no such opinion.

~~/s/ Deloitte & Touche LLP~~

~~Atlanta, Georgia~~

~~February 19, 2019~~

~~We have served as Mississippi Power's auditor since 2002.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF OPERATIONS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Mississippi Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Revenues:
Retail revenues $ 889
$ 854
$ 859
Wholesale revenues, non-affiliates 263
259
261
Wholesale revenues, affiliates 91
56
26
Other revenues 22
18
17
Total operating revenues 1,265
1,187
1,163
Operating Expenses:
Fuel 405
395
343
Purchased power 41
25
34
Other operations and maintenance 313
291
317
Depreciation and amortization 169
161
132
Taxes other than income taxes 107
104
109
Estimated loss on Kemper IGCC 37
3,362
428
Total operating expenses 1,072
4,338
1,363
Operating Income (Loss) 193
(3,151 ) (200 )
Other Income and (Expense):
Allowance for equity funds used during construction —
72
124
Interest expense, net of amounts capitalized (76 ) (42 ) (74 )
Other income (expense), net 17
1
(2 )
Total other income and (expense) (59 ) 31
48
Earnings (Loss) Before Income Taxes 134
(3,120 ) (152 )
Income taxes (benefit) (102 ) (532 ) (104 )
Net Income (Loss) 236
(2,588 ) (48 )
Dividends on Preferred Stock 1
2
2
Net Income (Loss) After Dividends on Preferred Stock $ 235
$ (2,590 ) $ (50 )

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Mississippi Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Net Income (Loss) $ 236
$ (2,588 ) $ (48 )
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(1), $(1), and $1,
respectively (1 ) (1 ) 1
Reclassification adjustment for amounts included in net income,
net of tax of $-, $1, and $1, respectively 1
1
1
Total other comprehensive income (loss) —
—
2
Comprehensive Income (Loss) $ 236
$ (2,588 ) $ (46 )

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CASH FLOWS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Mississippi Power Company 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Activities:
Net income (loss) $ 236
$ (2,588 ) $ (48 )
Adjustments to reconcile net income (loss)
to net cash provided from operating activities —
Depreciation and amortization, total 177
198
157
Deferred income taxes 475
(727 ) (67 )
Allowance for equity funds used during construction —
(72 ) (124 )
Pension and postretirement funding —
—
(47 )
Settlement of asset retirement obligations (35 ) (23 ) (23 )
Estimated loss on Kemper IGCC 33
3,179
428
Other, net 18
(8 ) (9 )
Changes in certain current assets and liabilities —
-Receivables (19 ) 540
13
-Fossil fuel stock (3 ) 24
4
-Prepaid income taxes (12 ) —
39
-Other current assets (7 ) (13 ) (12 )
-Accounts payable 15
(3 ) (14 )
-Accrued interest (1 ) (29 ) 27
-Accrued taxes (46 ) 80
14
-Over recovered regulatory clause revenues 14
(51 ) (45 )
-Customer liability associated with Kemper refunds —
(1 ) (73 )
-Other current liabilities (41 ) (3 ) 9
Net cash provided from operating activities 804
503
229
Investing Activities:
Property additions (188 ) (429 ) (798 )
Construction payables 4
(47 ) (26 )
Government grant proceeds —
—
137
Payments pursuant to LTSAs (29 ) (10 ) 10
Other investing activities (19 ) (18 ) (20 )
Net cash used for investing activities (232 ) (504 ) (697 )
Financing Activities:
Decrease in notes payable, net (4 ) (18 ) —
Proceeds —
Capital contributions from parent company 15
1,002
627
Senior notes 600
—
—
Long-term debt issuance to parent company —
40
200
Other long-term debt —
—
1,200
Short-term borrowings 300
109
—
Redemptions —
Preferred stock (33 ) —
—
Pollution control revenue bonds (43 ) —
—
Short-term borrowings (300 ) (109 ) (478 )
Long-term debt to parent company —
(591 ) (225 )
Capital leases —
(71 ) (3 )
Senior notes (155 ) (35 ) (300 )
Other long-term debt (900 ) (300 ) (425 )
Other financing activities (7 ) (2 ) (2 )
Net cash provided from (used for) financing activities (527 ) 25
594
Net Change in Cash, Cash Equivalents, and Restricted Cash 45
24
126
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 248
224
98
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 293
$ 248
$ 224
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $-, $29, and $49 capitalized, respectively) $ 80
$ 65
$ 50
Income taxes (net of refunds) (525 ) (424 ) (97 )
Noncash transactions — Accrued property additions at year-end 35
32
78

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Mississippi Power Company 2018 Annual Report~~

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 293
$ 248
Receivables —
Customer accounts receivable 34
36
Unbilled revenues 41
41
Affiliated 21
16
Other accounts and notes receivable 31
16
Fossil fuel stock 20
17
Materials and supplies, current 53
44
Other regulatory assets, current 116
125
Prepaid income taxes 12
—
Other current assets 7
9
Total current assets 628
552
Property, Plant, and Equipment:
In service 4,900
4,773
Less: Accumulated provision for depreciation 1,429
1,325
Plant in service, net of depreciation 3,471
3,448
Construction work in progress 103
84
Total property, plant, and equipment 3,574
3,532
Other Property and Investments 24
30
Deferred Charges and Other Assets:
Deferred charges related to income taxes 33
35
Other regulatory assets, deferred 474
437
Accumulated deferred income taxes 150
247
Other deferred charges and assets 3
33
Total deferred charges and other assets 660
752
Total Assets $ 4,886
$ 4,866

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Mississippi Power Company 2018 Annual Report~~

Liabilities and Stockholder's Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 40
$ 989
Notes payable —
4
Accounts payable —
Affiliated 60
59
Other 90
96
Accrued taxes —
Accrued income taxes —
40
Other accrued taxes 95
101
Accrued interest 15
16
Accrued compensation 38
39
Accrued plant closure costs 29
35
Asset retirement obligations, current 34
37
Over recovered regulatory clause liabilities 14
—
Other current liabilities 40
47
Total current liabilities 455
1,463
Long-Term Debt (See accompanying statements)
1,539
1,097
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 378
—
Deferred credits related to income taxes 382
372
Employee benefit obligations 115
116
Asset retirement obligations, deferred 126
137
Other cost of removal obligations 185
178
Other regulatory liabilities, deferred 81
79
Other deferred credits and liabilities 16
33
Total deferred credits and other liabilities 1,283
915
Total Liabilities 3,277
3,475
Cumulative Redeemable Preferred Stock (See accompanying statements)
—
33
Common Stockholder's Equity (See accompanying statements)
1,609
1,358
Total Liabilities and Stockholder's Equity $ 4,886
$ 4,866
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF CAPITALIZATION~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Mississippi Power Company 2018 Annual Report~~

2018 2017 2018 2017
(in millions) (percent of total)
Long-Term Debt:
Long-term notes payable —
5.55% due 2019 $ —
$ 125

1.63% to 5.40% due 2028-2042 950
680

Adjustable rate (3.05% at 12/31/17) due 2018 —
900

Adjustable rate (3.47% at 12/31/18) due 2020 300
—

Total long-term notes payable 1,250
1,705

Other long-term debt —
Pollution control revenue bonds —
5.15% due 2028 —
43

Variable rates (2.20% to 2.23% at 12/31/18) due 2019 40
40

Plant Daniel revenue bonds (7.13%) due 2021 270
270

Total other long-term debt 310
353

Unamortized debt premium 29
36

Unamortized debt discount (2 ) (1 )
Unamortized debt issuance expense (8 ) (7 )
Total long-term debt (annual interest requirement — $70 million) 1,579
2,086

Less amount due within one year 40
989

Long-term debt excluding amount due within one year 1,539
1,097
48.9 % 44.1 %
Cumulative Redeemable Preferred Stock:
$100 par value — 4.40% to 5.25%
Authorized — 1,244,139 shares
Outstanding — 2018: no shares
— 2017: 334,210 shares
—
33
—
1.3
Common Stockholder's Equity:
Common stock, without par value —
Authorized — 1,130,000 shares

Outstanding — 1,121,000 shares 38
38

Paid-in capital 4,546
4,529

Accumulated deficit (2,971 ) (3,205 )
Accumulated other comprehensive loss (4 ) (4 )
Total common stockholder's equity 1,609
1,358
51.1
54.6
Total Capitalization $ 3,148
$ 2,488
100.0 % 100.0 %

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~STATEMENTS OF COMMON STOCKHOLDER'S EQUITY~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Mississippi Power Company 2018 Annual Report~~

