UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2017~~March 31, 2018

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



Commission File Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.
1-3526	The Southern Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-0690070

1-3164	Alabama Power Company (An Alabama Corporation) 600 North 18^th Street Birmingham, Alabama 35203 (205) 257-1000	63-0004250

1-6468	Georgia Power Company (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526	58-0257110

001-31737	Gulf Power Company (A Florida Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111	59-0276810

001-11229	Mississippi Power Company (A Mississippi Corporation) 2992 West Beach Boulevard Gulfport, Mississippi 39501 (228) 864-1211	64-0205820

001-37803	Southern Power Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-2598670

1-14174	Southern Company Gas (A Georgia Corporation) Ten Peachtree Place, N.E. Atlanta, Georgia 30309 (404) 584-4000	58-2210952

~~Table of Contents~~

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Registrant	Large Accelerated Filer	Accelerated Filer	Non- accelerated Filer	Smaller Reporting Company	Emerging Growth Company
The Southern Company	X
Alabama Power Company			X
Georgia Power Company			X
Gulf Power Company			X
Mississippi Power Company			X
Southern Power Company			X
Southern Company Gas			X

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ (Response applicable to all registrants.)



Registrant	Description of Common Stock	Shares Outstanding at ~~June 30, 2017~~March 31, 2018
The Southern Company	Par Value $5 Per Share	~~999,474,028~~1,011,624,620
Alabama Power Company	Par Value $40 Per Share	30,537,500
Georgia Power Company	Without Par Value	9,261,500
Gulf Power Company	Without Par Value	7,392,717
Mississippi Power Company	Without Par Value	1,121,000
Southern Power Company	Par Value $0.01 Per Share	1,000
Southern Company Gas	Par Value $0.01 Per Share	100

This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Southern Power Company, and Southern Company Gas. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

~~June 30, 2017~~March 31, 2018



		Page Number

DEFINITIONS		5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION		8

	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	The Southern Company and Subsidiary Companies
	Condensed Consolidated Statements of Income	11
	Condensed Consolidated Statements of Comprehensive Income	12
	Condensed Consolidated Statements of Cash Flows	13
	Condensed Consolidated Balance Sheets	14
	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
	Alabama Power Company
	Condensed Statements of Income	5345
	Condensed Statements of Comprehensive Income	5345
	Condensed Statements of Cash Flows	5446
	Condensed Balance Sheets	5547
	Management's Discussion and Analysis of Financial Condition and Results of Operations	5749
	Georgia Power Company
	Condensed Statements of Income	7061
	Condensed Statements of Comprehensive Income	7061
	Condensed Statements of Cash Flows	7162
	Condensed Balance Sheets	7263
	Management's Discussion and Analysis of Financial Condition and Results of Operations	7465
	Gulf Power Company
	Condensed Statements of Income	9381
	Condensed Statements of Comprehensive Income	9381
	Condensed Statements of Cash Flows	9482
	Condensed Balance Sheets	9583
	Management's Discussion and Analysis of Financial Condition and Results of Operations	9785
	Mississippi Power Company
	Condensed Statements of ~~Income~~Operations	~~111~~97
	Condensed Statements of Comprehensive Income	~~111~~97
	Condensed Statements of Cash Flows	~~112~~98
	Condensed Balance Sheets	~~113~~99
	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~115~~101
	Southern Power Company and Subsidiary Companies
	Condensed Consolidated Statements of Income	~~141~~115
	Condensed Consolidated Statements of Comprehensive Income	~~141~~115
	Condensed Consolidated Statements of Cash Flows	~~142~~116
	Condensed Consolidated Balance Sheets	~~143~~117
	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~145~~119

INDEX TO QUARTERLY REPORT ON FORM 10-Q

~~June 30, 2017~~March 31, 2018



		Page Number
	PART I—FINANCIAL INFORMATION (CONTINUED)
	Southern Company Gas and Subsidiary Companies
	Condensed Consolidated Statements of Income	~~159~~131
	Condensed Consolidated Statements of Comprehensive Income	~~160~~131
	Condensed Consolidated Statements of Cash Flows	~~161~~132
	Condensed Consolidated Balance Sheets	~~162~~133
	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~164~~135
	Notes to the Condensed Financial Statements	~~188~~155
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5143
Item 4.	Controls and Procedures	5143

	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	~~258~~213
Item 1A.	Risk Factors	~~258~~213
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Inapplicable
Item 3.	Defaults Upon Senior Securities	Inapplicable
Item 4.	Mine Safety Disclosures	Inapplicable
Item 5.	Other Information	Inapplicable
Item 6.	Exhibits	~~261~~213
	Signatures	~~266~~217

DEFINITIONS



Term	Meaning

~~2012 MPSC CPCN Order~~	A detailed order issued by the Mississippi PSC in April 2012 confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC
2013 ARP	Alternative Rate Plan approved by the Georgia PSC in 2013 for Georgia Power for the years 2014 through 2016 and subsequently extended through 2019
AFUDC	Allowance for funds used during construction
Alabama Power	Alabama Power Company
ARO	Asset retirement obligation
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Atlanta Gas Light	Atlanta Gas Light Company, a wholly-owned subsidiary of Southern Company Gas
~~Baseload Act~~Atlantic Coast Pipeline	~~State of Mississippi legislation designed~~Atlantic Coast Pipeline, LLC, a joint venture to ~~enhance the Mississippi PSC's authority to facilitate development~~construct and ~~construction of baseload generation~~operate a natural gas pipeline in ~~the State of Mississippi~~which Southern Company Gas has a 5% ownership interest
Bechtel	Bechtel Power Corporation
CCR	Coal combustion residuals
~~Clean Power Plan~~	~~Final action published by the EPA in 2015 that established guidelines for states to develop plans to meet EPA-mandated CO~~₂ ~~emission rates or emission reduction goals for existing electric generating units~~
CO₂	Carbon dioxide
COD	Commercial operation date
Contractor Settlement Agreement	The December 31, 2015 agreement between Westinghouse and the Vogtle Owners resolving disputes between the Vogtle Owners and the EPC Contractor under the Vogtle 3 and 4 Agreement
CPCN	Certificate of public convenience and necessity
Customer Refunds	Refunds to be issued to Georgia Power customers no later than the end of the third quarter 2018 as ordered by the Georgia PSC related to the Guarantee Settlement Agreement
CWIP	Construction work in progress
Dalton Pipeline	A 50% undivided ownership interest of Southern Company Gas in a pipeline facility in Georgia
DOE	U.S. Department of Energy
ECO Plan	Mississippi Power's ~~Environmental Compliance Overview Plan~~environmental compliance overview plan
Eligible Project Costs	Certain costs of construction relating to Plant Vogtle Units 3 and 4 that are eligible for financing under the loan guarantee program established under Title XVII ~~Loan Guarantee Program~~of the Energy Policy Act of 2005
EPA	U.S. Environmental Protection Agency
EPC Contractor	Westinghouse and its affiliate, WECTEC ~~(formerly known as CB&I Stone & Webster,~~Global Project Services Inc.~~), formerly a subsidiary of The Shaw Group Inc. and Chicago Bridge & Iron Company N.V.~~; the former engineering, procurement, and construction contractor for Plant Vogtle Units 3 and 4
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FFB	Federal Financing Bank
Fitch	Fitch Ratings, Inc.
Form 10-K	Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas for the year ended December 31, ~~2016,~~2017, as applicable
GAAP	U.S. generally accepted accounting principles
Georgia Power	Georgia Power Company
Guarantee Settlement Agreement	The June 9, 2017 settlement agreement between the Vogtle Owners and Toshiba related to the Toshiba Guarantee
Gulf Power	Gulf Power Company
Heating Degree Days	A measure of weather, calculated when the average daily temperatures are less than 65 degrees Fahrenheit
Horizon Pipeline	Horizon Pipeline Company, LLC
IGCC	Integrated coal gasification combined cycle, the technology originally approved for Mississippi Power's Kemper County energy facility (Plant Ratcliffe)
IIC	Intercompany interchange contract
Illinois Commission	Illinois Commerce Commission ~~the state regulatory agency for Nicor Gas~~
~~IRC~~	~~Internal Revenue Code of 1986, as amended~~

DEFINITIONS

(continued)



Term	Meaning
Interim Assessment Agreement	Agreement entered into by the Vogtle Owners and the EPC Contractor to allow construction to continue after the EPC Contractor's bankruptcy filing
IRS	Internal Revenue Service
ITC	Investment tax credit
~~Kemper IGCC~~	~~Mississippi Power's IGCC project in Kemper County, Mississippi~~
KWH	Kilowatt-hour
LIBOR	London Interbank Offered Rate
LIFO	Last-in, first-out
LNG	Liquefied natural gas
Loan Guarantee Agreement	Loan guarantee agreement entered into by Georgia Power with the DOE in 2014, 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
LOCOM	Lower of weighted average cost or current market price
LTSA	Long-term service agreement
~~MATS rule~~	~~Mercury and Air Toxics Standards rule~~
Merger	The merger, effective July 1, 2016, of a wholly-owned, direct subsidiary of Southern Company with and into Southern Company Gas, with Southern Company Gas continuing as the surviving corporation
~~Mirror CWIP~~	~~A regulatory liability used by Mississippi Power to record customer refunds resulting from a 2015 Mississippi PSC order~~
Mississippi Power	Mississippi Power Company
mmBtu	Million British thermal units
Moody's	Moody's Investors Service, Inc.
MRA	Municipal and Rural Associations
MW	Megawatt
natural gas distribution utilities	Southern Company Gas' seven natural gas distribution utilities (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, Elizabethtown Gas, Florida City Gas, Chattanooga Gas Company, and Elkton Gas)
NCCR	Georgia Power's Nuclear Construction Cost Recovery
New Jersey BPU	New Jersey Board of Public Utilities ~~the state regulatory agency for Elizabethtown Gas~~
Nicor Gas	Northern Illinois Gas Company, a wholly-owned subsidiary of Southern Company Gas
NRC	U.S. Nuclear Regulatory Commission
NYMEX	New York Mercantile Exchange, Inc.
OCI	Other comprehensive income
PennEast Pipeline	PennEast Pipeline Company, LLC, a joint venture to construct and operate a natural gas pipeline in which Southern Company Gas has a 20% ownership interest
PEP	Mississippi Power's Performance Evaluation Plan
~~Piedmont~~Pivotal Home Solutions	~~Piedmont Natural~~ Nicor Energy Services Company, a wholly-owned subsidiary of Southern Company Gas, ~~Company, Inc.~~ doing business as Pivotal Home Solutions
Pivotal Utility Holdings	Pivotal Utility Holdings, Inc., a wholly-owned subsidiary of Southern Company Gas, doing business as Elizabethtown Gas, Elkton Gas, and Florida City Gas
~~Plant Vogtle Units 3 and 4~~	~~Two new nuclear generating units under construction at Georgia Power's Plant Vogtle~~
PowerSecure	PowerSecure, Inc.
power pool	The operating arrangement whereby the integrated generating resources of the traditional electric operating companies and Southern Power (excluding subsidiaries) are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA	Power purchase agreements, as well as, for Southern Power, contracts for differences that provide the owner of a renewable facility a certain fixed price for the electricity sold to the grid
PSC	Public Service Commission
PTC	Production tax credit
Rate CNP	Alabama Power's Rate Certificated New Plant
Rate CNP Compliance	Alabama Power's Rate Certificated New Plant Compliance

DEFINITIONS

(continued)



Term	Meaning

Rate CNP PPA	Alabama Power's Rate Certificated New Plant Power Purchase Agreement
Rate ECR	Alabama Power's Rate Energy Cost Recovery
Rate NDR	Alabama Power's Rate Natural Disaster Reserve
Rate RSE	Alabama Power's Rate Stabilization and Equalization plan
registrants	Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power Company, and Southern Company Gas
ROE	Return on equity
S&P	S&P Global Ratings, a division of S&P Global Inc.
~~scrubber~~	~~Flue gas desulfurization system~~
SCS	Southern Company Services, Inc. (the Southern Company system service company)
SEC	U.S. Securities and Exchange Commission
~~SMEPA~~	~~South Mississippi Electric Power Association (now known as Cooperative Energy)~~
SNG	Southern Natural Gas Company, L.L.C.
Southern Company	The Southern Company
Southern Company Gas	Southern Company Gas and its subsidiaries
Southern Company Gas Capital	Southern Company Gas Capital Corporation, a 100%-owned subsidiary of Southern Company Gas
Southern Company system	Southern Company, the traditional electric operating companies, Southern Power, Southern Company Gas, ~~(as of July 1, 2016),~~ Southern Electric Generating Company, Southern Nuclear, SCS, Southern Communications Services, Inc., PowerSecure, ~~(as of May 9, 2016),~~ and other subsidiaries
Southern Nuclear	Southern Nuclear Operating Company, Inc.
Southern Power	Southern Power Company and its subsidiaries
~~SouthStar~~Tax Reform Legislation	~~SouthStar Energy Services, LLC~~
~~STRIDE~~	~~Atlanta Gas Light's Strategic Infrastructure Development~~The Tax Cuts and ~~Enhancement program~~Jobs Act, which was signed into law on December 22, 2017 and became effective on January 1, 2018
Toshiba	Toshiba Corporation, parent company of Westinghouse
Toshiba Guarantee	Certain payment obligations of the EPC Contractor guaranteed by Toshiba
traditional electric operating companies	Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Triton	Triton Container Investments, LLC
VCM	Vogtle Construction Monitoring
Virginia Commission	Virginia State Corporation Commission ~~the state regulatory agency for Virginia Natural Gas~~
Virginia Natural Gas	Virginia Natural Gas, Inc., a wholly-owned subsidiary of Southern Company Gas
Vogtle 3 and 4 Agreement	Agreement entered into with the EPC Contractor in 2008 by Georgia Power, acting for itself and as agent for the Vogtle Owners, pursuant to which the EPC Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4
Vogtle Owners	Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light, and Sinking Fund Commissioners
Vogtle Services Agreement	The June 9, 2017 services agreement between the Vogtle Owners and the EPC Contractor, as amended and restated on July 20, 2017, for the EPC Contractor to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear
WACOG	Weighted average cost of gas
~~WECTEC~~	~~WECTEC Global Project Services Inc.~~
Westinghouse	Westinghouse Electric Company LLC

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION~~

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning regulated rates, the strategic goals for the wholesale business, customer and sales growth, economic conditions, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sources of capital, financing activities, completion dates of construction projects, filings with state and federal regulatory authorities, federal income tax benefits, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

the impact of recent and future federal and state regulatory changes, including environmental laws regulating emissions, discharges, and disposal to air, water, and land, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, including potential tax reform legislation, as well as changes in application of existing laws and regulations;

~~current and future litigation, regulatory investigations, proceedings, or inquiries;~~

~~the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate;~~

variations in demand for electricity and natural gas, including those relating to weather, the general economy and recovery from the last recession, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;

~~available sources and costs of natural gas and other fuels;~~

~~limits on pipeline capacity;~~

~~effects of inflation;~~

the ability to control costs and avoid cost overruns during the development, construction, and operation of facilities, which include the development and construction of generating facilities with designs that have not been finalized or previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages and 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, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by any PSC);

~~the impact of any inability or other failure of Toshiba to perform its obligations under the Toshiba Guarantee, including any effect on the construction of Plant Vogtle Units 3 and 4;~~

the ability to construct facilities in accordance with the requirements of permits and licenses, to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;

~~investment performance of the Southern Company system's employee and retiree benefit plans and nuclear decommissioning trust funds;~~

~~advances in technology;~~

~~ongoing renewable energy partnerships and development agreements;~~

~~state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery mechanisms;~~

~~legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions;~~

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

~~(continued)~~This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning regulated rates, the strategic goals for the wholesale business, customer and sales growth, economic conditions, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sources of capital, financing activities, completion dates of construction projects, completion of announced acquisitions or dispositions, filings with state and federal regulatory authorities, impacts of the Tax Reform Legislation, federal and state income tax benefits, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

the impact of recent and future federal and state regulatory changes, including environmental laws and regulations governing air, water, land, and protection of other natural resources, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;

the uncertainty surrounding the Tax Reform Legislation, including implementing regulations and IRS interpretations, actions that may be taken in response by regulatory authorities, and its impact, if any, on the credit ratings of Southern Company and its subsidiaries;

current and future litigation or regulatory investigations, proceedings, or inquiries;

the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate;

variations in demand for electricity and natural gas, including those relating to weather, the general economy, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;

available sources and costs of natural gas and other fuels;

limits on pipeline capacity;

transmission constraints;

effects of inflation;

the ability to control costs and avoid cost overruns during the development, construction, and operation of facilities, which include the development and construction of generating facilities with designs that have not been previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages, increased costs or inconsistent quality of equipment, materials, and labor, including any changes related to imposition of import tariffs, contractor or supplier delay, non-performance under construction, operating, or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance;

the ability to construct facilities in accordance with the requirements of permits and licenses (including satisfaction of NRC requirements), to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;

investment performance of the Southern Company system's employee and retiree benefit plans and nuclear decommissioning trust funds;

advances in technology;

ongoing renewable energy partnerships and development agreements;

state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery for the Kemper IGCC, including ongoing settlement discussions, Mississippi PSC review of the prudence of Kemper IGCC costs and approval of further permanent rate recovery plans, and related legal or regulatory proceedings;mechanisms;

the ability to successfully operate the electric utilities' generating, transmission, and distribution facilities and Southern Company Gas' natural gas distribution and storage facilities and the successful performance of necessary corporate functions;

legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions;

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

(continued)

if certain adverse events were to occur, a decision by more than 10% of the owners of Plant Vogtle Units 3 and 4 not to proceed with construction;

litigation related to the Kemper County energy facility;

the inherent risks involved in operating and constructing nuclear generating facilities, including environmental, health, regulatory, natural disaster, terrorism, and financial risks;

the inherent risks involved in transporting and storing natural gas;

the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

internal restructuring or other restructuring options that may be pursued;

potential business strategies, including acquisitions or dispositions of assets or businesses, including the proposed disposition by a wholly-owned subsidiary of Southern Company Gas of Elizabethtown Gas and Elkton Gas, the proposed disposition by Southern Company Gas of Pivotal Home Solutions, and the potential sale of a 33% equity interest in substantially all of Southern Power's solar assets, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

the possibility that the anticipated benefits from the Merger cannot be fully realized or may take longer to realize than expected and the possibility that costs related to the integration of Southern Company and Southern Company Gas will be greater than expected, the ability to retain and hire key personnel and maintain relationships with customers, suppliers, or other business partners, and the diversion of management time on integration-related issues;expected;

the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;

the ability to obtain new short- and long-term contracts with wholesale customers;

the direct or indirect effect on the Southern Company system's business resulting from cyber intrusion or ~~terrorist incidents~~physical attack and the threat of ~~terrorist incidents;~~physical attacks;

interest rate fluctuations and financial market conditions and the results of financing efforts;

changes in Southern Company's and any of its subsidiaries' credit ratings, including impacts on interest rates, access to capital markets, and collateral requirements;

the impacts of any sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on foreign currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the benefits of the DOE loan guarantees;

the ability of Southern Company's electric utilities to obtain additional generating capacity (or sell excess generating capacity) at competitive prices;

catastrophic events such as fires, earthquakes, explosions, floods, tornadoes, hurricanes and other storms, droughts, pandemic health events such as influenzas, or other similar occurrences;

the direct or indirect effects on the Southern Company system's business resulting from incidents affecting the U.S. electric grid, natural gas pipeline infrastructure, or operation of generating or storage resources;

impairments of goodwill or long-lived assets;

the effect of accounting pronouncements issued periodically by standard-setting bodies; and

other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.

The registrants expressly disclaim any obligation to update any forward-looking statements.

THE SOUTHERN COMPANY

AND SUBSIDIARY COMPANIES

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Retail electric revenues	$	3,777		$	3,748		$	7,171		$	7,124		$	3,568		$	3,394
Wholesale electric revenues	618			446			1,149			842			619			531
Other electric revenues	167			166			342			348			165			175
Natural gas revenues	684			—			2,214			—
Natural gas revenues (includes alternative revenue programs of $(24) and $9, respectively)													1,607			1,530
Other revenues	184			99			326			137			413			141
Total operating revenues	5,430			4,459			11,202			8,451			6,372			5,771
Operating Expenses:
Fuel	1,092			1,023			2,088			1,934			1,101			996
Purchased power	211			189			390			354			267			179
Cost of natural gas	232			—			951			—			720			719
Cost of other sales	114			58			203			77			289			88
Other operations and maintenance	1,301			1,099			2,631			2,206			1,451			1,383
Depreciation and amortization	754			569			1,469			1,110			769			716
Taxes other than income taxes	308			255			638			511			355			330
Estimated loss on Kemper IGCC	3,012			81			3,120			134			44			108
Total operating expenses	7,024			3,274			11,490			6,326			4,996			4,519
Operating Income (Loss)	(1,594		)	1,185			(288		)	2,125
Operating Income													1,376			1,252
Other Income and (Expense):
Allowance for equity funds used during construction	58			45			115			98			30			57
Earnings (loss) from equity method investments	28			(1		)	67			(1		)
Earnings from equity method investments													41			39
Interest expense, net of amounts capitalized	(424		)	(293		)	(840		)	(539		)	(458		)	(416		)
Other income (expense), net	(3		)	(28		)	(11		)	(56		)	60			48
Total other income and (expense)	(341		)	(277		)	(669		)	(498		)	(327		)	(272		)
Earnings (Loss) Before Income Taxes	(1,935		)	908			(957		)	1,627
Income taxes (benefit)	(587		)	261			(273		)	479
Consolidated Net Income (Loss)	(1,348		)	647			(684		)	1,148
Less:
Earnings Before Income Taxes													1,049			980
Income taxes													113			315
Consolidated Net Income													936			665
Dividends on preferred and preference stock of subsidiaries	11			12			22			23			4			11
Net income attributable to noncontrolling interests	22			12			17			13
Consolidated Net Income (Loss) Attributable to Southern Company	$	(1,381	)	$	623		$	(723	)	$	1,112
Net loss attributable to noncontrolling interests													(6		)	(4		)
Consolidated Net Income Attributable to Southern Company													$	938		$	658
Common Stock Data:
Earnings (loss) per share —
Earnings per share —
Basic	$	(1.38	)	$	0.67		$	(0.73	)	$	1.20		$	0.93		$	0.66
Diluted	$	(1.37	)	$	0.66		$	(0.72	)	$	1.20		$	0.92		$	0.66
Average number of shares of common stock outstanding (in millions)
Basic	998			934			996			925			1,011			993
Diluted	1,005			940			1,003			931			1,016			1,000
Cash dividends paid per share of common stock	$	0.5800		$	0.5600		$	1.1400		$	1.1025		$	0.58		$	0.56

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

For the Three Months Ended June 30, For the Six Months Ended June 30,
2017 2016 2017 2016
(in millions) (in millions)
Consolidated Net Income (Loss) $ (1,348 ) $ 647
$ (684 ) $ 1,148
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of
$23, $(13), $17, and $(85), respectively 38
(20 ) 29
(137 )
Reclassification adjustment for amounts included in net income,
net of tax of $(25), $10, $(26), and $11, respectively (41 ) 16
(42 ) 18
Pension and other postretirement benefit plans:
Reclassification adjustment for amounts included in net income,
net of tax of $1, $-, $1, and $1, respectively 1
1
2
2
Total other comprehensive income (loss) (2 ) (3 ) (11 ) (117 )
Comprehensive Income (Loss) (1,350 ) 644
(695 ) 1,031
Less:
Dividends on preferred and preference stock of subsidiaries 11
12
22
23
Comprehensive income attributable to noncontrolling interests 22
12
17
13
Consolidated Comprehensive Income (Loss) Attributable to
Southern Company
$ (1,383 ) $ 620
$ (734 ) $ 995



	For the Three Months Ended March 31,
	2018			2017
	(in millions)
Consolidated Net Income	$	936		$	665
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $16 and $(5), respectively	47			(9		)
Reclassification adjustment for amounts included in net income, net of tax of $(6) and $(1), respectively	(19		)	(1		)
Pension and other postretirement benefit plans:
Reclassification adjustment for amounts included in net income, net of tax of $- and $-, respectively	2			1
Total other comprehensive income (loss)	30			(9		)
Comprehensive Income	966			656
Dividends on preferred and preference stock of subsidiaries	4			11
Comprehensive loss attributable to noncontrolling interests	(6		)	(4		)
Consolidated Comprehensive Income Attributable to Southern Company	$	968		$	649

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Consolidated net income (loss)	$	(684	)	$	1,148
Adjustments to reconcile consolidated net income (loss) to net cash provided from operating activities —
Consolidated net income							$	936		$	665
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization, total	1,683			1,306			873			823
Deferred income taxes	(270		)	279			34			161
Allowance for equity funds used during construction	(115		)	(98		)	(30		)	(57		)
Pension, postretirement, and other employee benefits	(83		)	(56		)
Settlement of asset retirement obligations	(87		)	(66		)
Stock based compensation expense	73			69			69			61
Hedge settlements	1			(201		)
Estimated loss on Kemper IGCC	3,120			134			37			108
Income taxes receivable, non-current	(58		)	—
Mark-to-market adjustments							(60		)	(81		)
Other, net	(63		)	63			6			(10		)
Changes in certain current assets and liabilities —
-Receivables	110			(197		)	197			310
-Prepayments	(61		)	(28		)	(82		)	(111		)
-Fossil fuel for generation	6			70
-Natural gas for sale, net of temporary LIFO liquidation	223			—			413			411
-Other current assets	(36		)	(25		)	7			(31		)
-Accounts payable	(353		)	(71		)	(425		)	(533		)
-Accrued taxes	(132		)	74			(79		)	(212		)
-Accrued compensation	(331		)	(222		)	(471		)	(438		)
-Retail fuel cost over recovery	(187		)	(54		)	3			(122		)
-Other current liabilities	(14		)	15			81			(48		)
Net cash provided from operating activities	2,742			2,140			1,509			896
Investing Activities:
Business acquisitions, net of cash acquired	(1,062		)	(897		)	(46		)	(1,004		)
Property additions	(3,398		)	(3,486		)	(1,781		)	(1,488		)
Investment in restricted cash	(16		)	(8,608		)
Distribution of restricted cash	27			649
Nuclear decommissioning trust fund purchases	(388		)	(585		)	(306		)	(224		)
Nuclear decommissioning trust fund sales	383			580			301			218
Asset dispositions							135			64
Cost of removal, net of salvage	(128		)	(99		)	(79		)	(61		)
Change in construction payables, net	(117		)	(260		)	(112		)	(170		)
Investment in unconsolidated subsidiaries	(116		)	—			(30		)	(81		)
Payments pursuant to LTSAs	(132		)	(82		)	(73		)	(55		)
Other investing activities	58			113			(4		)	4
Net cash used for investing activities	(4,889		)	(12,675		)	(1,995		)	(2,797		)
Financing Activities:
Increase in notes payable, net	30			471			782			573
Proceeds —
Long-term debt	2,958			12,038			600			1,409
Common stock	417			1,383			113			186
Short-term borrowings	1,004			—			1,200			4
Redemptions and repurchases —
Long-term debt	(1,478		)	(1,272		)	(1,283		)	(608		)
Preference stock	(150		)	—
Short-term borrowings	—			(475		)	(150		)	—
Distributions to noncontrolling interests	(40		)	(11		)	(13		)	(18		)
Capital contributions from noncontrolling interests	73			179			8			71
Purchase of membership interests from noncontrolling interests	—			(129		)
Payment of common stock dividends	(1,134		)	(1,023		)	(586		)	(556		)
Other financing activities	(75		)	(133		)	(42		)	(36		)
Net cash provided from financing activities	1,605			11,028			629			1,025
Net Change in Cash and Cash Equivalents	(542		)	493
Cash and Cash Equivalents at Beginning of Period	1,975			1,404
Cash and Cash Equivalents at End of Period	$	1,433		$	1,897
Net Change in Cash, Cash Equivalents, and Restricted Cash							143			(876		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							2,147			1,992
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	2,290		$	1,116
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $55 and $61 capitalized for 2017 and 2016, respectively)	$	833		$	458
Interest (net of $17 and $25 capitalized for 2018 and 2017, respectively)							$	499		$	461
Income taxes, net	1			(138		)	(1		)	(6		)
Noncash transactions — Accrued property additions at end of period	629			549			894			578

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Assets:
Cash and cash equivalents	$	1,433		$	1,975		$	2,284		$	2,130
Receivables —
Customer accounts receivable	1,600			1,565			1,683			1,806
Energy marketing receivables	482			623			448			607
Unbilled revenues	593			706			777			810
Under recovered regulatory clause revenues	26			18
Income taxes receivable, current	544			544
Under recovered fuel clause revenues							156			171
Other accounts and notes receivable	513			377			703			698
Accumulated provision for uncollectible accounts	(52		)	(43		)	(54		)	(44		)
Materials and supplies	1,461			1,462			1,430			1,438
Fossil fuel for generation	624			689			565			594
Natural gas for sale	477			631			235			595
Prepaid expenses	361			364			432			452
Other regulatory assets, current	569			581			579			604
Other current assets	206			230			286			211
Total current assets	8,837			9,722			9,524			10,072
Property, Plant, and Equipment:
In service	101,021			98,416			104,499			103,542
Less: Accumulated depreciation	30,667			29,852			31,920			31,457
Plant in service, net of depreciation	70,354			68,564			72,579			72,085
Nuclear fuel, at amortized cost	892			905			908			883
Construction work in progress	7,440			8,977			7,460			6,904
Total property, plant, and equipment	78,686			78,446			80,947			79,872
Other Property and Investments:
Goodwill	6,271			6,251			6,226			6,268
Equity investments in unconsolidated subsidiaries	1,632			1,549			1,542			1,513
Other intangible assets, net of amortization of $126 and $62 at June 30, 2017 and December 31, 2016, respectively	929			970
Other intangible assets, net of amortization of $212 and $186 at March 31, 2018 and December 31, 2017, respectively							848			873
Nuclear decommissioning trusts, at fair value	1,722			1,606			1,827			1,832
Leveraged leases	782			774			781			775
Miscellaneous property and investments	230			270			250			249
Total other property and investments	11,566			11,420			11,474			11,510
Deferred Charges and Other Assets:
Deferred charges related to income taxes	1,325			1,629			818			825
Unamortized loss on reacquired debt	215			223			203			206
Other regulatory assets, deferred	6,668			6,851			6,948			6,943
Other deferred charges and assets	1,387			1,406			1,653			1,577
Total deferred charges and other assets	9,595			10,109			9,622			9,551
Total Assets	$	108,684		$	109,697		$	111,567		$	111,005

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholders' Equity	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Liabilities:
Securities due within one year	$	3,031		$	2,587		$	3,235		$	3,892
Notes payable	3,274			2,241			4,271			2,439
Energy marketing trade payables	534			597			437			546
Accounts payable	1,920			2,228			2,089			2,530
Customer deposits	546			558			530			542
Accrued taxes —
Accrued income taxes	125			193
Unrecognized tax benefits	400			385
Other accrued taxes	490			667
Accrued taxes							368			636
Accrued interest	508			518			432			488
Accrued compensation	584			915			493			959
Asset retirement obligations, current	300			378			301			351
Liabilities from risk management activities, net of collateral	71			107
Acquisitions payable	—			489
Other regulatory liabilities, current	169			236			551			337
Other current liabilities	799			818			923			874
Total current liabilities	12,751			12,917			13,630			13,594
Long-term Debt	43,885			42,629			44,446			44,462
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	13,529			14,092			6,930			6,842
Deferred credits related to income taxes	212			219			7,179			7,256
Accumulated deferred ITCs	2,301			2,228			2,362			2,267
Employee benefit obligations	2,156			2,299			2,206			2,256
Asset retirement obligations, deferred	4,297			4,136			4,536			4,473
Accrued environmental remediation	399			397			378			389
Other cost of removal obligations	2,706			2,748			2,667			2,684
Other regulatory liabilities, deferred	233			258			224			239
Other deferred credits and liabilities	805			880			660			691
Total deferred credits and other liabilities	26,638			27,257			27,142			27,097
Total Liabilities	83,274			82,803			85,218			85,153
Redeemable Preferred Stock of Subsidiaries	118			118			324			324
Redeemable Noncontrolling Interests	51			164
Stockholders' Equity:
Common Stockholders' Equity:
Common stock, par value $5 per share —
Authorized — 1.5 billion shares
Issued — June 30, 2017: 1.0 billion shares
— December 31, 2016: 991 million shares
Treasury — June 30, 2017: 0.9 million shares
— December 31, 2016: 0.8 million shares
Issued — 1.0 billion shares
Treasury — March 31, 2018: 1.0 million shares
— December 31, 2017: 0.9 million shares
Par value	4,997			4,952			5,054			5,038
Paid-in capital	10,106			9,661			10,603			10,469
Treasury, at cost	(34		)	(31		)	(38		)	(36		)
Retained earnings	8,494			10,356			9,257			8,885
Accumulated other comprehensive loss	(191		)	(180		)	(200		)	(189		)
Total Common Stockholders' Equity	23,372			24,758			24,676			24,167
Preferred and Preference Stock of Subsidiaries	462			609
Noncontrolling Interests	1,407			1,245			1,349			1,361
Total Stockholders' Equity	25,241			26,612			26,025			25,528
Total Liabilities and Stockholders' Equity	$	108,684		$	109,697		$	111,567		$	111,005

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

Table of Contents

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

Southern Company is a holding company that owns all of the common stock of the traditional electric operating companies and the parent entities of Southern Power and Southern Company Gas and owns other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system's primary businesses of electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas by Southern Company Gas. The four traditional electric operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through natural gas distribution utilities in seven states and is involved in several other complementary businesses including gas marketing services, wholesale gas services, and gas midstream operations. Southern Company's other business activities include providing energy technologies and services to electric utilities and large industrial, commercial, institutional, and municipal customers. Customer solutions include distributed generation systems, utility infrastructure solutions, and energy efficiency products and services. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. For additional information, see BUSINESS – "The Southern Company System – Traditional Electric Operating Companies," " – Southern Power," " – Southern Company Gas," and " – Other Businesses" in Item 1 of the Form 10-K. See FUTURE EARNINGS POTENTIAL herein for information regarding agreements entered into by Southern Company Gas to sell two of its natural gas distribution utilities and Pivotal Home Solutions.