Number of Common Shares Issued
Common
Stock
Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total
(in millions)
Balance at December 31, 2015 1
$ 38
$ 2,893
$ (566 ) $ (6 ) $ 2,359
Net loss after dividends on preferred stock —
—
—
(50 ) —
(50 )
Capital contributions from parent company —
—
632
—
—
632
Other comprehensive income (loss) —
—
—
—
2
2
Balance at December 31, 2016 1
38
3,525
(616 ) (4 ) 2,943
Net loss after dividends on preferred stock —
—
—
(2,590 ) —
(2,590 )
Capital contributions from parent company —
—
1,004
—
—
1,004
Other —
—
—
1
—
1
Balance at December 31, 2017 1
38
4,529
(3,205 ) (4 ) 1,358
Net income after dividends on preferred stock —
—
—
235
—
235
Capital contributions from parent company —
—
17
—
—
17
Other —
—
—
(1 ) —
(1 )
Balance at December 31, 2018 1
$ 38
$ 4,546
$ (2,971 ) $ (4 ) $ 1,609

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the stockholder and the Board of Directors of Southern Power Company and Subsidiary Companies~~

~~Opinion on the Financial Statements~~

We have audited the accompanying consolidated balance sheets of Southern Power Company and subsidiary companies (Southern Power) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Southern Power as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

~~Basis for Opinion~~

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Southern Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Southern Power's internal control over financial reporting. Accordingly, we express no such opinion.

~~/s/ Deloitte & Touche LLP~~

~~Atlanta, Georgia~~

~~February 19, 2019~~

~~We have served as Southern Power's auditor since 2002.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Revenues:
Wholesale revenues, non-affiliates $ 1,757
$ 1,671
$ 1,146
Wholesale revenues, affiliates 435
392
419
Other revenues 13
12
12
Total operating revenues 2,205
2,075
1,577
Operating Expenses:
Fuel 699
621
456
Purchased power 176
149
102
Other operations and maintenance 395
386
354
Depreciation and amortization 493
503
352
Taxes other than income taxes 46
48
23
Asset impairment 156
—
—
Gain on disposition (2 ) —
—
Total operating expenses 1,963
1,707
1,287
Operating Income 242
368
290
Other Income and (Expense):
Interest expense, net of amounts capitalized (183 ) (191 ) (117 )
Other income (expense), net 23
1
6
Total other income and (expense) (160 ) (190 ) (111 )
Earnings Before Income Taxes 82
178
179
Income taxes (benefit) (164 ) (939 ) (195 )
Net Income 246
1,117
374
Net income attributable to noncontrolling interests 59
46
36
Net Income Attributable to Southern Power $ 187
$ 1,071
$ 338

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

2018
2017
2016
(in millions)
Net Income $ 246
$ 1,117
$ 374
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(17), $39, and $(17), respectively (51 ) 63
(27 )
Reclassification adjustment for amounts included in net income,
net of tax of $19, $(46), and $36, respectively 58
(73 ) 58
Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of $2, $-, and $-, respectively 5
—
—
Reclassification adjustment for amounts included in net income, net of
tax of $-, $-, and $-, respectively 2
—
—
Total other comprehensive income (loss) 14
(10 ) 31
Comprehensive income attributable to noncontrolling interests 59
46
36
Comprehensive Income Attributable to Southern Power $ 201
$ 1,061
$ 369

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

2018
2017
2016
(in millions)
Operating Activities:
Net income $ 246
$ 1,117
$ 374
Adjustments to reconcile net income
to net cash provided from operating activities —
Depreciation and amortization, total 524
536
370
Deferred income taxes (239 ) (263 ) (1,063 )
Amortization of investment tax credits (58 ) (57 ) (37 )
Collateral deposits 17
(4 ) (102 )
Accrued income taxes, non-current (14 ) 14
(109 )
Income taxes receivable, non-current 42
(61 ) (13 )
Asset impairment 156
—
—
Other, net (10 ) (9 ) 12
Changes in certain current assets and liabilities —
-Receivables (20 ) (60 ) (54 )
-Prepaid income taxes 25
24
(29 )
-Other current assets (26 ) (28 ) 4
-Accrued taxes 7
(55 ) 940
-Other current liabilities (19 ) 1
46
Net cash provided from operating activities 631
1,155
339
Investing Activities:
Business acquisitions (65 ) (1,016 ) (2,284 )
Property additions (315 ) (268 ) (2,114 )
Change in construction payables (6 ) (153 ) (57 )
Proceeds from disposition 203
—
—
Payments pursuant to LTSAs and for equipment not yet received (75 ) (203 ) (350 )
Other investing activities 31
15
16
Net cash used for investing activities (227 ) (1,625 ) (4,789 )
Financing Activities:
Increase (decrease) in notes payable, net (105 ) (104 ) 73
Proceeds —
Short-term borrowings 200
—
—
Capital contributions 2
—
1,850
Senior notes —
525
2,831
Other long-term debt —
43
65
Redemptions —
Senior notes (350 ) (500 ) (200 )
Other long-term debt (420 ) (18 ) (86 )
Short-term borrowings (100 ) —
—
Return of capital (1,650 ) —
—
Distributions to noncontrolling interests (153 ) (119 ) (57 )
Capital contributions from noncontrolling interests 2,551
80
682
Purchase of membership interests from noncontrolling interests —
(59 ) (129 )
Payment of common stock dividends (312 ) (317 ) (272 )
Other financing activities (26 ) (33 ) (30 )
Net cash provided from (used for) financing activities
(363 ) (502 ) 4,727
Net Change in Cash, Cash Equivalents, and Restricted Cash 41
(972 ) 277
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 140
1,112
835
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 181
$ 140
$ 1,112
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $17, $11, and $44 capitalized, respectively) $ 173
$ 189
$ 89
Income taxes (net of refunds and investment tax credits) 79
(487 ) 116
Noncash transactions —
Accrued property additions at year-end 31
32
251
Accrued acquisitions at year-end —
—
461

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 181
$ 129
Receivables —
Customer accounts receivable 111
117
Affiliated 55
50
Other 116
98
Materials and supplies 220
278
Prepaid income taxes 25
50
Other current assets 37
36
Total current assets 745
758
Property, Plant, and Equipment:
In service 13,271
13,755
Less: Accumulated provision for depreciation 2,171
1,910
Plant in service, net of depreciation 11,100
11,845
Construction work in progress 430
511
Total property, plant, and equipment 11,530
12,356
Other Property and Investments:
Intangible assets, net of amortization of $61 and $47
at December 31, 2018 and December 31, 2017, respectively 345
411
Total other property and investments 345
411
Deferred Charges and Other Assets:
Prepaid LTSAs 98
118
Accumulated deferred income taxes 1,186
925
Income taxes receivable, non-current 30
72
Assets held for sale 576
—
Other deferred charges and assets 373
566
Total deferred charges and other assets 2,263
1,681
Total Assets $ 14,883
$ 15,206

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED BALANCE SHEETS~~

At ~~December 31, 2018~~ ~~and~~ ~~2017~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

Liabilities and Stockholders' Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 599
$ 770
Notes payable 100
105
Accounts payable —
Affiliated 92
102
Other 77
103
Accrued taxes 6
4
Liabilities held for sale, current 15
—
Other current liabilities 142
148
Total current liabilities 1,031
1,232
Long-Term Debt:
Senior notes —
1.95% due 2019 —
600
2.375% due 2020 300
300
2.50% due 2021 300
300
1.00% due 2022 687
720
2.75% due 2023 290
290
1.85% to 5.25% due 2025-2046 2,348
2,374
Other long-term debt —
Variable rate (3.34% at 12/31/18) due 2020 525
525
Unamortized debt premium (discount), net (9 ) (10 )
Unamortized debt issuance expense (23 ) (28 )
Total long-term debt 4,418
5,071
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 105
199
Accumulated deferred ITCs 1,832
1,884
Other deferred credits and liabilities 213
322
Total deferred credits and other liabilities 2,150
2,405
Total Liabilities 7,599
8,708
Common Stockholder's Equity:
Common stock, par value $0.01 per share —
Authorized — 1,000,000 shares
Outstanding — 1,000 shares —
—
Paid-in capital 1,600
3,662
Retained earnings 1,352
1,478
Accumulated other comprehensive income (loss) 16
(2 )
Total common stockholder's equity 2,968
5,138
Noncontrolling Interests 4,316
1,360
Total Stockholders' Equity 7,284
6,498
Total Liabilities and Stockholders' Equity $ 14,883
$ 15,206
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~For the Years Ended~~ ~~December 31, 2018~~, ~~2017, and~~ ~~2016~~

~~Southern Power Company and Subsidiary Companies 2018 Annual Report~~

Number of Common Shares Issued Common Stock Paid-In Capital Retained Earnings
Accumulated Other Comprehensive Income Total Common Stockholder's Equity
Noncontrolling Interests^(a)
Total
(in millions)
Balance at December 31, 2015 —
$ —
$ 1,822
$ 657
$ 4
$ 2,483
$ 781
$ 3,264
Net income attributable
   to Southern Power
—
—
—
338
—
338
—
338
Capital contributions from
   parent company
—
—
1,850
—
—
1,850
—
1,850
Other comprehensive income —
—
—
—
31
31
—
31
Cash dividends on common
   stock
—
—
—
(272 ) —
(272 ) —
(272 )
Capital contributions from
   noncontrolling interests
—
—
—
—
—
—
618
618
Distributions to noncontrolling
   interests
—
—
—
—
—
—
(57 ) (57 )
Purchase of membership interests
   from noncontrolling interests
—
—
—
—
—
—
(129 ) (129 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
32
32
Other —
—
(1 ) 1
—
—
—
—
Balance at December 31, 2016 —
—
3,671
724
35
4,430
1,245
5,675
Net income attributable
   to Southern Power
—
—
—
1,071
—
1,071
—
1,071
Capital contributions to parent
   company, net
—
—
(2 ) —
—
(2 ) —
(2 )
Other comprehensive income —
—
—
—
(10 ) (10 ) —
(10 )
Cash dividends on common
   stock
—
—
—
(317 ) —
(317 ) —
(317 )
Other comprehensive income
transfer from SCS ^(b)
—
—
—
—
(27 ) (27 ) —
(27 )
Capital contributions from
   noncontrolling interests
—
—
—
—
—
—
79
79
Distributions to noncontrolling
   interests
—
—
—
—
—
—
(122 ) (122 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
44
44
Reclassification from redeemable
   noncontrolling interests
—
—
—
—
—
—
114
114
Other —
—
(7 ) —
—
(7 ) —
(7 )
Balance at December 31, 2017 —
—
3,662
1,478
(2 ) 5,138
1,360
6,498
Net income attributable
   to Southern Power
—
—
—
187
—
187
—
187
Return of capital to parent —
—
(1,650 ) —
—
(1,650 ) —
(1,650 )
Capital contributions from parent
   company
—
—
2
—
—
2
—
2
Other comprehensive income —
—
—
—
14
14
—
14
Cash dividends on common
   stock
—
—
—
(312 ) —
(312 ) —
(312 )
Capital contributions from
   noncontrolling interests
—
—
—
—
—
—
1,372
1,372
Distributions to noncontrolling
   interests
—
—
—
—
—
—
(164 ) (164 )
Net income attributable to
   noncontrolling interests
—
—
—
—
—
—
59
59
Sale of noncontrolling interests^(c)
—
—
(417 ) —
—
(417 ) 1,690
1,273
Other —
—
3
(1 ) 4
6
(1 ) 5
Balance at December 31, 2018 —
$ —
$ 1,600
$ 1,352
$ 16
$ 2,968
$ 4,316
$ 7,284



~~(a)~~	~~Excludes redeemable noncontrolling interests. See Note 7 to the financial statements under "Noncontrolling Interests" for additional information.~~
~~(b)~~	In connection with Southern Power becoming a participant to the Southern Company qualified pension plan and other postretirement benefit plan, $27 million of other comprehensive income, net of tax of $9 million, was transferred from SCS.
~~(c)~~	~~See Note 15 under "Southern Power - Sales of Renewable Facility Interests" for additional information.~~

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the stockholder and the Board of Directors of Southern Company Gas and Subsidiary Companies~~

~~Opinion on the Financial Statements~~

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southern Company Gas and subsidiary companies (Southern Company Gas) (a wholly-owned subsidiary of The Southern Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2018 and 2017 and the six month periods ended June 30, 2016 (Predecessor) and December 31, 2016 (Successor), and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Southern Company Gas as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017 and the six months ended June 30, 2016 (Predecessor) and December 31, 2016 (Successor), in conformity with accounting principles generally accepted in the United States of America.

~~Basis for Opinion~~

These financial statements are the responsibility of Southern Company Gas' management. Our responsibility is to express an opinion on Southern Company Gas' financial statements based on our audits. We did not audit the financial statements of Southern Natural Gas Company, L.L.C. (SNG), Southern Company Gas' investment in which is accounted for by the use of the equity method. The accompanying consolidated financial statements of Southern Company Gas include its equity investment in SNG of $1,261 million and $1,262 million as of December 31, 2018 and December 31, 2017, respectively, and its earnings from its equity method investment in SNG of $131 million, $88 million, and $56 million for the years ended December 31, 2018 and 2017 and the six months ended December 31, 2016, respectively. Those statements were audited by other auditors whose reports (which express an unqualified opinion on SNG's financial statements and contain an emphasis of matter paragraph concerning the extent of its operations and relationships with affiliated entities) have been furnished to us, and our opinion, insofar as it relates to the amounts included for SNG, is based solely on the reports of the other auditors. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Southern Company Gas in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Southern Company Gas is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Southern Company Gas' internal control over financial reporting. Accordingly, we express no such opinion.

~~/s/ Deloitte & Touche LLP~~

~~Atlanta, Georgia~~

~~February 19, 2019~~

~~We have served as Southern Company Gas' auditor since 2016.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Successor Predecessor
For the year ended
December 31, For the year ended
December 31, July 1, 2016 through December 31, January 1, 2016 through June 30,
2018 2017 2016 2016
(in millions) (in millions)
Operating Revenues:
Natural gas revenues (includes revenue taxes of
$114, $100, $32, and $57 for the periods presented,
respectively) $ 3,874
$ 3,787
$ 1,591
$ 1,845
Alternative revenue programs (20 ) 4
5
(4 )
Other revenues 55
129
56
64
Total operating revenues 3,909
3,920
1,652
1,905
Operating Expenses:
Cost of natural gas 1,539
1,601
613
755
Cost of other sales 12
29
10
14
Other operations and maintenance 981
945
480
452
Depreciation and amortization 500
501
238
206
Taxes other than income taxes 211
184
71
99
Goodwill impairment 42
—
—
—
Gain on dispositions, net (291 ) —
—
—
Merger-related expenses —
—
41
56
Total operating expenses 2,994
3,260
1,453
1,582
Operating Income 915
660
199
323
Other Income and (Expense):
Earnings from equity method investments 148
106
60
2
Interest expense, net of amounts capitalized (228 ) (200 ) (81 ) (96 )
Other income (expense), net 1
44
12
3
Total other income and (expense) (79 ) (50 ) (9 ) (91 )
Earnings Before Income Taxes 836
610
190
232
Income taxes 464
367
76
87
Net Income 372
243
114
145
Net income attributable to noncontrolling interest —
—
—
14
Net Income Attributable to Southern Company Gas $ 372
$ 243
$ 114
$ 131

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Successor Predecessor
For the year ended
December 31, For the year ended
December 31, July 1, 2016 through December 31, January 1, 2016 through June 30,
2018 2017 2016 2016
(in millions) (in millions)
Net Income $ 372
$ 243
$ 114
$ 145
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of
$2, $(3), $(1), and $(23), respectively 5
(5 ) (1 ) (41 )
Reclassification adjustment for amounts included
in net income, net of tax of $(1), $-, $-, and $-,
respectively (1 ) 1
—
1
Pension and other postretirement benefit plans:
Benefit plan net gain (loss), net of tax of
$-, $-, $19, and $-, respectively —
(1 ) 27
—
Reclassification adjustment for amounts included
in net income, net of tax of $3, $-, $-, and $4,
respectively (2 ) —
—
5
Total other comprehensive income (loss) 2
(5 ) 26
(35 )
Comprehensive income attributable to
noncontrolling interest —
—
—
14
Comprehensive Income Attributable to
Southern Company Gas $ 374
$ 238
$ 140
$ 96