Alabama Power, Georgia Power, and Gulf Power recently reached agreements with their respective state PSCs relating to the regulatory impacts of the Tax Reform Legislation, which include capital structure adjustments expected to help mitigate the potential adverse impacts to certain of their credit metrics. In addition, Mississippi Power, Atlanta Gas Light, and Nicor Gas have each made filings with their respective state PSC or other regulatory agency relating to the Tax Reform Legislation and are awaiting final approval. See Note (B) to the Condensed Financial Statements under "Regulatory Matters" herein for additional information regarding state PSC or other regulatory agency actions related to the Tax Reform Legislation. Also see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation.

Southern Company continues to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, electric and natural gas system reliability, execution of major construction projects, and earnings per share.

Plant Vogtle Units 3 and 4 Status

In 2009, the Georgia PSC certified construction of Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. In December 2017, the Georgia PSC approved Georgia Power's recommendation to continue construction.

Georgia Power expects Plant Vogtle Units 3 and 4 to be placed in service by November 2021 and November 2022, respectively. Georgia Power's capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was $3.6 billion at March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the 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 $1.6 billion had been incurred through March 31, 2018.

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

RESULTS OF OPERATIONS

Net Income



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$280		42.6

Consolidated net income attributable to Southern Company was $938 million ($0.93 per share) for the first quarter 2018 compared to $658 million ($0.66 per share) for the corresponding period in 2017. The increase was primarily due to a lower federal income tax rate as a result of the Tax Reform Legislation and net state income tax benefits arising from the reorganization of Southern Power's legal entities, as well as higher retail electric revenues due to colder weather, partially offset by reductions in retail revenues related to the regulatory treatment of the Tax Reform Legislation impacts.

Retail Electric Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$174		5.1

In the first quarter 2018, retail electric revenues were $3.6 billion compared to $3.4 billion for the corresponding period in 2017.

Details of the changes in retail electric revenues were as follows:



	First Quarter 2018
	(in millions)			(% change)
Retail electric – prior year	$	3,394
Estimated change resulting from –
Rates and pricing	(103		)	(3.0	)
Sales growth	26			0.8
Weather	144			4.2
Fuel and other cost recovery	107			3.1
Retail electric – current year	$	3,568		5.1	%

Table of Contents

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenues associated with changes in rates and pricing decreased in the first quarter 2018 when compared to the corresponding period in 2017 primarily due to revenues deferred as regulatory liabilities for future adjustments to customer billings related to the Tax Reform Legislation, as well as the rate pricing effect of increased customer usage at Georgia Power. The decrease in revenues also reflects a decrease in the recovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff at Georgia Power, also primarily related to the Tax Reform Legislation. These decreases were partially offset by higher contributions from variable demand-driven pricing from commercial and industrial customers at Georgia Power.

See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power" and " – Georgia Power – Rate Plans" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.

Revenues attributable to changes in sales increased in the first quarter 2018 when compared to the corresponding period in 2017. Weather-adjusted residential KWH sales and weather-adjusted commercial KWH sales increased 1.1% and 1.2%, respectively, in the first quarter 2018 primarily due to customer growth. Industrial KWH sales increased 2.6% in the first quarter 2018, primarily in the primary metals and chemicals sectors, partially offset by decreased sales in the paper sector.

Fuel and other cost recovery revenues increased $107 million in the first quarter 2018 when compared to the corresponding period in 2017 primarily due to higher energy sales resulting from colder weather. 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.

Wholesale Electric Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$88		16.6

Wholesale electric revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives 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, Southern Company'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. Wholesale electric revenues at Mississippi Power include FERC-regulated municipal and rural association 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.

In the first quarter 2018, wholesale electric revenues were $619 million compared to $531 million for the corresponding period in 2017. This increase was primarily related to a $91 million increase in energy revenues, partially offset by a $3 million decrease in capacity revenues. The increase in energy revenues primarily relates to Southern Power and includes an increase in fuel costs that are contractually recovered through PPAs and new

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

natural gas PPAs related to existing facilities. Additionally, the increase in energy revenues is due to increased demand related to colder weather in the first quarter 2018 compared to the corresponding period in 2017.

Natural Gas Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$77		5.0

In the first quarter 2018, natural gas revenues were $1.6 billion compared to $1.5 billion for the corresponding period in 2017.

Details of the changes in natural gas revenues were as follows:



	First Quarter 2018
	(in millions)			(% change)
Natural gas – prior year	$	1,530
Estimated change resulting from –
Infrastructure replacement programs and base rate increases	47			3.0	%
Tax reform regulatory liabilities	(37		)	(2.4	)
Gas costs and other cost recovery	1			0.1
Weather	8			0.5
Wholesale gas services	35			2.3
Other	23			1.5
Natural gas – current year	$	1,607		5.0	%

The increase in natural gas revenues is primarily due to infrastructure investments recovered through replacement programs and increases in base rate revenues at the natural gas distribution utilities, an increase in commercial activity at Southern Company Gas' wholesale gas services business, colder weather, fixed and guaranteed bill revenue at Southern Company Gas' gas marketing services business as a result of adopting a new revenue recognition standard, and an increase in revenues resulting from the Dalton Pipeline being placed in service. These increases were partially offset by revenues deferred as regulatory liabilities for expected adjustments to customer billings as a result of the regulatory treatment of the Tax Reform Legislation impacts.

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 Notes (A) and (B) to the Condensed Financial Statements herein under "Recently Adopted Accounting Standards – Revenue" and "Regulatory Matters – Southern Company Gas," respectively, for additional information.

Other Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$272		192.9

In the first quarter 2018, other revenues were $413 million compared to $141 million for the corresponding period in 2017. This increase was primarily due to PowerSecure's storm restoration services in Puerto Rico.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and Purchased Power Expenses



	First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)
Fuel	$	105	10.5
Purchased power	88		49.2
Total fuel and purchased power expenses	$	193

In the first quarter 2018, total fuel and purchased power expenses were $1.4 billion compared to $1.2 billion for the corresponding period in 2017. The increase was primarily the result of a $147 million increase in the volume of KWHs generated and purchased and a $46 million increase in the average cost of fuel and purchased power.

Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" herein for additional information. Fuel expenses incurred under Southern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact net income.

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



	First Quarter 2018	First Quarter 2017
Total generation (in billions of KWHs)	48	44
Total purchased power (in billions of KWHs)	5	4
Sources of generation (percent) —
Gas	45	46
Coal	29	29
Nuclear	16	17
Hydro	4	2
Other	6	6
Cost of fuel, generated (in cents per net KWH) —
Gas	2.85	2.92
Coal	2.90	2.88
Nuclear	0.78	0.79
Average cost of fuel, generated (in cents per net KWH)	2.50	2.50
Average cost of purchased power (in cents per net KWH)^(*)	6.33	5.10


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

Fuel

In the first quarter 2018, fuel expense was $1.1 billion compared to $1.0 billion for the corresponding period in 2017. The increase was primarily due to a 14.2% increase in the volume of KWHs generated by natural gas and a 10.8% increase in the volume of KWHs generated by coal, partially offset by a 2.4% decrease in the average cost of natural gas per KWH generated.

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Purchased Power

In the first quarter 2018, purchased power expense was $267 million compared to $179 million for the corresponding period in 2017. The increase was primarily due to a 24.1% increase in the average cost per KWH purchased and a 14.0% increase in the volume of KWHs purchased.

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

Cost of Other Sales



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$201		228.4

In the first quarter 2018, cost of other sales was $289 million compared to $88 million for the corresponding period in 2017. The increase primarily reflects costs related to PowerSecure's storm restoration services in Puerto Rico.

Other Operations and Maintenance Expenses



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$68		4.9

In the first quarter 2018, other operations and maintenance expenses were $1.45 billion compared to $1.38 billion for the corresponding period in 2017. The increase was primarily due to a $42 million goodwill impairment charge recorded at Southern Company Gas in contemplation of the proposed sale of Pivotal Home Solutions. Additionally, the increase is related to a $28 million increase in employee compensation and benefits, including pension costs, a $19 million decrease in gains from sales of integrated transmission system assets at Georgia Power, and a $12 million increase at Southern Company Gas to align paid time off with the Southern Company system's policy. These increases were partially offset by $32.5 million resulting from the write-down of Gulf Power's ownership of Plant Scherer Unit 3 in the first quarter 2017 in accordance with a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement).

See Notes (A) and (J) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" and "Southern Company Gas – Proposed Sale of Pivotal Home Solutions," respectively, herein for additional information regarding the proposed sale of Pivotal Home Solutions and Note (G) to the Condensed Financial Statements herein for additional information on pension costs. Also, see Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information regarding the 2017 Gulf Power Rate Case Settlement Agreement.

Depreciation and Amortization



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$53		7.4

In the first quarter 2018, depreciation and amortization was $769 million compared to $716 million for the corresponding period in 2017. The increase reflects $34 million related to additional plant in service and also reflects a $25.5 million reduction in depreciation credits recorded in the first quarter 2017 as authorized in Gulf Power's 2013 rate case settlement.

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See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.

Taxes Other Than Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$25		7.6

In the first quarter 2018, taxes other than income taxes were $355 million compared to $330 million for the corresponding period in 2017. The increase was primarily due to increased municipal franchise fees and property taxes at Georgia Power and increased revenue tax expenses and payroll taxes related to aligning paid time off at Southern Company Gas with the Southern Company system's policy.

Estimated Loss on Kemper IGCC



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(64)		(59.3)

Estimated losses on the Kemper IGCC of $44 million were recorded in the first quarter 2018 resulting from the abandonment and related closure activities for the mine and gasifier-related assets as compared to $108 million for the corresponding period in 2017 related to revisions to the estimated construction costs prior to the June 2017 project suspension.

Allowance for Equity Funds Used During Construction



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(27)		(47.4)

In the first quarter 2018, AFUDC equity was $30 million compared to $57 million in the corresponding period in 2017. This decrease primarily resulted from Mississippi Power's suspension of the Kemper IGCC construction in June 2017.

Interest Expense, Net of Amounts Capitalized



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$42		10.1

In the first quarter 2018, interest expense, net of amounts capitalized was $458 million compared to $416 million in the corresponding period in 2017. The increase was largely due to an increase in average outstanding long-term debt, primarily at the parent company and Southern Company Gas.

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See Note 6 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein for additional information.

Other Income (Expense), Net



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$12		25.0

In the first quarter 2018, other income (expense), net was $60 million compared to $48 million for the corresponding period in 2017. The increase was primarily due to a gain from the settlement of a contractor litigation claim at Southern Company Gas.

Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(202)		(64.1)

In the first quarter 2018, income taxes were $113 million compared to $315 million for the corresponding period in 2017. The decrease was primarily due to a lower federal income tax rate as a result of the Tax Reform Legislation, as well as net state income tax benefits arising from the reorganization of Southern Power's legal entities holding its solar facilities.

See Note (H) to the Condensed Financial Statements herein for additional information.

Dividends on Preferred and Preference Stock of Subsidiaries



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(7)		(63.6)

In the first quarter 2018, dividends on preferred and preference stock of subsidiaries was $4 million compared to $11 million for the corresponding period in 2017. The decrease was due to the 2017 redemptions of all outstanding shares of preferred and preference stock at Georgia Power and preference stock at Gulf Power.

See Note 6 the financial statements of Southern Company under "Redeemable Preferred Stock of Subsidiaries" in Item 8 of the Form 10-K for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company's future earnings potential. The level of Southern Company's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Southern Company system's primary businesses of selling electricity and distributing natural gas. These factors include the traditional electric operating companies' and the natural gas distribution utilities' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. Plant Vogtle Units 3 and 4 construction and rate recovery and the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects are also major factors.

Future earnings for the electricity and natural gas businesses will be driven primarily by customer growth. Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies, increasing volumes of electronic

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commerce transactions, and higher multi-family home construction, all of which could contribute to a net reduction in customer usage. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale electric business also depends on numerous factors including regulatory matters, creditworthiness of customers, total electric generating capacity available and related costs, future acquisitions and construction of electric generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity and natural gas is primarily driven by the pace of economic growth that may be affected by changes in regional and global economic conditions, which may impact future earnings. In addition, the volatility of natural gas prices has a significant impact on the natural gas distribution utilities' customer rates, long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability.

As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets or businesses, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company.

In October 2017, a wholly-owned subsidiary of Southern Company Gas entered into agreements for the sale 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. As of March 31, 2018, the net book value of the assets to be disposed of in the sale was approximately $1.5 billion, which includes approximately $0.5 billion of goodwill. The goodwill is not deductible for tax purposes and, as a result, a deferred tax liability has not yet been provided. Through the completion of the asset sales, Southern Company Gas intends to invest approximately $0.1 billion in capital additions required for ordinary business operations of these assets. The completion of each asset sale is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, the receipt of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The asset sales are expected to be completed by the end of the third quarter 2018.

On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions for a purchase price of approximately $365 million, including estimated working capital. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. The remaining goodwill of $242 million is not deductible for tax purposes and, as a result, a deferred tax liability has not been provided. The completion of this transaction is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, approval from the Florida Office of Insurance Regulation and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed by the end of the second quarter 2018.

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

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For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

The Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. The Southern Company system maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies 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 and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of the traditional electric operating companies', Southern Power's, and the natural gas distribution utilities' operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power. Further, increased costs that are recovered through regulated rates could contribute to reduced demand for electricity and natural gas, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity and natural gas. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

Environmental Laws and Regulations

Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Laws and Regulations – Coal Combustion Residuals" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule and the outcome of any legal challenges and cannot be determined at this time.

Global Climate Issues

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Southern Company in Item 7 of the Form 10-K for additional information regarding domestic GHG policies.

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from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.

Regulatory Matters

Fuel Cost Recovery

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power – Rate ECR" and "Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery for the traditional electric operating companies.

The traditional electric operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional electric operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.

Alabama Power

Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through Rate RSE, Rate CNP, Rate ECR, and Rate NDR. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power. See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and the recovery balance of each regulatory clause for Alabama Power.

On May 1, 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 plans 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. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Federal Tax Reform Legislation" of Southern Company in Item 7 of the Form 10-K for additional information.

Rate RSE

The approved modifications to Rate RSE are effective June 2018 and applicable for January 2019 billings and thereafter. The modifications include reducing the top of the allowed weighted common equity return (WCER) range from 6.21% to 6.15% and modifications to the refund mechanism applicable to prior year actual results. The modifications to the refund mechanism allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.

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In accordance with an established retail tariff that provides for an interim adjustment to customer billings to recognize the impact of a change in the statutory income tax rate, Alabama Power will also return approximately $257 million to retail customers through bill credits in the second half of 2018 as a result of the change in the federal income tax rate under the Tax Reform Legislation.

Rate ECR

On May 1, 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 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Southern Company's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to the financial statements of Southern Company under "Federal Tax Reform Legislation" in Item 8 of the Form 10-K for additional information.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See Note (B) to the Condensed Financial Statements under "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's NCCR tariff. Also see Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.

Rate Plans

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Georgia Power – Rate Plans" of Southern Company in Item 7 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.

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(ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.

To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. Benefits from reduced federal income tax rates in excess of the amounts refunded to customers will be retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.

Gulf Power

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" of Southern Company in Item 7 of the Form 10-K for additional information.

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 among Gulf Power and three intervenors addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.

As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's fuel cost recovery rates. The ultimate outcome of this matter cannot be determined at this time.

Mississippi Power

On February 7, 2018, Mississippi Power revised its annual projected PEP filing for 2018 to reflect the impacts of the Tax Reform Legislation. The revised filing requests an increase of $26 million in annual revenues, based on a performance adjusted ROE of 9.33% and an increased equity ratio of 55%. The Mississippi PSC is expected to rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

Southern Company Gas

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Southern Company Gas" of Southern Company in Item 7 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information.

In December 2017, Atlanta Gas Light filed its 2018 annual rate adjustment with the Georgia PSC, which, if approved, would have increased annual base rate revenues by $22 million, effective June 1, 2018. On February 23, 2018, Atlanta Gas Light revised its filing to reflect the impacts of the Tax Reform Legislation. The revised request replaced the $22 million rate increase with a $16 million rate reduction for customers in 2018. The revised request maintains the previously authorized earnings band based on a return on equity between 10.55% and 10.95% and proposes to increase the equity ratio by 3% to an equity ratio of 54% to address the negative cash flow and credit metric impacts of the Tax Reform Legislation. Atlanta Gas Light also notified the Georgia PSC that it intends to

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seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.