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Successor Predecessor
For the year ended
December 31, For the year ended
December 31, July 1, 2016 through December 31, January 1,
2016 through June 30,
2018 2017 2016 2016
(in millions) (in millions)
Operating Activities:
Net income $ 372
$ 243
$ 114
$ 145
Adjustments to reconcile net income to net cash
provided from (used for) operating activities —
Depreciation and amortization, total 500
501
238
206
Deferred income taxes (1 ) 236
92
8
Pension and postretirement funding —
—
(125 ) —
Hedge settlements —
—
(35 ) (26 )
Goodwill impairment 42
—
—
—
Gain on dispositions, net (291 ) —
—
—
Mark-to-market adjustments (19 ) (24 ) (3 ) 162
Other, net (24 ) (51 ) (51 ) (57 )
Changes in certain current assets and liabilities —
-Receivables (218 ) (94 ) (490 ) 179
-Natural gas for sale, net of
temporary LIFO liquidation
49
36
(226 ) 273
-Prepaid income taxes (42 ) (39 ) (23 ) 151
-Other current assets 4
(24 ) (31 ) 37
-Accounts payable 372
(20 ) 194
43
-Accrued taxes 10
110
8
41
-Accrued compensation 32
15
(13 ) (21 )
-Other current liabilities (22 ) (8 ) 24
(30 )
Net cash provided from (used for) operating activities 764
881
(327 ) 1,111
Investing Activities:
Property additions (1,388 ) (1,514 ) (614 ) (509 )
Cost of removal, net of salvage (96 ) (66 ) (40 ) (32 )
Change in construction payables, net (37 ) 72
22
(7 )
Investment in unconsolidated subsidiaries (110 ) (145 ) (1,444 ) (14 )
Returned investment in unconsolidated subsidiaries 20
80
5
3
Proceeds from dispositions 2,609
—
—
—
Other investing activities —
5
4
3
Net cash provided from (used for) investing activities 998
(1,568 ) (2,067 ) (556 )
Financing Activities:
Increase (decrease) in notes payable, net (868 ) 262
1,143
(896 )
Proceeds —
First mortgage bonds 300
400
—
250
Capital contributions from parent company 24
103
1,085
—
Senior notes —
450
900
350
Redemptions and repurchases —
Gas facility revenue bonds (200 ) —
—
—
Medium-term notes —
(22 ) —
—
First mortgage bonds —
—
—
(125 )
Senior notes (155 ) —
(420 ) —
Return of capital (400 ) —
—
—
Distribution to noncontrolling interest —
—
(15 ) (19 )
Purchase of 15% noncontrolling interest in SouthStar —
—
(160 ) —
Payment of common stock dividends (468 ) (443 ) (126 ) (128 )
Other financing activities (3 ) (9 ) (8 ) 10
Net cash provided from (used for) financing activities (1,770 ) 741
2,399
(558 )
Net Change in Cash, Cash Equivalents, and Restricted Cash (8 ) 54
5
(3 )
Cash, Cash Equivalents, and Restricted Cash at Beginning of Year 78
24
19
22
Cash, Cash Equivalents, and Restricted Cash at End of Year $ 70
$ 78
$ 24
$ 19
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $7, $11, $4, and $3 capitalized, respectively) $ 249
$ 223
$ 135
$ 119
Income taxes, net 524
72
23
(100 )
Noncash transactions — Accrued property additions at year-end 97
135
63
41

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED BALANCE SHEETS~~

~~At December 31, 2018 and 2017~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Assets 2018
2017
(in millions)
Current Assets:
Cash and cash equivalents $ 64
$ 73
Receivables —
Energy marketing receivable 801
607
Customer accounts receivable 370
400
Unbilled revenues 213
285
Affiliated 11
12
Other accounts and notes receivable 142
91
Accumulated provision for uncollectible accounts (30 ) (28 )
Natural gas for sale 524
595
Prepaid expenses 118
79
Assets from risk management activities, net of collateral 219
135
Other regulatory assets, current 73
94
Other current assets 50
52
Total current assets 2,555
2,395
Property, Plant, and Equipment:
In service 15,177
15,833
Less: Accumulated depreciation 4,400
4,596
Plant in service, net of depreciation 10,777
11,237
Construction work in progress 580
491
Total property, plant, and equipment 11,357
11,728
Other Property and Investments:
Goodwill 5,015
5,967
Equity investments in unconsolidated subsidiaries 1,538
1,477
Other intangible assets, net of amortization of $145 and $120
at December 31, 2018 and December 31, 2017, respectively 101
280
Miscellaneous property and investments 20
21
Total other property and investments 6,674
7,745
Deferred Charges and Other Assets:
Other regulatory assets, deferred 669
901
Other deferred charges and assets 193
218
Total deferred charges and other assets 862
1,119
Total Assets $ 21,448
$ 22,987

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED BALANCE SHEETS~~

~~At December 31, 2018 and 2017~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Liabilities and Stockholder's Equity 2018
2017
(in millions)
Current Liabilities:
Securities due within one year $ 357
$ 157
Notes payable 650
1,518
Energy marketing trade payables 856
546
Accounts payable —
Affiliated 45
21
Other 402
425
Customer deposits 133
128
Accrued taxes —
Accrued income taxes 66
40
Other accrued taxes 75
78
Accrued interest 55
51
Accrued compensation 100
74
Liabilities from risk management activities, net of collateral 76
69
Other regulatory liabilities, current 79
135
Other current liabilities 130
159
Total current liabilities 3,024
3,401
Long-term Debt (See accompanying statements)
5,583
5,891
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,016
1,089
Deferred credits related to income taxes 940
1,063
Employee benefit obligations 357
415
Other cost of removal obligations 1,585
1,646
Accrued environmental remediation 268
342
Other deferred credits and liabilities 105
118
Total deferred credits and other liabilities 4,271
4,673
Total Liabilities 12,878
13,965
Common Stockholder's Equity (See accompanying statements)
8,570
9,022
Total Liabilities and Stockholder's Equity $ 21,448
$ 22,987
Commitments and Contingent Matters (See notes)

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF CAPITALIZATION~~

~~At December 31, 2018 and 2017~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

2018
2017
2018
2017
(in millions) (percent of total)
Long-Term Debt:
Long-term notes payable —
3.50% due 2018 $ —
$ 155

5.25% due 2019 300
300

3.50% to 9.10% due 2021 330
330

8.55% to 8.70% due 2022 46
46

2.45% due 2023 350
350

3.25% to 7.30% due 2025-2047 3,134
3,134

Total long-term notes payable 4,160
4,315

Other long-term debt —
First mortgage bonds —
4.70% due 2019 50
50

5.80% due 2023 50
50

2.66% to 6.58% due 2026-2058 1,225
925

Gas facility revenue bonds —
Variable rate (1.71% at 12/31/17) due 2022 —
47

Variable rate (1.71% at 12/31/17) due 2024-2033 —
153

Total other long-term debt 1,325
1,225

Unamortized fair value adjustment of long-term debt 474
525

Unamortized debt discount (19 ) (17 )
Total long-term debt (annual interest requirement — $244 million) 5,940
6,048

Less amount due within one year 357
157

Long-term debt excluding amount due within one year 5,583
5,891
39.4 % 39.5 %
Common Stockholder's Equity:
Common stock — par value $0.01 per share
Authorized — 100 million shares
Outstanding — 100 shares
Paid-in capital 8,856
9,214

Accumulated deficit (312 ) (212 )
Accumulated other comprehensive income 26
20

Total common stockholder's equity 8,570
9,022
60.6
60.5
Total Capitalization $ 14,153
$ 14,913
100.0 % 100.0 %

~~The accompanying notes are an integral part of these financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~Southern Company Gas and Subsidiary Companies 2018 Annual Report~~

Southern Company Gas Common Stockholders' Equity
Number of Common Shares Common Stock
Accumulated
Other
Comprehensive Income
(Loss)

Noncontrolling
Interests

Issued Treasury Par Value Paid-In Capital Treasury Retained Earnings (Accumulated Deficit) Total
(in thousands) (in millions)
Predecessor –
Balance at December 31, 2015 120,377
217
$ 603
$ 2,099
$ (8 ) $ 1,421
$ (186 ) $ 46
$ 3,975
Consolidated net income
   attributable to
   Southern Company Gas
—
—
—
—
—
131
—
—
131
Other comprehensive income
   (loss)
—
—
—
—
—
—
(35 ) —
(35 )
Stock issued 95
—
—
6
—
—
—
—
6
Stock-based compensation 270
—
2
28
—
—
—
—
30
Cash dividends on common stock —
—
—
—
—
(128 ) —
—
(128 )
Reclassification of
   noncontrolling interest
—
—
—
—
—
—
—
(46 ) (46 )
Predecessor –
Balance at June 30, 2016 120,742
217
605
2,133
(8 ) 1,424
(221 ) —
3,933
Successor –
Balance at July 1, 2016 —
—
—
8,001
—
—
—
—
8,001
Consolidated net income
   attributable to
   Southern Company Gas
—
—
—
—
—
114
—
—
114
Capital contributions from parent
company —
—
—
1,094
—
—
—
—
1,094
Other comprehensive income
   (loss)
—
—
—
—
—
—
26
—
26
Cash dividends on common stock —
—
—
—
—
(126 ) —
—
(126 )
Successor –
Balance at December 31, 2016 —
—
—
9,095
—
(12 ) 26
—
9,109
Consolidated net income
   attributable to
   Southern Company Gas
—
—
—
—
—
243
—
—
243
Capital contributions from
   parent company, net
—
—
—
117
—
—
—
—
117
Other comprehensive income
   (loss)
—
—
—
—
—
—
(5 ) —
(5 )
Cash dividends on common stock —
—
—
—
—
(443 ) —
—
(443 )
Other —
—
—
2
—
—
(1 ) —
1
Successor –
Balance at December 31, 2017 —
—
—
9,214
—
(212 ) 20
—
9,022
Consolidated net income
   attributable to
   Southern Company Gas
—
—
—
—
—
372
—
—
372
Return of capital to parent —
—
—
(400 ) —
—
—
—
(400 )
Capital contributions from
parent company —
—
—
42
—
—
—
—
42
Other comprehensive income
(loss) —
—
—
—
—
—
2
—
2
Cash dividends on common stock —
—
—
—
—
(468 ) —
—
(468 )
Other —
—
—
—
—
(4 ) 4
—
—
Successor –
Balance at December 31, 2018 —
—
$ —
$ 8,856
$ —
$ (312 ) $ 26
$ —
$ 8,570

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of ContentsIndex to Financial Statements~~

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

II-141

2018 2017 2016
(in millions)
Southern Company $ 89
$ 124
$ 50
Southern Power $ 25
$ 25
$ 10

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Amortization associated with other intangible assets in 2020, 2019, and 2018 was as follows:


	2020		2019		2018
	(in millions)
Southern Company(a)	$	49	$	61	$	89
Southern Power(b)	20		19		25
Southern Company Gas:
Gas marketing services	$	17	$	23	$	32
Wholesale gas services(b)	2		8		20
Southern Company Gas total	$	19	$	31	$	52

Successor Predecessor
Year Ended December 31, 2018 Year Ended December 31, 2017
July 1, 2016
through
December 31, 2016

January 1, 2016 through
June 30, 2016
(in millions) (in millions)
Southern Company Gas:
Wholesale gas services^(a)
$ 20
$ 32
$ 2
$ —
Gas marketing services^(b)
32
54
32
8
(a)Includes $22 million, $27 million, and $45 million in 2020, 2019, and 2018, respectively, recorded as a reduction to operating revenues.


~~(a)~~	~~Recorded as a reduction to operating revenues.~~


~~(b)~~	~~Included in depreciation and amortization.~~

(b)Recorded as a reduction to operating revenues.

At December 31, ~~2018,~~2020, the estimated amortization associated with other intangible assets for the next five years is as follows:


	2021		2022		2023		2024		2025
	(in millions)
Southern Company	$	43	$	39	$	37	$	35	$	32
Southern Power	20		20		20		20		20
Southern Company Gas	14		11		9		7		6

2019 2020 2021 2022 2023
(in millions)
Southern Company^(*)
$ 61
$ 50
$ 43
$ 39
$ 38
Southern Power^(*)
20
20
20
20
20
Southern Company Gas 29
19
13
10
9


~~(*)~~	~~Excludes amounts related to held for sale assets. See Note 15 under "Southern Power –~~ ~~Sales~~Intangible liabilities of ~~Natural Gas Plants" for additional information.~~

~~Included in other deferred credits and liabilities on the balance sheet is~~ $91 million ~~of intangible liabilities that were~~ recorded ~~during~~under acquisition accounting for transportation contracts at Southern Company ~~Gas. At~~Gas were fully amortized as of December 31, 2018, the accumulated amortization of these intangible liabilities was $74 million. In 2019, the remaining $17 million of amortization associated with the intangible liabilities will be recorded in natural gas revenues.2019.

Acquisition Accounting

The purchase price of each asset acquisition is allocated based on the relative fair value of assets acquired.

Development Costs

For Southern Power, development costs are capitalized once a project is probable of completion, primarily based on a review of its economics and operational feasibility, as well as the status of power off-take agreements and regulatory approvals, if applicable. Southern Power's capitalized development costs are included in CWIP on the balance sheets. All of Southern Power's development costs incurred prior to the determination that a project is probable of completion are expensed as incurred and included in other operations and maintenance expense in the statements of income. If it is determined that a project is no longer probable of completion, any of Southern Power's capitalized development costs are expensed and included in other operations and maintenance expense in the statements of income.

Long-Term Service Agreements

II-142

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

Transmission Receivables/Prepayments

Cash and Cash Equivalents

For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less.

Restricted Cash

~~The registrants adopted ASU 2016-18 as of January 1, 2018. See "Recently Adopted Accounting Standards~~ – ~~Other" herein for additional information.~~

At December 31, ~~2018, Georgia Power had restricted cash related to the redemption of pollution control revenue bonds, which were redeemed subsequent to December 31, 2018. See Note 8 under "Long-term Debt~~ – ~~Pollution Control Revenue Bonds" for additional information. At December 31, 2017, Southern Power had restricted cash primarily related to certain acquisitions~~2020 and ~~construction projects. At December 31, 2018 and 2017,~~2019, Southern Company Gas had $2 million and $3 million, respectively, of restricted cash held as collateral for ~~worker's~~workers' compensation, life insurance, and long-term disability ~~insurance.~~

~~The following tables provide a reconciliation of~~insurance, which is included in cash, cash equivalents, and restricted cash ~~reported within the balance sheets that total to the amounts shown in~~on the statements of cash ~~flows for the registrants that had restricted cash at December 31, 2018 and/or 2017:~~

Southern
Company
Georgia
Power
Southern
Company Gas
(in millions)
At December 31, 2018
Cash and cash equivalents $ 1,396
$ 4
$ 64
Cash and cash equivalents classified as assets held for sale 9
—
—
Restricted cash:

Restricted cash —
108
—
Other accounts and notes receivable 114
—
6
Total cash, cash equivalents, and restricted cash $ 1,519
$ 112
$ 70

~~Table of ContentsIndex to Financial Statements~~

~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

Southern
Company Southern
Power Southern
Company Gas
(in millions)
At December 31, 2017
Cash and cash equivalents $ 2,130
$ 129
$ 73
Restricted cash:
Other accounts and notes receivable 5
—
5
Deferred charges and other assets 12
11
—
Total cash, cash equivalents, and restricted cash $ 2,147
$ 140
$ 78
flows.

Storm Damage Reserves

Each traditional electric operating company maintains a reserve to cover or is allowed to defer and recover the cost of damages from major storms to its transmission and distribution lines and, for Mississippi Power, the cost of uninsured damages to its generation facilities and other property. Alabama Power also has authority from the Alabama PSC to accrue certain additional amounts as circumstances warrant. Alabama Power recorded additional accruals of $100 million and $84 million in 2020 and 2019, respectively. In accordance with their respective state PSC orders, the traditional electric operating companies accrued the following amounts related to storm damage ~~reserves~~recovery in ~~2018, 2017,~~2020, 2019, and ~~2016:~~2018:


	Southern Company(a)(b)		Alabama Power(b)		Georgia Power		Mississippi Power
	(in millions)
2020	$	326	$	112	$	213	$	1
2019	170		139		30		1
2018	74		16		30		1

Southern
Company^(*)
Alabama
Power Georgia
Power Mississippi
Power
(in millions)
2018 $ 74
$ 16
$ 30
$ 1
2017 41
4
30
3
2016 40
3
30
4
(a)Includes accruals at Gulf Power of $26.9 million in 2018. See Note 15 under "Southern Company" for information regarding the sale of Gulf Power.


~~(*)~~	~~Includes accruals at Gulf Power of $26.9 million in 2018 and $3.5 million in each of 2017 and 2016. See Note 15 under "Southern Company's Sale of Gulf Power" for information regarding the sale of Gulf Power.~~

(b)Includes $39 million applied in 2019 to Alabama ~~Power and Mississippi Power also have authority based on orders~~Power's NDR from ~~their state PSCs to accrue certain additional amounts as circumstances warrant. There were no such additional accruals for~~its remaining excess deferred income tax regulatory liability balance in accordance with an Alabama ~~Power and Mississippi Power in any year presented.~~PSC order.

See Note 2 under "~~Alabama~~"Alabama Power – Rate NDR,," "~~Georgia~~"Georgia Power – Storm Damage Recovery,," and "~~Mississippi~~"Mississippi Power – System Restoration ~~Rider~~"Rider" for additional information regarding each company's storm damage reserve.