In accordance with an Illinois Commission order and pursuant to its rehearing request, on April 13, 2018, Nicor Gas filed for revised base rates with the Illinois Commission, which would result in a decrease of approximately $44 million in annual base rate revenues effective in the second quarter 2018 to incorporate the reduction in the federal income tax rate as a result of the Tax Reform Legislation. Nicor Gas' previously-authorized capital structure and ROE of 9.8% were not addressed in the rehearing and remain unchanged. The Illinois Commission is expected to rule on the request on May 2, 2018.

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

Kemper County Energy Facility

For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K.

As the mining permit holder for the Kemper County energy facility, Liberty Fuels Company, LLC has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. Mine reclamation began in the first quarter 2018. See Note 1 to the financial statements of Southern Company under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K for additional information.

The combined cycle and associated common facilities portions of the Kemper County energy facility were dedicated as Plant Ratcliffe on April 27, 2018.

~~Construction Program~~

~~See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," and Note (B) to the Condensed Financial Statements under "Regulatory Matters~~ – ~~Georgia Power~~ – ~~Nuclear Construction" and "Integrated Coal Gasification Combined Cycle~~" herein for additional information regarding the construction program. For information about Southern Power's acquisitions and construction of renewable energy facilities, see Note (I) to the Condensed Financial Statements under "~~Southern Power" herein.~~

~~Kemper IGCC~~

On June 21, 2017, the Mississippi PSC stated its intent to issue an order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant, rather than an IGCC plant, and address all issues associated with the Kemper IGCC (Kemper Settlement Order). The Kemper Settlement Order established a new docket for the purposes of pursuing a global settlement of costs of the Kemper IGCC (Kemper IGCC Settlement Docket). The Mississippi PSC requested any such proposed settlement agreement reflect: (i) at a minimum, no rate increase to Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifier and related assets; and (iii) modification or amendment of the CPCN for the Kemper IGCC to allow only for ownership and operation of a natural gas facility.

Although the ability to achieve a negotiated settlement is uncertain, Mississippi Power intends to pursue any available settlement alternatives. In addition, the Kemper Settlement Order provides that, in the event a settlement agreement is not reached, the Mississippi PSC reserves its right to take any appropriate steps, including issuing an order to show cause as to why the CPCN for the Kemper IGCC should not be revoked.

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~~FINANCIAL CONDITION AND~~ RESULTS OF OPERATIONS

Net Income

~~On June 28, 2017, Mississippi Power notified the Mississippi PSC that it would begin a process~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$280		42.6

Consolidated net income attributable to suspend operations and start-up activities on the gasifier portion of the Kemper IGCC, given the uncertainty as to the future of the gasifier portion of the Kemper IGCC. Mississippi Power expects to continue to operate the combined cycle portion of the Kemper IGCC as it has done since August 2014.

~~At the time of project suspension, the total cost estimate~~Southern Company was $938 million ($0.93 per share) for the ~~Kemper IGCC~~first quarter 2018 compared to $658 million ($0.66 per share) for the corresponding period in 2017. The increase was ~~approximately $7.38 billion, including approximately $5.95 billion of costs subject~~primarily due to ~~the construction cost cap, and was net of the $137 million in additional grants from the DOE received on April 8, 2016 (Additional DOE Grants). Mississippi Power recorded pre-tax charges to~~a lower federal income for revisions to the cost estimate subject to the construction cost cap totaling $196 million ($121 million after tax) in the second quarter through May 31, 2017 and a total of $305 million ($188 million after tax) for year-to-date through May 31, 2017. In the aggregate, Mississippi Power incurred charges of $3.07 billion ($1.89 billion after tax)tax rate as a result of ~~changes~~the Tax Reform Legislation and net state income tax benefits arising from the reorganization of Southern Power's legal entities, as well as higher retail electric revenues due to colder weather, partially offset by reductions in the cost estimate above the cost cap for the Kemper IGCC through May 31, 2017. The May 31, 2017 cost estimate included approximately $175 million of estimated costs to be incurred beyond the then-estimated in-service date of June 30, 2017 that were expected to be subject to the $2.88 billion cost cap.

~~At June 30, 2017, approximately $3.3 billion in actual Kemper IGCC costs were not reflected in Mississippi Power's~~ retail ~~and wholesale rates, of which $0.5 billion was~~revenues related to the ~~combined cycle and associated facilities and $2.8 billion was related to the gasification portions~~regulatory treatment of the ~~Kemper IGCC.~~Tax Reform Legislation impacts.

~~While~~Retail Electric Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$174		5.1

In the ~~ultimate disposition~~first quarter 2018, retail electric revenues were $3.6 billion compared to $3.4 billion for the corresponding period in 2017.

Details of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increase for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 of $2.8 billion ($2.0 billion after tax), which includes estimated costs associated with the gasification portions of the plant and lignite mine. In the event the gasification portions of the project are ultimately canceled, additional pre-tax costs currently estimated at approximately $100 million to $200 million are expected to be incurred.

Total pre-tax charges to income for the estimated probable losses on the Kemper IGCC were $3.0 billion ($2.1 billion after tax) for the second quarter 2017 and $3.1 billion ($2.2 billion after tax) for the six months ended June 30, 2017. In the aggregate, since the Kemper IGCC project started, Mississippi Power has incurred charges of $6.0 billion ($3.9 billion after tax) through June 30, 2017.

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is includedchanges in retail ~~and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility,~~electric revenues were as well as the 15% that was previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.follows:

For additional information on the Kemper IGCC, including information on the project economic viability analysis, pending lawsuits, and an ongoing SEC investigation, see Note 3 to the financial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "~~Integrated Coal Gasification Combined Cycle" and "Other Matters" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein.~~

~~Nuclear Construction~~

On March 29, 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. To provide for a continuation of work at Plant Vogtle Units 3 and 4, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an interim assessment agreement with the EPC Contractor (Interim Assessment Agreement), which the bankruptcy court approved on March 30, 2017. On June 9, 2017, Georgia Power



	First Quarter 2018
	(in millions)			(% change)
Retail electric – prior year	$	3,394
Estimated change resulting from –
Rates and pricing	(103		)	(3.0	)
Sales growth	26			0.8
Weather	144			4.2
Fuel and other cost recovery	107			3.1
Retail electric – current year	$	3,568		5.1	%

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenues associated with changes in rates and pricing decreased in the ~~other Vogtle Owners and Toshiba entered into a settlement agreement regarding the Toshiba Guarantee (Guarantee Settlement Agreement). Pursuant~~first quarter 2018 when compared to the ~~Guarantee Settlement Agreement, Toshiba acknowledged~~corresponding period in 2017 primarily due to revenues deferred as regulatory liabilities for future adjustments to customer billings related to the ~~amount~~Tax Reform Legislation, as well as the rate pricing effect of ~~its obligation under~~increased customer usage at Georgia Power. The decrease in revenues also reflects a decrease in the Toshiba Guarantee is $3.68 billion (Guarantee Obligations), of which Georgia Power's proportionate share is approximately $1.7 billion, and that the Guarantee Obligations exist regardless of whether Plant Vogtle Units 3 and 4 are completed. Additionally, on June 9, 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into a services agreement (Services Agreement), which was amended and restated on July 20, 2017, for the EPC Contractor to transition construction managementrecovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff at Georgia Power, also primarily related to the Tax Reform Legislation. These decreases were partially offset by higher contributions from variable demand-driven pricing from commercial and industrial customers at Georgia Power.

Wholesale Electric Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$88		16.6

In the first quarter 2018, wholesale electric revenues were $619 million compared to $531 million for the corresponding period in 2017. This increase was primarily related to a $91 million increase in energy revenues, partially offset by a $3 million decrease in capacity revenues. The increase in energy revenues primarily relates to Southern ~~Nuclear~~Power and includes an increase in fuel costs that are contractually recovered through PPAs and new

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

natural gas PPAs related to ~~provide ongoing design, engineering,~~existing facilities. Additionally, the increase in energy revenues is due to increased demand related to colder weather in the first quarter 2018 compared to the corresponding period in 2017.

Natural Gas Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$77		5.0

In the first quarter 2018, natural gas revenues were $1.6 billion compared to $1.5 billion for the corresponding period in 2017.

Details of the changes in natural gas revenues were as follows:



	First Quarter 2018
	(in millions)			(% change)
Natural gas – prior year	$	1,530
Estimated change resulting from –
Infrastructure replacement programs and base rate increases	47			3.0	%
Tax reform regulatory liabilities	(37		)	(2.4	)
Gas costs and other cost recovery	1			0.1
Weather	8			0.5
Wholesale gas services	35			2.3
Other	23			1.5
Natural gas – current year	$	1,607		5.0	%

The increase in natural gas revenues is primarily due to infrastructure investments recovered through replacement programs and ~~procurement~~increases in base rate revenues at the natural gas distribution utilities, an increase in commercial activity at Southern Company Gas' wholesale gas services business, colder weather, fixed and guaranteed bill revenue at Southern Company Gas' gas marketing services business as a result of adopting a new revenue recognition standard, and an increase in revenues resulting from the Dalton Pipeline being placed in service. These increases were partially offset by revenues deferred as regulatory liabilities for expected adjustments to customer billings as a result of the regulatory treatment of the Tax Reform Legislation impacts.

See Notes (A) and (B) to the Condensed Financial Statements herein under "Recently Adopted Accounting Standards – Revenue" and "Regulatory Matters – Southern ~~Nuclear. On July 27, 2017,~~Company Gas," respectively, for additional information.

Other Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$272		192.9

In the ~~Services Agreement,~~first quarter 2018, other revenues were $413 million compared to $141 million for the corresponding period in 2017. This increase was primarily due to PowerSecure's storm restoration services in Puerto Rico.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and Purchased Power Expenses



	First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)
Fuel	$	105	10.5
Purchased power	88		49.2
Total fuel and purchased power expenses	$	193

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



	First Quarter 2018	First Quarter 2017
Total generation (in billions of KWHs)	48	44
Total purchased power (in billions of KWHs)	5	4
Sources of generation (percent) —
Gas	45	46
Coal	29	29
Nuclear	16	17
Hydro	4	2
Other	6	6
Cost of fuel, generated (in cents per net KWH) —
Gas	2.85	2.92
Coal	2.90	2.88
Nuclear	0.78	0.79
Average cost of fuel, generated (in cents per net KWH)	2.50	2.50
Average cost of purchased power (in cents per net KWH)^(*)	6.33	5.10


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

Fuel

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Purchased Power

Energy purchases will vary depending on demand for energy within the Southern Company system's electric service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, and the ~~EPC Contractor's rejection~~availability of the ~~Vogtle~~Southern Company system's generation.

Cost of Other Sales



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$201		228.4

Other Operations and Maintenance Expenses



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$68		4.9

In the first quarter 2018, other operations and maintenance expenses were $1.45 billion compared to $1.38 billion for the corresponding period in 2017. The increase was primarily due to a $42 million goodwill impairment charge recorded at Southern Company Gas in contemplation of the proposed sale of Pivotal Home Solutions. Additionally, the increase is related to a $28 million increase in employee compensation and benefits, including pension costs, a $19 million decrease in gains from sales of integrated transmission system assets at Georgia Power, and a $12 million increase at Southern Company Gas to align paid time off with the Southern Company system's policy. These increases were partially offset by $32.5 million resulting from the write-down of Gulf Power's ownership of Plant Scherer Unit 3 ~~and 4 Agreement, became effective upon approval~~in the first quarter 2017 in accordance with a settlement agreement approved by the ~~DOE~~Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement).

Depreciation and Amortization



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$53		7.4

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.

Taxes Other Than Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$25		7.6

Estimated Loss on Kemper IGCC



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(64)		(59.3)

Allowance for Equity Funds Used During Construction



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(27)		(47.4)

Interest Expense, Net of Amounts Capitalized



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$42		10.1

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See Note 6 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein for additional information.

Other Income (Expense), Net



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$12		25.0

Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(202)		(64.1)

See Note (H) to the Condensed Financial Statements herein for additional information.

Dividends on Preferred and Preference Stock of Subsidiaries



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(7)		(63.6)

See Note 6 the financial statements of Southern Company under "Redeemable Preferred Stock of Subsidiaries" in Item 8 of the Form 10-K for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company's future earnings potential. The level of Southern Company's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Southern Company system's primary businesses of selling electricity and distributing natural gas. These factors include the traditional electric operating companies' and the ~~Interim Assessment Agreement expired pursuant~~natural gas distribution utilities' ability to ~~its terms. The Services Agreement will continue until~~maintain a constructive regulatory environment that allows for the ~~start-up~~timely recovery of prudently-incurred costs during a time of increasing costs and ~~testing of~~limited projected demand growth over the next several years. Plant Vogtle Units 3 and 4 ~~is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.~~

Georgia Power and the other Vogtle Owners are continuing to conduct comprehensive schedule and cost-to-complete assessments, as well as cancellation cost assessments, to determine the impact of the EPC Contractor's bankruptcy filing on the construction cost and schedule for Plant Vogtle Units 3 and 4. Georgia Power will continue working with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4, including, but not limited to, the status of construction and rate recovery and ~~currently expects~~the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects are also major factors.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

commerce transactions, and higher multi-family home construction, all of which could contribute to a net reduction in customer usage. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include ~~its recommendation~~weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, the price elasticity of demand, and the rate of economic growth or decline in ~~its seventeenth Vogtle Construction Monitoring (VCM) report to~~the service territory. In addition, the level of future earnings for the wholesale electric business also depends on numerous factors including regulatory matters, creditworthiness of customers, total electric generating capacity available and related costs, future acquisitions and construction of electric generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity and natural gas is primarily driven by the pace of economic growth that may be ~~filed with~~affected by changes in regional and global economic conditions, which may impact future earnings. In addition, the ~~Georgia PSC in late August 2017.~~

~~An inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have~~volatility of natural gas prices has a ~~further material~~significant impact on the natural gas distribution utilities' customer rates, 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 significant portion of Southern Company Gas' operations to earnings variability.

In October 2017, a wholly-owned subsidiary of Southern Company Gas entered into agreements for the sale 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. As of March 31, 2018, the net ~~cost~~book value of the assets to be disposed of in the sale was approximately $1.5 billion, which includes approximately $0.5 billion of goodwill. The goodwill is not deductible for tax purposes and, as a result, a deferred tax liability has not yet been provided. Through the completion of the asset sales, Southern Company Gas intends to invest approximately $0.1 billion in capital additions required for ordinary business operations of these assets. The completion of each asset sale is subject to the ~~Vogtle Owners~~satisfaction or waiver of certain conditions, including, among other customary closing conditions, the receipt of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The asset sales are expected to be completed by the end of the third quarter 2018.

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

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Environmental Laws and Regulations

Coal Combustion Residuals

Global Climate Issues

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in energy efficiency, and ~~therefore,~~continue research and development efforts focused on technologies to lower GHG emissions. The Southern ~~Company's financial statements.~~Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of ~~these matters also is dependent on~~this matter cannot be determined at this time.

Regulatory Matters

Fuel Cost Recovery

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" of Southern Company in Item 7 and Note 3 to the ~~completion~~financial statements of Southern Company under "Regulatory Matters – Alabama Power – Rate ECR" and "Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the ~~assessments described above,~~Form 10-K for additional information regarding fuel cost recovery for the traditional electric operating companies.

Alabama Power

Rate RSE

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Rate ECR

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory ~~treatment, and~~liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See ~~FUTURE EARNINGS POTENTIAL – "Construction Program~~ ~~– Nuclear Construction" herein~~Note 5 to the financial statements of Southern Company under "Federal Tax Reform Legislation" in Item 8 of the Form 10-K for additional ~~information on~~information.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 ~~including~~are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See Note (B) to the Condensed Financial Statements under "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's ~~preliminary cost-to-complete~~NCCR tariff. Also see Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.

Rate Plans

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Georgia Power – Rate Plans" of Southern Company in Item 7 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and ~~cancellation~~the Georgia PSC's 2018 order related to the Tax Reform Legislation.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gulf Power

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" of Southern Company in Item 7 of the Form 10-K for additional information.

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base rates and $15.6 million from environmental cost ~~assessments~~recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.

Mississippi Power

Southern Company Gas

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.

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

Kemper County Energy Facility

For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K.

The combined cycle and associated common facilities portions of the Kemper County energy facility were dedicated as Plant ~~Vogtle Units 3 and 4.~~Ratcliffe on April 27, 2018.

RESULTS OF OPERATIONS

Net Income ~~(Loss)~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(2,004) N/M $(1,835) N/M

~~N/M - Not meaningful~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$280		42.6

Consolidated net ~~loss~~income attributable to Southern Company was ~~$(1.4) billion~~$938 million ($~~(1.38)~~0.93 per share) for the ~~second~~first quarter ~~2017~~2018 compared to ~~net income of $623~~$658 million ($~~0.67~~0.66 per share) for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~charges~~a lower federal income tax rate as a result of ~~$3.0 billion~~the Tax Reform Legislation and ~~$81 million in~~net state income tax benefits arising from the ~~second quarter 2017 and 2016, respectively, related to the Kemper IGCC at Mississippi Power. Also contributing to the change were increases in renewable energy sales at~~reorganization of Southern ~~Power,~~Power's legal entities, as well as higher retail electric revenues ~~resulting from increases in base rates, and $49 million in net income from Southern Company Gas, which was acquired on July 1, 2016,~~due to colder weather, partially offset by ~~higher interest expense.~~reductions in retail revenues related to the regulatory treatment of the Tax Reform Legislation impacts.