Leveraged Leases

AAt December 31, 2020 and 2019, a subsidiary of Southern Holdings ~~has several~~had 4 leveraged lease agreements, with original terms ranging up to 45 years, which relate to ~~international and domestic~~ energy generation, distribution, and transportation ~~assets.~~assets, including two international projects. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. Southern Company reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the effective tax rate, the residual value, the credit quality of the lessees, and the timing of expected tax cash flows.

~~The ability of the lessees to make required payments to the~~ See Notes 3 and 15 under "Other Matters – Southern ~~Holdings subsidiary is dependent~~Company" and "Southern Company," respectively, for additional information on the ~~operational performance of the assets. In 2017, the financial~~leveraged lease investments, including impairment charges and ~~operational performance of one of the lessees~~completed and the associated generation assets raised significant concerns about the short-term ability of the generation assets to produce cash flows sufficient to support ongoing operations and the lessee's contractual obligations and its ability to make the remaining semi-annual lease payments to the Southern Holdings subsidiary beginning in June 2018. As a result of operational improvements in 2018, the 2018 lease payments were paid in full. However, operational issues and the resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments. These operational challenges may also impact the expected residual value of the assets at the end of the lease term in 2047. If any future lease payment is not paid in full, the Southern Holdings subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the generation assets. Failure to make the required payment to the debtholders could represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the generation assets from the Southern Holdings subsidiary, in effect terminating the lease and resulting in the write-off of the related lease receivable, which would result in a reduction in net income of approximately $86 million after tax based on the lease receivable balance at December 31, 2018. Southern Company has evaluated the recoverability of the lease receivable and the expected residual value ofplanned sales.

II-143

Table of Contents �� Index to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

the generation assets at the end of the lease under various scenarios and has concluded that its investment in the leveraged lease is not impaired at December 31, 2018. Southern Company will continue to monitor the operational performance of the underlying assets and evaluate the ability of the lessee to continue to make the required lease payments. The ultimate outcome of this matter cannot be determined at this time.

Southern Company's net investment in ~~domestic and international~~ leveraged leases consists of the following at December 31:


	2020(*)		2019
	(in millions)
Net rentals receivable	$	734	$	1,410
Unearned income	(178)		(622)
Investment in leveraged leases	556		788
Deferred taxes from leveraged leases	(7)		(238)
Net investment in leveraged leases	$	549	$	550

2018 2017
(in millions)
Net rentals receivable $ 1,563
$ 1,498
Unearned income (765 ) (723 )
Investment in leveraged leases 798
775
Deferred taxes from leveraged leases (255 ) (252 )
Net investment in leveraged leases $ 543
$ 523
(*)Excludes the investment classified as held for sale at December 31, 2020. See Note 15 under "Assets Held for Sale" for additional information.

AThe following table provides a summary of the components of income ~~from~~related to leveraged lease investments. Income was impacted in 2020 and 2019 by the ~~leveraged leases follows:~~impairment charges discussed in Note 3 under "Other Matters – Southern Company."

2018 2017 2016
(in millions)
Pretax leveraged lease income $ 25
$ 25
$ 25
Net impact of Tax Reform Legislation —
48
—
Income tax expense (6 ) (9 ) (9 )
Net leveraged lease income $ 19
$ 64
$ 16


	2020		2019		2018
	(in millions)
Pretax leveraged lease income (loss)	$	(180)	$	11	$	25
Income tax benefit (expense)	98		0		(6)
Net leveraged lease income (loss)	$	(82)	$	11	$	19

Materials and Supplies

Fuel Inventory

Fuel inventory for the traditional electric operating companies includes the average cost of coal, natural gas, oil, transportation, and emissions allowances. Fuel inventory for Southern Power, which is included in other current assets, includes the average cost of oil, natural gas, ~~biomass,~~ and emissions allowances. Fuel is recorded to inventory when purchased and then expensed, at weighted average cost, as used. Emissions allowances granted by the EPA are included in inventory at zero cost. The traditional electric operating companies recover fuel expense through fuel cost recovery rates approved by each state PSC or, for wholesale rates, the FERC.

Natural Gas for Sale

Nicor Gas' natural gas inventory is carried at cost on a LIFO basis. Inventory decrements occurring during the year that are restored prior to year end are charged to cost of natural gas at the estimated annual replacement cost. Inventory decrements that are not restored prior to year end are charged to cost of natural gas at the actual LIFO cost of the inventory layers liquidated. The cost of natural gas, including inventory costs, is recovered from customers under a purchased gas recovery mechanism adjusted

~~Table of ContentsIndex to Financial Statements~~

~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

for differences between actual costs and amounts billed; therefore, LIFO liquidations have no impact on Southern Company's or Southern Company Gas' net income. At December 31, ~~2018,~~2020, the Nicor Gas LIFO inventory balance was ~~$165~~$178 million. Based on the average cost of gas purchased in December ~~2018,~~2020, the estimated replacement cost of Nicor Gas' inventory at December 31, ~~2018~~2020 was ~~$409~~$259 million. ~~During 2018, Nicor Gas did not liquidate any LIFO-based inventory.~~

II-144

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

Southern Company Gas' gas marketing services, wholesale gas services, and all other segments record inventory at LOCOM, with cost determined on a WACOG basis. For these segments, Southern Company Gas evaluates the weighted average cost of its natural gas inventories against market prices to determine whether any declines in market prices below the WACOG are other than temporary. For any declines considered to be other than temporary, Southern Company Gas ~~recorded~~records LOCOM adjustments to cost of natural gas to reduce the value of its natural gas inventories to market value. LOCOM adjustments ~~were $10 million during 2018~~ for wholesale gas services were $1 million, $21 million, and ~~immaterial for all other periods presented.~~$10 million during 2020, 2019, and 2018, respectively.

Energy Marketing Receivables and Payables

Southern Company Gas' wholesale gas services provides services to retail gas marketers, wholesale gas marketers, utility companies, and industrial customers. These counterparties utilize netting agreements that enable wholesale gas services to net receivables and payables by counterparty upon settlement. Southern Company Gas' wholesale gas services also nets across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, or owed to, wholesale gas services' counterparties are settled net, they are recorded on a gross basis in the balance sheets as energy marketing receivables and energy marketing payables.

Southern Company Gas' wholesale gas services has trade and credit contracts that contain minimum credit rating requirements. These credit rating requirements typically give counterparties the right to suspend or terminate credit if Southern Company Gas' credit ratings are downgraded to non-investment grade status. Under such circumstances, Southern Company Gas' wholesale gas services would need to post collateral to continue transacting business with some of its counterparties. As of December 31, ~~2018~~2020 and ~~2017,~~2019, the required collateral in the event of a credit rating downgrade was ~~$30~~$5 million and $8$11 million, respectively.

~~Credit~~Southern Company Gas' wholesale gas services uses established credit policies ~~were established~~ to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Collateral or credit security is most often in the form of cash or letters of credit from an investment-grade financial institution, but may also include cash or U.S. government securities held by a trustee. When ~~Southern Company Gas' wholesale gas services is engaged in~~ more than one ~~outstanding~~ derivative transaction with the same counterparty is outstanding and ~~it also has~~ a legally enforceable netting agreement exists with that counterparty, the "net" mark-to-market exposure represents ~~the netting of the positive and negative exposures with that counterparty combined with~~ a reasonable measure of Southern Company Gas' credit ~~risk.~~risk with that counterparty. Southern Company Gas' wholesale gas services also uses other netting agreements with certain counterparties with whom it conducts significant transactions.

See "~~Concentration~~"Concentration of Credit ~~Risk~~"Risk" herein for additional information.

Provision for Uncollectible Accounts

Credit risk exposure at Nicor Gas is mitigated by a bad debt rider approved by the Illinois Commission. The bad debt rider provides for the recovery from (or refund to) customers of the difference between Nicor Gas' actual bad debt experience on an annual basis and the benchmark bad debt expense used to establish its base rates for the respective year.

~~Concentration~~See Note 2 for information regarding recovery of ~~Credit Risk~~

~~Southern Company Gas' wholesale gas services business has a concentration of credit risk for services it provides~~incremental bad debt expense related to its counterparties. This credit risk is generally concentrated in 20 of its counterparties and is measured by 30-day receivable exposure plus forward exposure. Counterparty credit risk is evaluated using a S&P equivalent credit rating, which is determined by a process of converting the ~~lower~~COVID-19 pandemic at certain of the S&P or Moody's rating to an internal rating ranging from 9 to 1, with 9 being equivalent to AAA/Aaa by S&P and Moody's, respectively, and 1 being equivalent to D/Default by S&P and Moody's, respectively. A counterparty that does not have an external rating is assigned an internal rating based on the strength of its financial ratios. As of

~~Table of ContentsIndex to Financial Statements~~

~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

~~December 31, 2018, the top 20 counterparties represented 48%, or $298 million, of the total counterparty exposure and had a weighted average S&P equivalent rating of A-.~~

Concentration of credit risk occurs at Atlanta Gas Light for amounts billed for services and other costs to its customers, which consist of 15 Marketers in Georgia (including SouthStar). The credit risk exposure to Marketers varies seasonally, with the lowest exposure in the non-peak summer monthstraditional electric operating companies 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 functions of the retail sale of gas include the purchase and sale of natural gas, customer service, billings, and collections. 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.distribution utilities.