~~Consolidated net loss attributable to Southern Company was $(723) million ($(0.73) per share) for year-to-date 2017~~Retail Electric Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$174		5.1

In the first quarter 2018, retail electric revenues were $3.6 billion compared to ~~net income of $1.1~~$3.4 billion ~~($1.20 per share)~~ for the corresponding period in ~~2016. The decrease was primarily due to charges~~2017.

Details of ~~$3.1 billion and $134 million for year-to-date 2017 and 2016, respectively, related to~~ the ~~Kemper IGCC at Mississippi Power. Also contributing to the change was $288 million~~changes in ~~net income from Southern Company Gas, increases in renewable energy sales at Southern Power, and higher~~ retail electric revenues were as follows:



	First Quarter 2018
	(in millions)			(% change)
Retail electric – prior year	$	3,394
Estimated change resulting from –
Rates and pricing	(103		)	(3.0	)
Sales growth	26			0.8
Weather	144			4.2
Fuel and other cost recovery	107			3.1
Retail electric – current year	$	3,568		5.1	%

1817

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

resulting from increases in base rates, partially offset by higher interest expense and a decrease in retail electric revenues resulting from milder weather for year-to-date 2017 compared to the corresponding period in 2016.

~~See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC and Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information on the Merger.~~

~~Retail Electric Revenues~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$29 0.8 $47 0.7

~~In the second quarter 2017, retail electric revenues were $3.8 billioncompared to $3.7 billion for the corresponding period in 2016. For year-to-date 2017, retail revenues were $7.2 billion compared to $7.1 billion for the corresponding period in 2016.~~

~~Details of the changes in retail electric revenues were as follows:~~

Second Quarter 2017 Year-to-Date 2017
(in millions) (% change) (in millions) (% change)
Retail electric – prior year $ 3,748
$ 7,124

Estimated change resulting from –
Rates and pricing 81
2.2
200
2.8
Sales decline (12 ) (0.3 ) (22 ) (0.3 )
Weather (51 ) (1.4 ) (189 ) (2.6 )
Fuel and other cost recovery 11
0.3
58
0.8
Retail electric – current year $ 3,777
0.8 % $ 7,171
0.7 %

Revenues associated with changes in rates and pricing ~~increased~~decreased in the ~~second~~first quarter ~~and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to revenues deferred as regulatory liabilities for future adjustments to customer billings related to the Tax Reform Legislation, as well as the rate pricing effect of increased customer usage at Georgia Power. The decrease in revenues also reflects a ~~Rate RSE increase at Alabama Power effective January 1, 2017,~~decrease in the recovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff at Georgia Power, ~~and an ECO Plan rate increase at Mississippi Power implemented in~~also primarily related to the ~~third quarter 2016. Additionally, the second quarter 2017 increase was~~Tax Reform Legislation. These decreases were partially offset by ~~the rate~~higher contributions from variable demand-driven pricing ~~effect of decreased customer usage and lower contributions~~ from commercial and industrial customers ~~under a rate plan for variable demand-driven pricing~~ at Georgia Power.

Revenues attributable to changes in sales ~~decreased~~increased in the first ~~second~~ quarter ~~2017~~2018 when compared to the corresponding period in ~~2016.~~2017. Weather-adjusted residential KWH sales and weather-adjusted commercial KWH sales increased 1.1% and 1.2%, respectively, in the first quarter 2018 primarily due to customer growth. Industrial KWH sales ~~decreased 0.8%~~increased 2.6% in the ~~second~~first quarter ~~2017~~2018, primarily in the ~~paper,~~ primary metals and ~~transportation~~chemicals sectors, partially offset by ~~increased~~decreased sales in the ~~chemicals~~paper sector. Despite a more stable dollar and improving global economy, the industrial sector remains constrained by economic policy uncertainty. Weather-adjusted residential KWH sales decreased 0.4% in the second quarter 2017primarily due to decreased customer usage primarily resulting from increased efficiency improvements in residential appliances and lighting, partially offset by customer growth. Weather-adjusted commercial KWH sales were flat in the~~second quarter 2017 primarily due to decreased customer usage resulting from an increase in electronic commerce transactions and energy saving initiatives, offset by customer growth.~~

Revenues attributable to changes in sales decreased for year-to-date 2017 when compared to the corresponding period in 2016. Industrial KWH sales decreased 1.5% for year-to-date 2017 primarily in the paper, stone, clay, and

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

glass, and transportation sectors. Despite a more stable dollar and improving global economy, the industrial sector remains constrained by economic policy uncertainty. Weather-adjusted commercial KWH sales decreased 0.9% foryear-to-date 2017 primarily due to decreased customer usage resulting from an increase in electronic commerce transactions and energy saving initiatives, partially offset by customer growth. Weather-adjusted residential KWH sales increased 0.2% for year-to-date 2017~~primarily due to customer growth, partially offset by decreased customer usage primarily resulting from efficiency improvements in residential appliances and lighting.~~

Fuel and other cost recovery revenues increased ~~$11 million and $58~~$107 million in the ~~second~~first quarter ~~and year-to-date 2017, respectively,~~2018 when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to ~~an increase in natural gas prices.~~higher energy sales resulting from colder weather. 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.

Wholesale Electric Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$172 38.6 $307 36.5



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$88		16.6

Wholesale electric revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives 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. ~~Electricity~~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 ~~for electricity.~~related to the energy. As a result, Southern Company'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. Wholesale electric revenues at Mississippi Power include FERC-regulated municipal and rural association 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.

In the ~~second~~first quarter ~~2017~~,2018, wholesale electric revenues were ~~$618~~$619 million compared to ~~$446~~$531 million for the corresponding period in ~~2016.~~2017. This increase was primarily related to a ~~$158~~$91 million increase in energy revenues, ~~and~~partially offset by a ~~$14~~$3 million ~~increase~~decrease in capacity revenues. ~~For year-to-date 2017, wholesale electric revenues were $1.1 billion compared to $842 million for the corresponding period in 2016. This increase was primarily related to a $276 million~~The increase in energy revenues ~~and a $31 million increase in capacity revenues. The increases in energy revenues~~ primarily ~~related~~relates to Southern Power ~~increases~~and includes an increase in ~~renewable energy sales arising from new solar and wind facilities, sales from new natural gas~~fuel costs that are contractually recovered through PPAs and ~~non-PPA revenues from short-term sales. The increases in capacity revenues primarily resulted from PPAs related to~~ new ~~natural gas facilities and additional customer load requirements at Southern Power.~~

~~Natural Gas Revenues~~

Natural gas revenues represent sales from the natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $684 million and $2.2 billion of natural gas revenues are included in the consolidated statements of income for the second quarter and year-to-date 2017, respectively.

2018

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Natural Gas Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$77		5.0

In the first quarter 2018, natural gas revenues were $1.6 billion compared to $1.5 billion for the corresponding period in 2017.

Details of the changes in natural gas revenues were as follows:



	First Quarter 2018
	(in millions)			(% change)
Natural gas – prior year	$	1,530
Estimated change resulting from –
Infrastructure replacement programs and base rate increases	47			3.0	%
Tax reform regulatory liabilities	(37		)	(2.4	)
Gas costs and other cost recovery	1			0.1
Weather	8			0.5
Wholesale gas services	35			2.3
Other	23			1.5
Natural gas – current year	$	1,607		5.0	%

See ~~Note (I)~~Notes (A) and (B) to the Condensed Financial Statements herein under "~~Southern Company~~"Recently Adopted Accounting Standards – ~~Merger with~~Revenue" and "Regulatory Matters – Southern Company Gas," ~~herein~~respectively, for additional information.

Other Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$85 85.9 $189 N/M



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$272		192.9

~~N/M - Not meaningful~~

In the ~~second~~first quarter ~~2017~~,2018, other revenues were ~~$184~~$413 million compared to ~~$99~~$141 million for the corresponding period in ~~2016. For year-to-date 2017, other revenues were $326 million compared to $137 million for the corresponding period in 2016. These increases were~~2017. This increase was primarily due to ~~increases~~PowerSecure's storm restoration services in Puerto Rico.

Table of $60 million and $130 million for the second quarter and year-to-date 2017, respectively, from products and services at PowerSecure, which was acquired on May 9, 2016, and $32 million and $62 million for the second quarter and year-to-date 2017, respectively, of revenues from gas marketing products and services at Southern Company Gas following the Merger.Contents

~~See Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information on the Merger and the acquisition of PowerSecure.~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and Purchased Power Expenses


	Second Quarter 2017 vs. Second Quarter 2016			Year-to-Date 2017 vs. Year-to-Date 2016			First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)	(change in millions)		(% change)	(change in millions)		(% change)
Fuel	$	69	6.7	$	154	8.0	$	105	10.5
Purchased power	22		11.6	36		10.2	88		49.2
Total fuel and purchased power expenses	$	91		$	190		$	193

In the ~~second~~first quarter ~~2017~~,2018, total fuel and purchased power expenses were ~~$1.3~~$1.4 billion compared to $1.2 billion for the corresponding period in ~~2016.~~2017. The increase was primarily the result of a ~~$154~~$147 million increase in the volume of KWHs generated and purchased and a $46 million increase in the average cost of fuel and purchased ~~power primarily due to higher natural gas prices, partially offset by a $63 million decrease primarily due to the volume of KWHs purchased.~~

For year-to-date 2017, total fuel and purchased power expenses were $2.5 billion compared to $2.3 billion for the corresponding period in 2016. The increase was primarily the result of a $277 million increase in the average cost of fuel and purchased power primarily due to higher natural gas prices, partially offset by an $87 million decrease primarily due to the volume of KWHs purchased.power.

~~Table of Contents~~

~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
Total generation (in billions of KWHs)	49	45	93	89	48	44
Total purchased power (in billions of KWHs)	3	4	7	8	5	4
Sources of generation (percent) —
Gas					45	46
Coal	31	32	30	30	29	29
Nuclear	16	16	16	17	16	17
Gas	43	48	45	47
Hydro	3	2	3	4	4	2
Other	7	2	6	2	6	6
Cost of fuel, generated (in cents per net KWH) —
Gas					2.85	2.92
Coal	2.77	3.20	2.82	3.22	2.90	2.88
Nuclear	0.80	0.82	0.80	0.82	0.78	0.79
Gas	2.94	2.24	2.93	2.20
Average cost of fuel, generated (in cents per net KWH)	2.49	2.33	2.49	2.28	2.50	2.50
Average cost of purchased power (in cents per net KWH)^(*)	7.70	5.03	6.85	5.14	6.33	5.10


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

Fuel

In the ~~second~~first quarter ~~2017~~,2018, fuel expense was $1.1 billion compared to $1.0 billion for the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~31.3%~~14.2% increase in the ~~average cost~~volume of KWHs generated by natural gas ~~per KWH generated~~ and a ~~3.0%~~10.8% increase in the volume of KWHs generated by coal, partially offset by a ~~13.4%~~2.4% decrease ~~in the average cost of coal per KWH generated and a 4.8% decrease in the volume of KWHs generated by natural gas.~~

~~For year-to-date 2017, fuel expense was $2.1 billion compared to $1.9 billion for the corresponding period in 2016. The increase was primarily due to a 33.2% increase~~ in the average cost of natural gas per KWH ~~generated and a 4.1% increase in the volume~~generated.

Table of ~~KWHs generated by coal, partially offset by a 12.4% decrease in the average cost of coal per KWH generated and a 6.6% decrease in the volume of KWHs generated by natural gas.~~Contents

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purchased Power

In the ~~second~~first quarter ~~2017~~,2018, purchased power expense was ~~$211~~$267 million compared to ~~$189~~$179 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~53.1%~~24.1% increase in the average cost per KWH purchased ~~primarily as~~and a ~~result of higher natural gas prices, partially offset by a 28.0% decrease in the volume of KWHs purchased.~~

~~For year-to-date 2017, purchased power expense was $390 million compared to $354 million for the corresponding period in 2016. The~~14.0% increase ~~was primarily due to a 33.3% increase in the average cost per KWH purchased, primarily as a result of higher natural gas prices, partially offset by a 16.8% decrease~~ in the volume of KWHs purchased.

~~Table of Contents~~

~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Cost of Natural Gas~~

~~Cost of natural gas represents the cost of natural gas sold by the natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $232 millionand$951 million of natural gas costs were included in the consolidated statements of income for the second quarter and year-to-date 2017, respectively.~~

~~See Note (I) to the Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein for additional information.~~

Cost of Other Sales

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$56 96.6% $126 N/M



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$201		228.4

~~N/M - Not meaningful~~

In the ~~second~~first quarter ~~2017~~,2018, cost of other sales was ~~$114~~$289 million compared to ~~$58~~$88 million for the corresponding period in ~~2016. For year-to-date 2017, cost of other sales was $203 million compared to $77 million for the corresponding period in 2016. These increases were~~2017. The increase primarily ~~due to~~reflects costs related to ~~sales of products and~~PowerSecure's storm restoration services by PowerSecure, which was acquired on May 9, 2016, and costs related to gas marketing products and services at Southern Company Gas following the Merger. See Note (I) to the Condensed Financial Statements under "~~Southern Company" herein for additional information.~~in Puerto Rico.

Other Operations and Maintenance Expenses

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$202 18.4 $425 19.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$68		4.9

In the ~~second~~first quarter ~~2017~~,2018, other operations and maintenance expenses were ~~$1.3~~$1.45 billion compared to ~~$1.1~~$1.38 billion for the corresponding period in ~~2016.~~2017. The increase was primarily due to ~~$213~~a $42 million ~~in operations and maintenance expenses~~goodwill impairment charge recorded at Southern Company Gas ~~following~~in contemplation of the ~~Merger,~~proposed sale of Pivotal Home Solutions. Additionally, the increase is related to a $28 million increase in employee compensation and benefits, including pension costs, a $19 million ~~increase associated with new solar, wind, and gas facilities~~decrease in gains from sales of integrated transmission system assets at ~~Southern~~Georgia Power, and a ~~$15~~$12 million increase ~~in operations and maintenance expenses~~ at ~~PowerSecure, which was acquired on May 9, 2016.~~Southern Company Gas to align paid time off with the Southern Company system's policy. These increases were partially offset by ~~a $24 million decrease in acquisition-related expenses and a $7 million decrease in scheduled outage and maintenance costs at generation facilities.~~

For year-to-date 2017, other operations and maintenance expenses were $2.6 billion compared to $2.2 billion for the corresponding period in 2016. The increase was primarily due to increases of $467 million and $36 million in operations and maintenance expenses from Southern Company Gas and PowerSecure, respectively, a $35 million increase associated with new solar, wind, and gas facilities at Southern Power, and $32.5 million resulting from the write-down of Gulf Power's ownership of Plant Scherer Unit 3 in the first quarter 2017 in accordance with a settlement agreement approved by the Florida PSC onin April 4, 2017 (2017 Gulf Power Rate Case Settlement Agreement). These increases were partially offset by a $46 million decrease in scheduled outage and maintenance costs at generation facilities, a $26 million decrease in acquisition-related expenses, a $19 million increase in gains from sales of integrated transmission system assets at Georgia Power, a $16 million decrease in customer accounts, service, and sales costs primarily associated with demand-side management costs related to the timing of new programs at Georgia Power, and a $14 million decrease in employee compensation and benefits including pension costs.

See ~~Note (B)~~Notes (A) and (J) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" and "~~Regulatory Matters~~Southern Company Gas – ~~Gulf Power~~ – ~~Retail Base Rate Cases~~Proposed Sale of Pivotal Home Solutions," respectively, herein for additional information regarding the proposed sale of Pivotal Home Solutions and Note (G) to the Condensed Financial Statements herein for additional information on pension costs. Also, see Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information regarding the 2017 Gulf Power Rate Case Settlement ~~Agreement~~Agreement.

Depreciation and ~~Note (I)~~Amortization



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$53		7.4

2321

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Condensed Financial Statements under "Southern Company" herein for additional information related to the Merger and the acquisition of PowerSecure.~~

~~Depreciation and Amortization~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$185 32.5 $359 32.3

~~In the~~ ~~second quarter 2017~~, depreciation and amortization was $754 million compared to $569 million for the corresponding period in 2016. Following the Merger, $125 million in depreciation and amortization for Southern Company Gas is included in the consolidated statements of income for the second quarter 2017. Additionally, the increase reflects $61 million related to additional plant in service at the traditional electric operating companies and Southern Power, partially offset by $8 million more of a reduction in depreciation in the second quarter 2017 compared to the corresponding period in 2016 at Gulf Power, as authorized in its 2013 rate case settlement approved by the Florida PSC.