Financial Instruments

II-145

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

accrual method. Derivative contracts that qualify as cash flow hedges of anticipated transactions or are recoverable through the traditional electric operating companies' and the natural gas distribution utilities' fuel-hedging programs result in the deferral of related gains and losses in AOCI or regulatory assets and liabilities, respectively, until the hedged transactions occur. For 2017 and 2016, ineffectiveness arising from cash flow hedges was recognized in net income. Upon the adoption of ASU 2017-12 in 2018, ineffectiveness is no longer separately measured and recorded in earnings. See "~~Recently Adopted Accounting Standards" herein for additional information.~~ Other derivative contracts that qualify as fair value hedges are marked to market through current period income and are recorded on a net basis in the statements of income. Cash flows from derivatives are classified on the statements of cash flows in the same category as the hedged item. See Note 14 for additional information regarding derivatives.

The ~~registrants~~Registrants offset fair value amounts recognized for multiple derivative instruments executed with the same counterparty under netting arrangements. The ~~registrants~~Registrants had no0 outstanding collateral repayment obligations or rights to reclaim collateral arising from derivative instruments recognized at December 31, ~~2018.~~2020.

The ~~registrants~~Registrants are exposed to potential losses related to financial instruments in the event of counterparties' nonperformance. The ~~registrants~~Registrants have established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate their exposure to counterparty credit risk.

Southern Company Gas

~~Table of ContentsIndex to Financial Statements~~

~~COMBINED NOTES TO FINANCIAL STATEMENTS (continued)~~

~~Southern Company and Subsidiary Companies 2018 Annual Report~~

capacity and payments associated with asset management agreements, and these demand charges and payments are recognized on the statements of income in the period they are incurred. This difference in accounting methods can result in volatility in reported earnings, even though the economic margin is substantially unchanged from the dates the transactions were consummated.

Comprehensive Income

The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income consists of net income attributable to the ~~registrant,~~Registrant, changes in the fair value of qualifying cash flow hedges, and reclassifications for amounts included in net income. Comprehensive income also consists of certain changes in pension and other postretirement benefit plans for Southern Company, Southern Power, and Southern Company Gas.

II-146

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies 2020 Annual Report

AOCI (loss) balances, net of tax effects, for Southern Company, Southern Power, and Southern Company Gas were as follows:


	Qualifying Hedges		Pension and Other Postretirement Benefit Plans		Accumulated Other Comprehensive Income (Loss)
	(in millions)
Southern Company
Balance at December 31, 2019	$	(179)	$	(142)	$	(321)
Current period change	(30)		(45)		(75)
Balance at December 31, 2020(*)	$	(209)	$	(187)	$	(395)

Southern Power
Balance at December 31, 2019	$	11	$	(37)	$	(26)
Current period change	(32)		(10)		(42)
Balance at December 31, 2020(*)	$	(21)	$	(47)	$	(67)

Southern Company Gas
Balance at December 31, 2019	$	(6)	$	13	$	7
Current period change	(14)		(15)		(29)
Balance at December 31, 2020	$	(20)	$	(2)	$	(22)

Qualifying
Hedges

Pension and Other
Postretirement
Benefit Plans

Accumulated Other
Comprehensive
Income (Loss)
(in millions)
Southern Company
Balance at December 31, 2017 $ (119 ) $ (70 ) $ (189 )
Adjustment to beginning balance^(*)
(26 ) (14 ) (40 )
Current period change 24
2
26
Balance at December 31, 2018 $ (121 ) $ (82 ) $ (203 )

Southern Power
Balance at December 31, 2017 $ 25
$ (27 ) $ (2 )
Adjustment to beginning balance^(*)
4
—
4
Current period change 7
7
14
Balance at December 31, 2018 $ 36
$ (20 ) $ 16

Southern Company Gas
Balance at December 31, 2017 $ (6 ) $ 26
$ 20
Adjustment to beginning balance^(*)
(1 ) 5
4
Current period change 4
(2 ) 2
Balance at December 31, 2018 $ (3 ) $ 29
$ 26
(*)May not add due to rounding.


~~(*)~~	~~Reflects the reclassification related to~~ ~~stranded tax effects~~ ~~resulting from the Tax Reform Legislation as allowed by ASU 2018-02. See "Recently Adopted Accounting Standards~~ – ~~Other" herein for additional information.~~

Variable Interest Entities

Alabama Power has established a wholly-owned trust to issue preferred securities. See Note 8 under "~~Long-term Debt~~ – ~~Other Long-Term Debt~~ – ~~Alabama Power~~""Long-term Debt" for additional information. However, Alabama Power is not considered the primary beneficiary of the trust. Therefore, the investment in the trust is reflected as other investments, and the related loan from the trust is reflected as long-term debt in Alabama Power's balance sheets.

II-147

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report

2. REGULATORY MATTERS

~~Southern Company~~

Regulatory Assets and Liabilities

~~Regulatory~~Details of regulatory assets and (liabilities) reflected in the ~~consolidated~~ balance sheets ~~of Southern Company~~ at December 31, ~~2018~~2020 and ~~2017 relate to:~~2019 are provided in the following tables:


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2020
AROs(a)(s)	$	5,147	$	1,470	$	3,457	$	212	$	0
Retiree benefit plans(b)(s)	4,958		1,265		1,647		238		187
Remaining net book value of retired assets(c)	1,183		632		527		24		0
Deferred income tax charges(d)	801		235		531		32		0
Environmental remediation(e)(s)	310		0		41		0		269
Loss on reacquired debt(f)	304		47		248		6		3
Storm damage(g)	262		0		262		0		0
Vacation pay(h)(s)	207		80		104		10		13
Under recovered regulatory clause revenues(i)	185		58		0		52		75
Regulatory clauses(j)	142		142		0		0		0
Nuclear outage(k)	101		61		40		0		0
Long-term debt fair value adjustment(l)	92		0		0		0		92
Kemper County energy facility assets, net(m)	50		0		0		50		0
Plant Daniel Units 3 and 4(n)	32		0		0		32		0

Other regulatory assets(o)	205		52		68		4		81
Deferred income tax credits(d)	(6,016)		(2,016)		(2,805)		(320)		(847)
Other cost of removal obligations(a)	(1,999)		(335)		212		(194)		(1,649)
Over recovered regulatory clause revenues(i)	(185)		(46)		(44)		0		(95)
Storm/property damage reserves(p)	(81)		(77)		0		(4)		0
Customer refunds(q)	(56)		(50)		(6)		0		0
Other regulatory liabilities(r)	(149)		(37)		(30)		(6)		(54)
Total regulatory assets (liabilities), net	$	5,493	$	1,481	$	4,252	$	136	$	(1,925)

II-148

2018 2017 Note
(in millions)
Retiree benefit plans $ 3,658
$ 3,931
(a,p)
Asset retirement obligations-asset 2,933
1,133
(b,p)
Deferred income tax charges 799
814
(b,o)
Property damage reserves-asset 416
333
(c)
Under recovered regulatory clause revenues 407
317
(d)
Environmental remediation-asset 366
511
(e,p)
Loss on reacquired debt 346
223
(f)
Remaining net book value of retired assets 211
306
(g)
Vacation pay 182
183
(h,p)
Long-term debt fair value adjustment 121
138
(i)
Deferred PPA charges —
119
(j,p)
Other regulatory assets 581
625
(k)
Deferred income tax credits (6,455 ) (7,261 ) (b,o)
Other cost of removal obligations (2,297 ) (2,684 ) (b)
Customer refunds (293 ) (188 ) (n)
Property damage reserves-liability (76 ) (135 ) (l)
Over recovered regulatory clause revenues (47 ) (155 ) (d)
Other regulatory liabilities (132 ) (104 ) (m)
Total regulatory assets (liabilities), net $ 720
$ (1,894 )

~~Note: Unless otherwise noted, the recovery and amortization periods for these regulatory assets and (liabilities) are approved by the respective PSC or regulatory agency and are as follows:~~


~~(a)~~	~~Recovered and amortized over the average remaining service period which may range up to 15 years. See Note 11 for additional information.~~

~~(b)~~

Asset retirement and other cost of removal obligations are recorded, deferred income tax assets are recovered, and deferred income tax liabilities are amortized over the related property lives, which may range up to 80 years. Asset retirement and removal liabilities will be settled and trued up following completion of the related activities. Included in the deferred income tax assets is $28 million for the retiree Medicare drug subsidy, which is being recovered and amortized through 2027.


~~(c)~~	~~Through 2019, Georgia Power is recovering approximately $30 million annually for storm damage, which is expected to be adjusted in the Georgia Power 2019 Base Rate Case. See "Georgia Power~~ – ~~Storm Damage Recovery" herein for additional information.~~


~~(d)~~	~~Recorded and recovered or amortized over periods generally not exceeding 10 years.~~


~~(e)~~	~~Recovered through environmental cost recovery mechanisms when the remediation is performed or the work is performed.~~


~~(f)~~	~~Recovered over either the remaining life of the original issue or, if refinanced, over the remaining life of the new issue, which may range up to 50 years.~~


~~(g)~~	~~Amortized over periods not exceeding eight years.~~


~~(h)~~	~~Recorded as earned by employees and recovered as paid, generally within one year. This includes both vacation and banked holiday pay.~~


~~(i)~~	~~Recovered over the remaining life of the original debt issuances, which range up to 20 years. For additional information see Note 15 under "Southern Company Merger with Southern Company Gas~~."


~~(j)~~	~~Related to Gulf Power and reclassified as assets held for sale at December 31, 2018. See Note 15 under "Southern Company's Sale of Gulf Power" for information regarding the sale of Gulf Power.~~


~~(k)~~	Comprised of numerous immaterial components including nuclear outage, fuel-hedging losses, cancelled construction projects, building and generating plant leases, property tax, and other miscellaneous assets. These costs are recorded and recovered or amortized over periods generally not exceeding 50 years.


~~(l)~~	~~Amortized as storm restoration and potential reliability-related expenses are incurred.~~


~~(m)~~	~~Comprised of numerous components including retiree benefit plans, fuel-hedging gains, AROs, and other liabilities that are recorded and recovered or amortized over periods not exceeding 20 years.~~

~~(n)~~

At December 31, 2018, represents amounts accrued and outstanding for refund, including approximately $109 million as a result of Alabama Power's 2018 retail return exceeding the allowed range, approximately $55 million pursuant to the Georgia Power Tax Reform Settlement Agreement, and approximately $100 million, subject to review and approval by the Georgia PSC, as a result of Georgia Power's 2018 retail ROE exceeding the allowed retail ROE range. See "Alabama Power – ~~Rate RSE" and "Georgia Power~~ – ~~Rate Plans" herein for additional information.~~


~~(o)~~	As a result of the Tax Reform Legislation, these accounts include certain deferred income tax assets and liabilities not subject to normalization. The recovery and amortization of these amounts will be determined in future rate proceedings. See "Georgia Power," "Mississippi Power," and "Southern Company Gas" herein and Note 10 for additional information.


~~(p)~~	~~Not earning a return as offset in rate base by a corresponding asset or liability.~~

Table of ContentsIndex to Financial Statements

COMBINED NOTES TO FINANCIAL STATEMENTS (continued)

Southern Company and Subsidiary Companies ~~2018~~2020 Annual Report


	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At December 31, 2019
Retiree benefit plans(b)(s)	$	4,423	$	1,131	$	1,516	$	213	$	167
AROs(a)(s)	4,381		1,043		3,119		210		0
Remaining net book value of retired assets(c)	1,275		649		596		30		0
Deferred income tax charges(d)	803		245		523		33		0
Storm damage(g)	410		0		410		0		0
Environmental remediation(e)(s)	349		0		52		0		296
Loss on reacquired debt(f)	323		52		262		6		4
Vacation pay(h)(s)	186		72		93		9		11
Under recovered regulatory clause revenues(i)	159		40		0		47		72
Regulatory clauses(j)	142		142		0		0		0
Long-term debt fair value adjustment(l)	107		0		0		0		107
Nuclear outage(k)	105		78		27		0		0
Fuel-hedging (realized and unrealized) losses(t)	102		22		53		27		0
Kemper County energy facility assets, net(m)	61		0		0		61		0
Plant Daniel Units 3 and 4(n)	34		0		0		34		0
Other regulatory assets(o)	127		45		23		6		53
Deferred income tax credits(d)	(6,301)		(1,960)		(3,078)		(358)		(874)
Other cost of removal obligations(a)	(2,084)		(412)		156		(189)		(1,606)
Customer refunds(q)	(285)		(56)		(229)		0		0
Over recovered regulatory clause revenues(i)	(205)		(112)		(10)		0		(82)
Storm/property damage reserves(p)	(204)		(150)		0		(55)		0
Other regulatory liabilities(r)	(70)		(19)		(6)		(10)		(22)
Total regulatory assets (liabilities), net	$	3,838	$	810	$	3,507	$	64	$	(1,874)

~~Gulf~~Unless otherwise noted, the following recovery and amortization periods for these regulatory assets and (liabilities) have been approved by the respective state PSC or regulatory agency:

(a)AROs and other cost of removal obligations generally are recorded over the related property lives, which may range up to 53 years for Alabama Power,

On 60 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. AROs and cost of removal obligations will be settled and trued up following completion of the related activities. Effective January 1, ~~2019,~~2020, Georgia Power is recovering CCR AROs, including past under recovered costs and estimated annual compliance costs, over three-year periods ending December 31, 2022, 2023, and 2024 through its Environmental Compliance Cost Recovery (ECCR) tariff, as discussed further under "Georgia Power – Rate Plans" herein. See Note 6 for additional information on AROs.

(b)Recovered and amortized over the average remaining service period, which may range up to 13 years for Alabama Power, 13 years for Georgia Power, 14 years for Mississippi Power, and 13 years for Southern Company ~~completed its sale of Gulf Power~~Gas. Southern Company's balances also include amounts at SCS and Southern Nuclear that are allocated to ~~NextEra Energy.~~the applicable regulated utilities. See Note ~~15 under "Southern Company's Sale of Gulf Power~~"11 for additional information.

~~In accordance~~(c)Alabama Power: Primarily represents the net book value of Plant Gorgas Units 8, 9, and 10 ($585 million at December 31, 2020). Being amortized over remaining periods not exceeding 17 years (through 2037).

Mississippi Power: Represents net book value associated with Plant Watson and Plant Greene County. The retail and wholesale portions totaling approximately $11 million and $13 million at December 31, 2020, respectively, are being amortized over a ~~Florida PSC-approved settlement agreement, Gulf Power's rates effective~~four-year period through 2024 and a 10-year period through 2030, respectively. See "Mississippi Power – Environmental Compliance Overview Plan" herein for additional information.

(d)Deferred income tax charges are recovered and deferred income tax credits are amortized over the related property lives, which may range up to 53 years for Alabama Power, 60 years for Georgia Power, 55 years for Mississippi Power, and 80 years for Southern Company Gas. See Note 10 for additional information. Included in the deferred income tax charges are amounts ($8 million, $9 million, and $1 million for Alabama Power, Georgia Power, and Mississippi Power, respectively, at December 31, 2020) for the ~~first billing cycle in July 2017 increased by approximately $54 million annually (2017 Gulf~~retiree Medicare drug subsidy, which are being recovered and amortized through 2027, 2022, and 2024 for Alabama Power, Rate Case Settlement), including a $62 million increase in base revenues, less an $8 million purchased power capacity cost recovery clause credit. The 2017 Rate Case Settlement Agreement also resulted in a $32.5 million write-down of Gulf Power's ownership of Plant Scherer Unit 3, which was recorded in the first quarter 2017.

Georgia Power, and Mississippi Power, respectively. As a continuation of the 2017 Gulf Power Rate Case Settlement Agreement, on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement addressing Gulf Power's retail revenue requirement effectsresult of the Tax Reform Legislation, (Gulf Power Tax Reform Settlement Agreement). Beginning in April 1, 2018, the Gulf Power Tax Reform Settlement Agreement resulted in annual reductions of approximately $18 million to Gulf Power's base ratesthese accounts include certain deferred income tax assets and ~~approximately $16 million to Gulf Power's environmental cost recovery rates and a one-time refund of approximately $69 million for the retail portion of unprotected (not~~liabilities not subject to ~~normalization) deferred tax liabilities, which was credited to customers through Gulf Power's fuel cost recovery rates~~normalization, as described further below:

Alabama Power: Related amounts are being recovered and amortized ratably over the ~~remainder of 2018.~~related property lives.