For year-to-date 2017, depreciation and amortization was $1.5 billion compared to $1.1 billion for the corresponding period in 2016. Following the Merger, $244 million in depreciation and amortization for Southern Company Gas is included in the consolidated statements of income for year-to-date 2017. Additionally, the increase reflects $122 million related to additional plant in service at the traditional electric operating companies and Southern Power, partially offset by $28 million more of a reduction in depreciation for year-to-date 2017 compared to the corresponding period in 2016 at Gulf Power, as authorized in its 2013 rate case settlement approved by the Florida PSC.

See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.

Taxes Other Than Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$25		7.6

Estimated Loss on Kemper IGCC



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(64)		(59.3)

See Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Gulf Power~~ – ~~Retail Base Rate Cases~~""Kemper County Energy Facility" herein for additional information. ~~Also see Note (I) to the Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein for additional information.~~

~~Taxes Other Than Income Taxes~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$53 20.8 $127 24.9

~~In the~~ ~~second quarter 2017~~, taxes other than income taxes were $308 million compared to $255 million for the corresponding period in 2016. For year-to-date 2017, taxes other than income taxes were $638 million compared to $511 million for the corresponding period in 2016. These increases were primarily related to $44 million and $114 million in the second quarter and year-to-date 2017, respectively, in taxes other than income taxes associated with Southern Company Gas following the Merger.

~~See Note (I) to the Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein for additional information.~~

~~Table of Contents~~

~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Estimated Loss on Kemper IGCC~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$2,931 N/M $2,986 N/M

~~N/M - Not meaningful~~

Prior to the project suspension on June 28, 2017, estimated probable losses on the Kemper IGCC of $196 million and $305 million were recorded at Mississippi Power in the second quarter and year-to-date 2017, respectively, compared to $81 millionand $134 million in the second quarter and year-to-date 2016, respectively. These losses reflected revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC prior to project suspension in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO₂ pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions).

~~See FUTURE EARNINGS POTENTIAL – "Construction Program~~ – ~~Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.~~

Allowance for Equity Funds Used During Construction

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$13 28.9 $17 17.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(27)		(47.4)

In the ~~second~~first quarter ~~2017~~,2018, AFUDC equity was ~~$58~~$30 million compared to ~~$45~~$57 million in the corresponding period in ~~2016. For year-to-date 2017, AFUDC equity was $115 million compared to $98 million in the corresponding period in 2016. These increases~~2017. This decrease primarily resulted from ~~a higher AFUDC rate and an increase in~~Mississippi Power's suspension of the Kemper IGCC ~~CWIP subject~~construction in June 2017.

See Note 3 to ~~AFUDC prior to project suspension at Mississippi Power.~~

~~See FUTURE EARNINGS POTENTIAL – "Construction Program~~ – ~~Integrated Coal Gasification Combined Cycle~~"the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Integrated Coal Gasification Combined Cycle~~""Kemper County Energy Facility" herein for additional information.

Interest Expense, Net of Amounts Capitalized



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$42		10.1

2522

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Earnings from Equity Method Investments~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$29 N/M $68 N/M

~~N/M - Not meaningful~~

In the second quarter and year-to-date 2017, earnings from equity method investments were $28 million and $67 million, respectively, primarily related to earnings from Southern Company Gas' equity method investment in SNG effective September 2016.

See Note ~~(I)~~6 to the ~~Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein for additional information.~~

~~Interest Expense, Net of Amounts Capitalized~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$131 44.7 $301 55.8

~~In the~~ ~~second quarter 2017~~, interest expense, net of amounts capitalized was $424 million compared to $293 million in the corresponding period in 2016. For year-to-date 2017, interest expense, net of amounts capitalized was $840 million compared to $539 million in the corresponding period in 2016. These increases were primarily due to an increase in average outstanding long-term debt primarily related to the Merger and the funding of Southern Power's acquisitions and construction projects. In addition, following the Merger, $48 million and $94 million in interest expensefinancial statements of Southern Company ~~Gas was included~~ in Item 8 of the ~~consolidated statements of income for the second quarter~~Form 10-K and ~~year-to-date 2017, respectively.~~

~~See~~ Note ~~(E)~~(F) to the Condensed Financial Statements herein ~~and Note (I) to the Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein~~ for additional information.

Other Income (Expense), Net

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$25 89.3 $45 80.4



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$12		25.0

In the ~~second~~first quarter ~~2017~~,2018, other income (expense), net was ~~$(3)~~$60 million compared to ~~$(28)~~$48 million for the corresponding period in ~~2016. For year-to-date 2017, other~~2017. The increase was primarily due to a gain from the settlement of a contractor litigation claim at Southern Company Gas.

Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(202)		(64.1)

In the first quarter 2018, income ~~(expense), net was $(11)~~taxes were $113 million compared to ~~$(56)~~$315 million for the corresponding period in ~~2016. These changes were~~2017. The decrease was primarily due to ~~expenses incurred in 2016 associated with bridge financing for~~a lower federal income tax rate as a result of the ~~Merger. These changes also include increases of $99 million and $116 million in currency losses~~Tax Reform Legislation, as well as net state income tax benefits arising from ~~a translation~~the reorganization of euro-denominated fixed-rate notes into U.S. dollars for the second quarter and year-to-date 2017, respectively, fully offset by an equal change in gains on the foreign currency hedges that were reclassified from accumulated OCI into earnings at Southern ~~Power.~~Power's legal entities holding its solar facilities.

See Note (H) to the Condensed Financial Statements ~~under "Foreign Currency Derivatives~~" herein for additional information.

~~Table~~Dividends on Preferred and Preference Stock of ~~Contents~~

~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Income Taxes (Benefit)~~Subsidiaries

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(848) N/M $(752) N/M



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(7)		(63.6)

~~N/M - Not meaningful~~

In the ~~second~~first quarter ~~2017, income tax benefit~~2018, dividends on preferred and preference stock of subsidiaries was ~~$587~~$4 million compared to ~~income tax expense of $261~~$11 million for the corresponding period in ~~2016.~~2017. The decrease was ~~primarily~~ due to ~~$865 million in tax benefits related to~~ the ~~estimated probable losses on~~2017 redemptions of all outstanding shares of preferred and preference stock at Georgia Power and preference stock at Gulf Power.

See Note 6 the ~~Kemper IGCC at Mississippi Power, partially offset by $31 million in taxes at~~financial statements of Southern Company ~~Gas following~~under "Redeemable Preferred Stock of Subsidiaries" in Item 8 of the ~~Merger.~~

For year-to-date 2017, income tax benefit was $273 million compared to income tax expense of $479 million for the corresponding period in 2016, primarily due to $886 million in tax benefits related to the estimated probable losses on the Kemper IGCC at Mississippi Power. In addition, the change reflects $180 million in taxes at Southern Company Gas following the Merger, partially offset by a net increase in tax benefits of $16 million from renewable tax credits at Southern Power.

~~See Note (G) to the Condensed Financial Statements herein and Note (I) to the Condensed Financial Statements under "Southern Company~~ – ~~Merger with Southern Company Gas" herein~~Form 10-K for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company's future earnings potential. The level of Southern Company's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Southern Company system's primary businesses of selling electricity and distributing natural gas. These factors include the traditional electric operating companies' and the natural gas distribution utilities' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. ~~Completion of cost assessments and the determination of future actions related to~~ Plant Vogtle Units 3 and 4 construction and rate recovery and ~~the ability to recover costs for the remainder of the Kemper County energy facility not included in current rates are also major factors. In addition,~~ the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects are also major factors.

Current proposals related to potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals, including any potential changes to the availability or realizability of ITCs and PTCs, is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Southern Company's financial statements.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

commerce transactions, and higher multi-family home ~~construction.~~construction, all of which could contribute to a net reduction in customer usage. Earnings for both the electricity and natural gas businesses are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale electric business also depends on numerous factors including regulatory matters, creditworthiness of customers, total electric generating capacity available and related costs, future acquisitions and construction of electric generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity and natural gas is primarily driven by ~~economic growth. The~~the pace of economic growth ~~and electricity and natural gasdemand~~that may be affected by changes

~~Table of Contents~~

~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

in regional and global economic conditions, which may impact future earnings. In addition, the volatility of natural gas prices has a significant impact on the natural gas distribution utilities' customer rates, long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability.

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

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form ~~10-K and RISK FACTORS in Item 1A herein.~~10-K.

Environmental Matters

~~Compliance~~The Southern Company system's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. The Southern Company system maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs ~~related~~associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to ~~federal and state~~comply with environmental ~~statutes~~laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of the traditional electric operating companies', Southern Power's, and the natural gas distribution utilities' operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, ~~higher~~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 financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity and natural gas. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

Environmental ~~Statutes~~Laws and Regulations

~~Air Quality~~Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental ~~Statutes~~Laws and Regulations – ~~Air Quality"~~ Coal Combustion Residuals" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's ~~eight-hour ozone National Ambient Air Quality Standard (NAAQS).~~

~~On June 2, 2017,~~announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published athe first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final rule ~~redesignating a 15-county area within metropolitan Atlanta to attainment for~~and the ~~2008 eight-hour ozone NAAQS.~~

~~On June 18, 2017, the EPA published a notice delaying attainment designations for the 2015 eight-hour ozone NAAQS by one year, setting a revised deadline of October 1, 2018. The ultimate~~ outcome of ~~this matter~~any legal challenges and cannot be determined at this time.

~~Water Quality~~Global Climate Issues

Through 2017, the ~~final effluent guidelines rule and the final rule revising the regulatory definition~~Southern Company system has achieved an estimated GHG emission reduction of ~~waters~~36% since 2007. In April 2018, Southern Company established an intermediate goal of ~~the U.S. for all Clean Water Act (CWA) programs.~~a 50% reduction in carbon emissions

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~~On April 25, 2017,~~from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the ~~EPA published a notice announcing it would reconsider~~Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the ~~effluent guidelines rule, which had been finalized~~use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in ~~November 2015. On June 6, 2017, the EPA proposed a rule establishing a stay of the compliance deadlines for certain effluent limitations~~energy efficiency, and ~~pretreatment standards under the rule.~~

~~On June 27, 2017, the EPA~~continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the ~~U.S. Army Corps~~development, deployment, and advancement of Engineers proposed to rescind the final rule that revised the regulatory definition of waters of the U.S. for all CWA programs. The final rule has been stayed since October 2015 by the U.S. Court of Appeals for the Sixth Circuit.

relevant energy technologies. The ultimate outcome of ~~these matters~~this matter cannot be determined at this time.

~~Global Climate Issues~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Environmental Matters~~ – ~~Global Climate Issues" of Southern Company in Item 7 of the Form 10-K for additional information.~~

On March 28, 2017, the U.S. President signed an executive order directing agencies to review actions that potentially burden the development or use of domestically produced energy resources. The executive order specifically directs the EPA to review the Clean Power Plan and final greenhouse gas emission standards for new, modified, and reconstructed electric generating units and, if appropriate, take action to suspend, revise, or rescind those rules.

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

~~FERC Matters~~

~~Market-Based Rate Authority~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"FERC Matters~~ – Market-Based Rate Authority" of Southern Company in Item 7 of the Form 10-K for additional information regarding the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.

On May 17, 2017, the FERC accepted the traditional electric operating companies' and Southern Power's compliance filing accepting the terms of the FERC's February 2, 2017 order regarding an amendment by the traditional electric operating companies and Southern Power to their market-based rate tariff. While the FERC's order references the traditional electric operating companies' and Southern Power's market power proceeding, it remains a separate, ongoing matter.

~~Southern Company Gas~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"FERC Matters~~ – Southern Company Gas" of Southern Company in Item 7 and Note 4 to the financial statements of Southern Company in Item 8 of the Form 10-K for additional information regarding Southern Company Gas' pipeline projects.

~~On August 1, 2017, the Dalton Pipeline was placed in service as authorized by the FERC and transportation service for customers commenced.~~

Regulatory Matters

Fuel Cost Recovery

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery for the traditional electric operating companies.

~~Renewables~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Regulatory Matters~~ – ~~Renewables" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Southern Company system's renewables activity.~~

On May 16, 2017, the Georgia PSC approved Georgia Power's request to build, own, and operate a 139-MW solar generation facility at a U.S. Air Force base that is expected to be placed in service by the end of 2019.

During the six months ended June 30, 2017, Georgia Power continued construction of a 31-MW solar generation facility at a U.S. Marine Corps base that is expected to be placed in service in the fourth quarter 2017.

Mississippi Power placed in service two solar projects in January 2017 and June 2017. A third solar project is expected to be placed in service in the third quarter 2017. Mississippi Power may retire the renewable energy credits (REC) generated on behalf of its customers or sell the RECs, separately or bundled with energy, to third parties.

On June 9, 2017, Mississippi Power submitted a CPCN to the Mississippi PSC for the approval of construction, operation, and maintenance of a 52.5-MW solar energy generating facility, which, if approved, is expected to be placed in service by January 2020.

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

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. See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and ~~accounting orders. The~~the recovery balance of each regulatory clause for Alabama Power.

On May 1, 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 plans 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 ~~reported~~to achieve an equity ratio of approximately 55% by the end of 2025. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Federal Tax Reform Legislation" of Southern Company in ~~Note (B)~~Item 7 of the Form 10-K for additional information.

Rate RSE

The approved modifications to Rate RSE are effective June 2018 and applicable for January 2019 billings and thereafter. The modifications include reducing the top of the allowed weighted common equity return (WCER) range from 6.21% to 6.15% and modifications to the ~~Condensed Financial Statements herein.~~refund mechanism applicable to prior year actual results. The modifications to the refund mechanism allow Alabama Power to retain a portion of the revenue that causes the actual WCER for a given year to exceed the allowed range.

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Rate ECR

Accounting Order

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to ~~the~~certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Georgia Power~~ – Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under ~~"Regulatory Matters – Georgia Power – Nuclear~~"Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's NCCR tariff. Also see Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.

Rate Plans

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~~Integrated Resource Plan~~(ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Georgia Power – Integrated Resource Plan" of Southern Company in Item 7~~To address the negative cash flow and credit metric impacts of the ~~Form 10-K for additional information regarding Georgia Power's triennial Integrated Resource Plan.~~

~~On March 7, 2017,~~Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's ~~decision~~retail equity ratio to ~~suspend work at a future generation site~~the lower of (i) Georgia Power's actual common equity weight in ~~Stewart County,~~its capital structure or (ii) 55%, until Georgia ~~due to changing economics, including load forecasts and lower fuel costs. The timing of recovery for costs incurred of approximately $50 million will be determined by the Georgia PSC in a future~~Power's next base rate case. ~~The ultimate outcome~~Benefits from reduced federal income tax rates in excess of ~~this matter cannot~~the amounts refunded to customers will be ~~determined at this time.~~retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.

Gulf Power

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" of Southern Company in Item 7 of the Form 10-K for additional ~~information regarding~~information.

As a continuation of the 2017 Gulf ~~Power's October 2016 request to the Florida PSC to increase retail base rates and Gulf Power's ownership of Plant Scherer Unit 3.~~

~~On April 4, 2017,~~Power Rate Case Settlement Agreement, on March 26, 2018, the Florida PSC approved ~~the 2017 Rate Case Settlement Agreement~~a stipulation and settlement agreement among Gulf Power and three intervenors ~~with respect~~addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's ~~request~~revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to ~~increase retail base rates. Under~~normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the ~~terms~~remainder of 2018. As a result of the ~~2017 Rate Case~~Gulf Power Tax Reform Settlement Agreement, ~~Gulf Power increased rates effective with~~ the ~~first billing cycle in July 2017 to provide~~Florida PSC also approved an ~~annual overall net customer impact of approximately $54.3 million. The net customer impact consists of a $62.0 million~~ increase in annual base revenues less an annual equivalent credit of approximately $7.7 million for 2017 for certain wholesale revenues to be provided through December 2019 through the purchased power capacity cost recovery clause. In addition, Gulf ~~Power continued its authorized retail ROE midpoint (10.25%) and range (9.25% to 11.25%) and is deemed to have an~~Power's maximum equity ratio offrom 52.5% to 53.5% for all retail regulatory purposes.

As part of the Gulf Power will also begin amortizing the regulatory asset associated with the investment balances remaining after the retirement of Plant Smith Units 1 and 2 (357 MWs) over 15 years effective January 1, 2018 and will implement new depreciation rates effective January 1, 2018. The 2017 Rate CaseTax Reform Settlement Agreement, ~~also resulted~~a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in ~~a $32.5 million write-down of~~this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs), which was recorded in the first quarter 2017. The remaining issues related to the inclusion of Gulf Power's investment in Plant Scherer Unit 3 in retail rates have been resolved as a result of the 2017 Rate Case Settlement Agreement, including recoverability of certain costs associated with the ongoing ownership and operation of the unit through the environmentalfuel cost recovery ~~clause rate approved by the Florida PSC in November 2016.~~

~~Southern Company Gas~~

~~Natural Gas Cost Recovery~~

Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. 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's revenues or net income, but will affect cash flows.~~

~~Base Rate Cases~~

On March 10, 2017, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $208 million increase in annual base rate revenues. The requested increase is based on a 2018 projected test year and a ROE of 10.7%. 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.

Mississippi Power

Southern Company Gas

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seek a further equity ratio increase of 2% to an equity ratio of 56% in its 2019 filing. The Georgia PSC is expected to rule on the revised request in the second quarter 2018.

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

Kemper County Energy Facility

For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K.

The combined cycle and associated common facilities portions of the Kemper County energy facility were dedicated as Plant Ratcliffe on April 27, 2018.

Construction Program

Overview

The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new electric generating facilities, adding environmental modifications to certain existing units, expanding the electric transmission and distribution systems, and updating and expanding the natural gas distribution systems. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. Southern Company Gas is engaged in various infrastructure improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates. See Notes 3 and 12 to the financial statements of Southern Company under "Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" and "Southern Power – Construction Projects in Progress," respectively, in Item 8 of the Form 10-K and Note (J) to the Condensed Financial Statements under "Southern Power" herein for additional information.

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The largest construction project currently underway in the Southern Company system is Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs). Georgia Power and the other Vogtle Owners are continuing to conduct comprehensive schedule and cost-to-complete assessments, as well as cancellation cost assessments, to determine the impact of the EPC Contractor's bankruptcy filing on the construction cost and schedule for Plant Vogtle Units 3 and 4. Georgia Power will continue working with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4, including, but not limited to, the status of construction and rate recovery, and currently expects to include its recommendation in its seventeenth VCM report to be filed with the Georgia PSC in late August 2017. On June 21, 2017, the Mississippi PSC directed Mississippi Power to pursue a settlement under which the Kemper IGCC would be operated as a natural gas plant rather than an IGCC plant and, on June 28, 2017, Mississippi Power notified the Mississippi PSC that it would begin a process to suspend operations and start-up activities on the gasifier portion of the plant. See Note 3 to the financial statements of Southern Company under ~~"Regulatory Matters – Georgia Power – Nuclear~~"Nuclear Construction" ~~and "Integrated Coal Gasification Combined Cycle"~~ in Item 8 of the Form 10-K and ~~Note (B) to the Condensed Financial Statements under "Regulatory Matters~~– ~~Georgia Power~~– ~~Nuclear Construction" and "Integrated Coal Gasification Combined Cycle~~""Nuclear Construction" herein for additional information. For additional information about costs relating to Southern Power's acquisitions that involve construction of renewable energy facilities, see Note 12 to the financial statements of Southern Company under "Southern Power – Construction Projects" in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements under "~~Southern Power~~" herein. See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~–~~Southern Company Gas~~–~~Regulatory Infrastructure Programs" herein for information regarding infrastructure improvement programs at the natural gas distribution utilities.~~

Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.

~~Integrated Coal Gasification Combined Cycle~~Nuclear Construction

See Note 3 to the financial statements of Southern Company under "Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, VCM reports, and the NCCR tariff.

Vogtle 3 and 4 Contracts

Effective in July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Vogtle Services Agreement, whereby Westinghouse will provide facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The ~~Kemper IGCC was approved~~Vogtle Services Agreement 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 ~~Mississippi PSC in~~Vogtle Owners upon 30 days' written notice.

In October 2017, Georgia Power, acting for itself and as agent for the ~~2010 CPCN proceedings,~~other Vogtle Owners, entered into a construction completion agreement with Bechtel, whereby Bechtel will serve as the primary contractor for the remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The Bechtel Agreement is 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 ~~a construction~~adjustment based on Bechtel's performance against cost ~~cap~~and schedule targets. Each Vogtle Owner is severally (not jointly) liable for its proportionate share, based on its ownership interest, of ~~$2.88 billion, net of $245 million of Initial DOE Grants and excluding~~all amounts owed to Bechtel under the ~~Cost Cap Exceptions.~~Bechtel Agreement. The ~~combined cycle and associated common facilities~~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 ~~Kemper IGCC were placed in service in August 2014.~~

~~In December 2015,~~base fee), certain termination-related costs, and, at certain stages of the ~~Mississippi PSC issued an order (In-Service Asset Rate Order), based on a stipulation~~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. Pursuant to the Loan Guarantee Agreement between ~~Mississippi~~Georgia Power and the ~~Mississippi Public Utilities Staff, authorizing rates that~~DOE, Georgia Power is required to obtain the DOE's approval of the Bechtel Agreement prior to obtaining any further advances under the Loan Guarantee Agreement.

In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, ~~the recovery of approximately $126 million annually related~~among other conditions, additional Vogtle Owner approval requirements. Pursuant to the ~~combined cycle~~Vogtle Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Plant Vogtle Units 3 and ~~associated common facilities portion~~4 must vote to continue construction if certain adverse events occur, including (i) the bankruptcy of ~~Kemper IGCC assets previously placed~~Toshiba; (ii) termination or rejection in ~~service. As~~bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power 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 because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Vogtle Joint Ownership Agreements, the required byapproval of holders of ownership interests in Plant Vogtle Units 3 and 4 is at least (i) 90% for a change of the ~~In-Service Asset Rate Order, on June 5, 2017,~~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. 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

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Mississippi Power made a rate filing requesting to adjust the amortization schedules of the regulatory assets reviewed and determined prudent in a manner that would not change customer rates or annual revenues. On June 28, 2017, the Mississippi PSC suspended this filing. On July 6, 2017, the Mississippi PSC issued an order requiring Mississippi Power to establish a regulatory liability account to maintain current rates related to the Kemper IGCC following the July 2017 completion of the amortization period for certain regulatory assets approved in the In-Service Asset Rate Order that would allow for subsequent refund if the Mississippi PSC deems the rates unjust and unreasonable.

The remainder of the plant includes the gasifiers and the gas clean-up facilities. The initial production of syngas began on July 14, 2016 for gasifier "B" and on September 13, 2016 for gasifier "A." Mississippi Power achieved integrated operation of both gasifiers on January 29, 2017, including the production of electricity from syngas in both combustion turbines. During testing, the plant produced and captured CO₂, and produced sulfuric acid and ammonia, each of acceptable quality under the related off-take agreements. However, Mississippi Power experienced numerous challenges during the extended start-up process to achieve integrated operation of the gasifiers on a sustained basis. Most recently, in May 2017, after achieving these milestones, Mississippi Power determined that a critical system component, the syngas coolers, would need replacement sooner than originally planned, which would require significant lead time and significant cost. In addition, the long-term natural gas price forecast has decreased significantly and the estimated cost of operating and maintaining the facility during the first five full years of operations increased significantly since certification.

On June 21, 2017, the Mississippi PSC stated its intent to issue the Kemper Settlement Order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant, rather than an IGCC plant, and address all issues associated with the Kemper IGCC. The Kemper Settlement Order established the Kemper IGCC Settlement Docket for the purposes of pursuing a global settlement of costs of the Kemper IGCC. The Mississippi PSC requested any such proposed settlement agreement reflect: (i) at a minimum, no rate increase to Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifier and related assets; and (iii) modification or amendment of the CPCN for the Kemper IGCC to allow only for ownership and operation of a natural gas facility. The Kemper Settlement Order provides that any related settlement agreement be filed within 45 days from the effective date of the Kemper Settlement Order. If a settlement agreement is filed, a hearing will be set 45 days from the date of the settlement's filing, and the appropriate scheduling order will be established.

On June 28, 2017, Mississippi Power notified the Mississippi PSC that it would begin a process to suspend operations and start-up activities on the gasifier portion of the Kemper IGCC, given the uncertainty as to the future of the gasifier portion of the Kemper IGCC. Mississippi Power expects to continue to operate the combined cycle portion of the Kemper IGCC as it has done since August 2014.

At the time of project suspension, the total cost estimate for the Kemper IGCC was approximately $7.38 billion, including approximately $5.95 billion of costs subject to the construction cost cap, and was net of the $137 million in Additional DOE Grants. Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate subject to the construction cost cap totaling $196 million ($121 million after tax) in the second quarter through May 31, 2017 and a total of $305 million ($188 million after tax) for year-to-date through May 31, 2017. In the aggregate, Mississippi Power incurred charges of $3.07 billion ($1.89 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through May 31, 2017. The May 31, 2017 cost estimate included approximately $175 million of estimated costs to be incurred beyond the then-estimated in-service date of June 30, 2017 that were expected to be subject to the $2.88 billion cost cap.

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At June 30, 2017, approximately $3.3 billion in actual Kemper IGCC costs were not reflected in Mississippi Power's retail and wholesale rates, of which $0.5 billion was related to the combined cycle and associated facilities and $2.8 billion was related to the gasification portions of the Kemper IGCC.

While the ultimate disposition of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increase for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 of $2.8 billion ($2.0 billion after tax), which includes estimated costs associated with the gasification portions of the plant and lignite mine. In the event the gasification portions of the project are ultimately canceled, additional pre-tax costs currently estimated at approximately $100 million to $200 million are expected to be incurred.

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that was previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.

~~Litigation~~

On April 26, 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean, which was amended and refiled on July 11, 2016 to include, among other things, Southern Company as a defendant. The individual plaintiff alleges that Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedule of the Kemper IGCC and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper IGCC; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper IGCC in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper IGCC costs from being charged to customers through electric rates. On June 23, 2017, the Circuit Court ruled in favor of motions by Southern Company and Mississippi Power and dismissed the case. On July 7, 2017, the plaintiffs filed notice to appeal to the Mississippi Supreme Court.

On June 9, 2016, Treetop Midstream Services, LLC (Treetop) and other related parties filed a complaint against Mississippi Power, Southern Company, and SCS in the state court in Gwinnett County, Georgia. The complaint relates to the cancelled CO₂~~contract with Treetop and alleges fraudulent misrepresentation, fraudulent concealment, civil conspiracy, and breach of contract on the part of Mississippi Power, Southern Company, and SCS and seeks~~

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~~compensatory damages of $100 million, as well as unspecified punitive damages. Southern Company, Mississippi Power, and SCS have moved to compel arbitration pursuant to the terms of the CO~~₂ ~~contract, which the court granted on May 4, 2017. On June 28, 2017, Treetop and other related parties filed a claim for arbitration requesting $500 million in damages.~~

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

~~Nuclear Construction~~

See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, VCM reports, the NCCR tariff, and the Contractor Settlement Agreement.

~~Vogtle 3 and 4 Agreement and EPC Contractor Bankruptcy~~

~~In 2008, Georgia Power, acting for itself and as agent~~ for the Vogtle Owners ~~entered into the Vogtle 3 and 4 Agreement, pursuant~~is limited to ~~which the EPC Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4. Under the terms~~removal of the Vogtle 3 and 4 Agreement, the Vogtle Owners agreed to pay a purchase price subject to certain price escalations and adjustments, including fixed escalation amounts and index-based adjustments, as well as adjustments for change orders, and performance bonuses for early completion and unit performance. Georgia Power's proportionate share of Plant Vogtle Units 3 and 4 is 45.7%.

The Vogtle 3 and 4 Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million (approximately $420 million based on Georgia Power's ownership interest). Under the Toshiba Guarantee, Toshiba guaranteed certain payment obligations of the EPC Contractor, including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Vogtle Owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under the Vogtle 3 and 4 Agreement. The Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020 and require 60 days' written notice to Georgia Power ~~in the event the Westinghouse Letters of Credit will not be renewed.~~

On March 29, 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. To provide for a continuation of work at Plant Vogtle Units 3 and 4, Georgia Power, acting for itself andand/or Southern Nuclear as agent, ~~for the Vogtle Owners, entered into the Interim Assessment Agreement, which the bankruptcy court approved on March 30, 2017.~~

~~The Interim Assessment Agreement provided, among other items, that during the term~~except in cases of the Interim Assessment Agreement (i) Georgia Power was obligated to pay, on behalf of the Vogtle Owners, all costs accrued by the EPC Contractor for subcontractors and vendors for services performed or goods provided, with these amounts paid to the EPC Contractor, except that amounts accrued for Fluor Corporation (Fluor) were paid directly to Fluor; (ii) the EPC Contractor provided certain engineering, procurement, and management services for Plant Vogtle Units 3 and 4, to the same extent as contemplated by the Vogtle 3 and 4 Agreement, and Georgia Power, on behalf of the Vogtle Owners, made payments of $5.4 million per week for these services; (iii) Georgia Power had the right to make payments, on behalf of the Vogtle Owners, directly to subcontractors and vendors who had accounts past due with the EPC Contractor; (iv) the EPC Contractor used commercially reasonable efforts to provide information reasonably requested by Georgia Power as was necessary to continue construction and investigation of the

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completion status of Plant Vogtle Units 3 and 4; (v) the EPC Contractor rejected or accepted the Vogtle 3 and 4 Agreement by the termination of the Interim Assessment Agreement; and (vi) Georgia Power did not exercise any remedies against Toshiba under the Toshiba Guarantee. Under the Interim Assessment Agreement, all parties expressly reserved all rights and remedies under the Vogtle 3 and 4 Agreement and all related security and collateral under applicable law.

The Interim Assessment Agreement, as amended, expired on July 27, 2017. Georgia Power's aggregate liability for the Vogtle Owners under the Interim Assessment Agreement totaled approximately $650 million, of which $552 million had been paid or accrued as of June 30, 2017. Georgia Power's proportionate share of this aggregate liability totaled approximately $297 million.

Subsequent to the EPC Contractor bankruptcy filing, a number of subcontractors to the EPC Contractor, including Fluor Enterprises, Inc., a subsidiary of Fluor, alleged non-payment by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3 and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken, and continues to take, actions to remove liens filed by these subcontractors through the posting of surety bonds. Georgia Power estimates the aggregate liability, through July 31, 2017, of the Vogtle Owners for the removal of subcontractor liens and payment of other EPC Contractor pre-petition accounts payable to total approximately $400 million, of which $354 million had been paid or accrued as of June 30, 2017. Georgia Power's proportionate share of this aggregate liability totaled approximately $183 million.

On June 9, 2017, Georgia Power and the other Vogtle Owners and Toshiba entered the Guarantee Settlement Agreement. Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the amount of its obligation under the Toshiba Guarantee is $3.68 billion, of which Georgia Power's proportionate share is approximately $1.7 billion, and that the Guarantee Obligations exist regardless of whether Plant Vogtle Units 3 and 4 are completed. The Guarantee Settlement Agreement also provides for a schedule of payments for the Guarantee Obligations, beginning in October 2017 and continuing through January 2021. In the event Toshiba receives certain payments, including sale proceeds, from or related to Westinghouse (or its subsidiaries) or Toshiba Nuclear Energy Holdings (UK) Limited (or its subsidiaries), it will hold a portion of such payments in trust for the Vogtle Owners and promptly pay them as offsets against any remaining Guarantee Obligations. Under the Guarantee Settlement Agreement, the Vogtle Owners will forbear from exercising certain remedies, including drawing on the Westinghouse Letters of Credit, until June 30, 2020, unless certain events of nonpayment, insolvency, or other material breach of the Guarantee Settlement Agreement by Toshiba occur. If such an event occurs, the balance of the Guarantee Obligations will become immediately due and payable, and the Vogtle Owners may exercise any and all rights and remedies, including drawing on the Westinghouse Letters of Credit without restriction. In addition, the Guarantee Settlement Agreement does not restrict the Vogtle Owners from fully drawing on the Westinghouse Letters of Credit in the event they are not renewed or replaced prior to the expiration date.

On June 23, 2017, Toshiba released a revised outlook for fiscal year 2016, which reflected a negative shareholders' equity balance of approximately $5 billion as of March 31, 2017, and announced that its independent audit process was continuing. Toshiba has also announced the existence of material events and conditions that raise substantial doubt about Toshiba's ability to continue as a going concern. As a result, substantial risk regarding the Vogtle Owners' ability to fully collect the Guarantee Obligations continues to exist. An inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4 and, therefore, on Southern Company's financial statements.

Additionally, on June 9, 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Services Agreement, which was amended and restated on July 20, 2017, for the EPC Contractor to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear. On July 20, 2017, the bankruptcy court approved the EPC Contractor's motion seeking authorization to (i) enter into the Services Agreement, (ii) assume and assign to the Vogtle Owners certain project-related contracts, (iii) join the Vogtle Owners as counterparties to certain assumed project-related contracts, and (iv) reject the Vogtle 3 and 4 Agreement.

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The Services Agreement, and the EPC Contractor's rejection of the Vogtle 3 and 4 Agreement, became effective upon approval by the DOE on July 27, 2017. The Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.

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

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 ~~nuclear construction projects certified by the Georgia PSC.~~Plant Vogtle Units 3 and 4. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff ~~by including~~up to the ~~related CWIP accounts in rate base during the construction period.~~certified capital cost of $4.418 billion. As of ~~June 30, 2017,~~March 31, 2018, Georgia Power had recovered approximately ~~$1.4~~$1.6 billion of financing costs. On March 20, 2018, the Georgia PSC approved a decrease to the NCCR tariff of approximately $50 million, effective April 1, 2018.

~~On December 20,~~Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the 2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.

In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) certain recommendations made by Georgia Power in the seventeenth VCM report and modifying the Vogtle Cost Settlement Agreement. The Vogtle Cost Settlement Agreement, as modified by the January 11, 2018 order, resolved the following ~~prudence matters:~~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 ~~will~~should be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement iswas reasonable and prudent and none of the amounts ~~paid or to be~~ paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) financing costs on verified and approved capital costs will be deemed prudent provided they are incurred prior to December 31, 2019 and December 31, 2020 for Plant Vogtle Units 3 and 4, respectively; and (iv) (a) the in-service capital cost forecast will be adjusted to $5.680 billion (Revised Forecast), which includes a contingency of $240 million above Georgia Power's then current forecast of $5.440 billion, (b) capital costs incurred up to ~~the Revised Forecast will~~$5.68 billion would be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, ~~and (c)~~(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 ~~Revised Forecast are reasonable and prudent. Under~~impact of payments received under the ~~terms of the Vogtle Cost~~Guarantee Settlement Agreement and 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 ~~certified in-service capital~~revised cost ~~for purposes of calculating~~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 ~~NCCR tariff will remain at $4.418 billion. Construction capital costs above $4.418 billion will accrue AFUDC through the date each unit is placed in service. The~~ ROE used to calculate the NCCR tariff ~~was reduced~~(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. For purposes of the AFUDC calculation,~~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 ~~on costs between $4.418 billion and $5.440 billion~~in no case will ~~also~~ be ~~10.00% and the ROE on any amounts above $5.440 billion would be~~less than Georgia Power's average cost of long-term ~~debt. If~~debt); (viii) reduced the ~~Georgia PSC adjusts Georgia Power's~~ ROE ~~rate setting point in a rate case prior to~~used for AFUDC equity for Plant Vogtle Units 3 and 4 ~~being placed into~~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 ~~rate~~ base ~~then~~rates would be adjusted to include carrying costs on those capital costs deemed prudent in the ~~ROE for purposes of calculating both the NCCR tariff and AFUDC will likewise be 95 basis points lower than the revised ROE rate setting point. If~~Vogtle Cost Settlement Agreement. The January 11, 2018 order also stated that if Plant Vogtle Units 3 and 4 are not ~~placed in service~~commercially operational by ~~December 31, 2020, then (i)~~June 1, 2021 and June 1, 2022, respectively, the ROE ~~for purposes of calculating~~used to calculate the NCCR tariff will be further reduced ~~an additional 300~~by 10 basis points ~~or $8 million per~~each month ~~and may, at the Georgia PSC's discretion, be accrued to be used for the benefit of customers, until such time as the units are placed in service and (ii) the ROE used to calculate AFUDC will be~~(but not lower than Georgia Power's average cost of long-term ~~debt.~~

~~Under~~debt) until the ~~terms~~respective unit is commercially operational. The ROE reductions negatively impacted earnings by approximately $25 million in 2017 and are estimated to have negative earnings impacts of ~~the Vogtle Cost Settlement Agreement,~~approximately $100 million in 2018 and an aggregate of $585 million from 2019 to 2022. In its January 11, 2018 order, the Georgia PSC ~~will determine, for retail ratemaking purposes, the process of transitioning Plant Vogtle Units 3~~stated if other certain conditions and ~~4 from a construction project to an operating plant no later than~~assumptions upon which Georgia Power's ~~base rate case required to be filed by July 1, 2019.~~

~~The Georgia PSC has approved fifteen~~seventeenth VCM ~~reports covering the periods through June 30, 2016, including construction capital costs incurred, which through that date totaled $3.7 billion.~~report are based do not materialize, both Georgia Power ~~filed its sixteenth VCM report, covering the period from July 1 through December 31, 2016, requesting approval of $222 million of construction capital costs incurred during that period, with~~and the Georgia PSC ~~on February 27, 2017.~~

~~The ultimate outcome of these matters cannot be determined at this time.~~reserve the right to reconsider the decision to continue construction.

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~~Revised Cost~~On February 12, 2018, Georgia Interfaith Power & Light, Inc. and ~~Schedule~~

Partnership for Southern Equity, Inc. 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 final decision and denial of Georgia Watch's motion for reconsideration. Georgia Power believes the two appeals have no merit; however, an adverse outcome in either appeal could have a material impact on Southern Company's results of operations, financial condition, and ~~the other Vogtle Owners are continuing~~liquidity.

The IRS has allocated PTCs to ~~conduct comprehensive schedule and cost-to-complete assessments, as well as cancellation cost assessments, to determine the impact~~each of ~~the EPC Contractor's bankruptcy filing on the construction cost and schedule for~~ Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's ~~preliminary assessment results indicate~~portion of the PTCs is approximately $500 million per unit.

The Georgia PSC has approved seventeen VCM reports covering the periods through June 30, 2017, including total construction capital costs incurred through that date of $4.4 billion. Georgia Power filed its eighteenth VCM report on February 28, 2018 requesting approval of $448 million of construction capital costs (excluding the $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and the $188 million in Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.

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

Cost and Schedule

Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 ~~ranges~~with in-service dates of November 2021 and November 2022, respectively, is as follows:

Preliminary in-service dates
Unit 3 February 2021 – March 2022
Unit 4 February 2022 – March 2023
(in billions)
Preliminary estimated cost to complete $ 3.9
– $ 4.6
CWIP as of June 30, 2017 4.5
4.5
Guarantee Obligations (1.7 ) (1.7 )
Estimated capital costs $ 6.7
– $ 7.4
Vogtle Cost Settlement Agreement Revised Forecast (5.7 ) (5.7 )
Estimated net additional capital costs $ 1.0
– $ 1.7



	(in billions)
Project capital cost forecast	$	7.3
Net investment as of March 31, 2018	(3.7		)
Remaining estimate to complete	$	3.6

Georgia Power's estimates for cost to complete and schedule are based on preliminary analysis and remain subject to further refinement of labor productivity and consumable and commodity quantities and costs.

~~Georgia Power's estimated~~Note: Excludes financing costs ~~during~~capitalized through AFUDC and is net of $1.7 billion received from Toshiba in 2017 under the ~~construction period total approximately $3.1 billion to $3.5 billion, of which approximately $1.4 billion had been incurred through June 30,~~Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017.

Georgia ~~Power's preliminary cancellation cost estimate results indicate~~Power estimates that its ~~proportionate share~~financing costs for construction of the estimated cancellation costs is approximately $400 million. As a result, as of June 30, 2017, total estimated costs subject to evaluation by Georgia Power and the Georgia PSC in the event of a cancellation decision are as follows:

Preliminary Cancellation Cost Estimate
(in billions)
CWIP as of June 30, 2017 $ 4.5
Financing costs collected, net of tax 1.4
Cancellation costs^(*)
0.4
Total $ 6.3


~~(*)~~	The estimate for cancellation costs includes, but is not limited to, costs to terminate contracts for construction and other services, as well as costs to secure the Plant Vogtle Units 3 and 4 construction site.

The Guarantee Obligations continue to exist in the event of cancellation. In addition, under Georgia law, prudently incurred costs related to certificated projects cancelled by the Georgia PSC are allowed recovery, including carrying costs, in future retail rates. Georgia Power will continue working with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4 ~~including, but not limited~~will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.

Subsequent to the ~~status~~EPC Contractor bankruptcy filing, a number of ~~construction and rate recovery, and currently expects~~subcontractors to ~~include its recommendation in its seventeenth VCM report to be filed with~~ the ~~Georgia PSC in late August 2017.~~

~~The ultimate outcome of these matters is dependent~~EPC Contractor alleged non-payment by the EPC Contractor for amounts owed for work performed on ~~the completion of the assessments described above, as well as the related regulatory treatment, and cannot be determined at this time.~~

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~~Other Matters~~

~~As of June 30, 2017, Georgia Power had borrowed $2.6 billion related to~~ Plant Vogtle Units 3 and ~~4 costs through a loan guarantee agreement between~~4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, lawsuits against the EPC Contractor and the ~~DOE~~Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and ~~a multi-advance credit facility among Georgia Power,~~other EPC Contractor pre-petition accounts payable have been paid or accrued as of March 31, 2018.

As construction continues, challenges with management of contractors, subcontractors, and vendors, labor productivity and availability, fabrication, delivery, assembly, and installation of plant systems, structures, and components (some of which are based on new technology and have not yet operated in the ~~DOE,~~global nuclear industry at this scale), or other issues could arise and change the ~~FFB. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K~~projected schedule and ~~Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.~~

~~The IRS has allocated PTCs to Plant Vogtle Units 3 and 4 which require that the applicable unit be placed in service prior to 2021. The net present value of Georgia Power's PTCs is~~ estimated ~~at approximately $400 million per unit.~~cost.

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 if construction proceeds.~~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 Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise, ~~if construction proceeds,~~ which may result in additional license amendments or require other resolution. If any license amendment

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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.

If construction continues, the risk remains that challenges with labor productivity, fabrication, delivery, assembly, and installation of plant systems, structures, and components, or other issues could arise and may further impact project schedule and cost.

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

See RISK FACTORS of Southern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.

DOE Financing

As of March 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. This conditional commitment expires on June 30, 2018, 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 ~~additional risks~~Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item ~~1A herein regarding~~8 of the ~~EPC Contractor's bankruptcy.~~Form 10-K for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.

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

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company in Item 7 of the Form 10-K and ~~Note (G) to the Condensed Financial Statements herein for additional information.~~

~~Bonus Depreciation~~

Approximately $1.2 billion of positive cash flows is expected to result from bonus depreciation for the 2017 tax year, but may not all be realized in 2017 due to net operating loss projections for the 2017 tax year. Approximately $370 million of the 2017 benefit is dependent upon placing the remainder of the Kemper IGCC in service by December 31, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount previously estimated as bonus depreciation would be claimed as a deduction under IRC Section 165. As of June 30, 2017, $82 million has been received through quarterly income tax refunds for bonus depreciation related to the Kemper IGCC, which may be subject to repayment. SeeFINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under ~~"Integrated Coal Gasification Combined Cycle" herein~~"Regulatory Matters," and Note ~~(G)~~(H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.

Southern Power

In March 2018, Southern Power substantially completed a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of its solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $50 million, which were recorded in the first quarter 2018. In April 2018, Southern Power completed the final stage of the reorganization resulting in additional ~~information.~~net state tax benefits of approximately $4 million. Southern Power is pursuing the sale of a 33% equity interest in the newly-formed holding company owning these solar facilities. If successful, the sale is expected to close in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

~~Section 174 Research and Experimental Deduction~~

Southern Company has reflected deductions for research and experimental (R&E) expenditures related to the Kemper IGCC in its federal income tax calculations since 2013 and filed amended federal income tax returns for

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2008 through 2013 to also include such deductions. In December 2016, Southern Company and the IRS reached a proposed settlement, subject to approval of the U.S. Congress Joint Committee on Taxation, resolving a methodology for these deductions. Due to the uncertainty related to this tax position, Southern Company had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million as of June 30, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount not allowed under IRC Section 174 would be claimed as a deduction under IRC Section 165, and would result in a reversal of the related unrecognized tax benefits, excluding interest. See Notes (B) and (G) to the Condensed Financial Statements under "~~Integrated Coal Gasification Combined Cycle~~" and "Section 174 Research and Experimental Deduction," respectively, herein for additional information. This matter is expected to be resolved in the next 12 months; however, the ultimate outcome of this matter cannot be determined at this time.

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 regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, 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.

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Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstSouthernCompanyanditssubsidiaries~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,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 Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

OnLitigation

In 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean, which was amended and refiled to include, among other things, Southern Company as a defendant. The individual plaintiff alleges that Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedule of the Kemper County energy facility and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper County energy facility; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper County energy facility in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper County energy facility costs from being charged to customers through electric rates. In June 2017, the Circuit Court ruled in favor of motions by Southern Company and Mississippi Power and dismissed the case. In July 2017, the plaintiffs filed notice of an appeal.

In January ~~20,~~ 2017, a purported securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia, 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 ~~IGCC~~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. OnIn June ~~12,~~ 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. OnIn July ~~27,~~ 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with ~~prejudice.~~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 and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. On April 26, 2018, the defendants filed a motion for reconsideration of the court's order, seeking the dismissal of the remaining claims in the lawsuit.

OnIn February ~~27,~~ 2017, Jean Vineyard filed a shareholder derivative lawsuit and, in May 2017, Judy Mesirov filed a shareholder derivative lawsuit, each in the U.S. District Court for the Northern District of ~~Georgia that~~Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In August 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia and the court has deferred the consolidated case until after certain further action in the purported securities class action complaint discussed above. The ~~complaint alleges~~complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper ~~IGCC~~County energy facility cost and schedule. Further, the ~~complaint alleges~~complaints allege that the defendants were unjustly enriched and caused the waste of corporate ~~assets. The~~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 ~~her~~each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. ~~The~~Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes. ~~On March 27, 2017, the court deferred this lawsuit until 30 days after certain further action in the purported securities class action complaint discussed above.~~

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In May ~~15,~~ 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

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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 ~~IGCC.~~County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper ~~IGCC~~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 June 1, 2017, Judy Mesirov filed a shareholder derivative~~ The court has deferred the lawsuit until after certain further action in the U.S. District Court for the Northern District of Georgia, that names as defendants Southern Company, certain of its current and former directors, certain of its officers, and certain former Mississippi Power officers. Thepurported securities class action 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 IGCC. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper IGCC 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, disgorgement of profits, and equitable relief and, on her own 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.discussed above.

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.

~~The SEC is conducting a formal investigation~~Investments in Leveraged Leases

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters – Investments in Leveraged Leases" of Southern Company in Item 7 and ~~Mississippi Power concerning~~Note 1 to the ~~estimated costs and expected in-service date~~financial statements of Southern Company under "Leveraged Leases" in Item 8 of the Kemper IGCC. Southern Company believes the investigation is focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC. See ACCOUNTING POLICIES – "~~Application of Critical Accounting Policies and Estimates" herein~~Form 10-K for additional information regarding a Southern Company Holdings Inc. (Southern Holdings) subsidiary's leveraged lease agreements and concerns about the financial and operational performance of one of the lessees and the associated generation assets.

The ability of the lessees to make required payments to the Southern Holdings subsidiary is dependent on the ~~Kemper IGCC.~~operational performance of the assets. As a result of operational improvements in the first quarter 2018, the June 2018 lease payment is currently expected to be paid in full. However, operational issues and resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments, including the lease payment due in December 2018. 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 would 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 had a balance of approximately $86 million as of March 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 as of March 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; however, it is not expected to have a material impact on the financial statements of Southern Company.~~time.

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 Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates related to Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, Goodwill and Other Intangible Assets, Derivatives and Hedging Activities, and Contingent Obligations.

~~Kemper IGCC Rate Recovery~~

For periods prior to the second quarter 2017, significant accounting estimates included Kemper IGCC estimated construction costs, project completion date, and rate recovery. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery" of Southern Company in Item 7 of the Form 10-K for additional information. Mississippiestimates.

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Power recorded total pre-tax charges to income related to the Kemper IGCC of $428 million ($264 million after tax) in 2016, $365 million ($226 million after tax) in 2015, $868 million ($536 million after tax) in 2014, and $1.2 billion ($729 million after tax) in prior years.Recently Issued Accounting Standards

As a result of the Mississippi PSC's June 21, 2017 stated intent to issue an order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant rather than an IGCC plant, as well as Mississippi Power's June 28, 2017 suspension of the operation and start-up of the gasifier portion of the Kemper IGCC, the estimated construction costs and project completion date are no longer considered significant accounting estimates. Significant accounting estimates for the June 30, 2017 financial statements presented herein include the overall assessment of rate recovery for the Kemper County energy facility and the estimated costs for the potential cancellation of the Kemper IGCC.

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that was previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.

In the aggregate, since the Kemper IGCC project started, Mississippi Power has incurred charges of $5.96 billion ($3.94 billion after tax) through June 30, 2017. Mississippi Power recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC of $3.0 billion ($2.1 billion after tax) and $81 million ($50 million after tax) in the second quarter 2017 and the second quarter 2016, respectively, and total pre-tax charges of $3.1 billion ($2.2 billion after tax) and $134 million ($83 million after tax) year-to-date in 2017 and 2016, respectively.

Given the significant judgment involved in estimating the costs to cancel the gasifier portion of the Kemper IGCC, the ultimate rate recovery for the Kemper IGCC, including the $0.5 billion of combined cycle-related costs not yet in rates, and the impact on Southern Company's results of operations, Southern Company considers these items to be critical accounting estimates. See ~~Note 3 to the financial statements~~MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Company ~~under "Integrated Coal Gasification Combined Cycle"~~ in Item 87 of the Form 10-K ~~and~~for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note ~~(B)~~(A) to the Condensed Financial Statements ~~under "Integrated Coal Gasification Combined Cycle"~~ herein for ~~additional information.~~

~~Recently Issued Accounting Standards~~

~~While Southern Company expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of~~ Southern Company's ~~revenue, including energy provided to customers, is from tariff offerings that provide electricity or natural gas without a defined~~

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contractual term, as well as longer-term contractual commitments, including PPAs and non-derivative natural gas asset management and optimization arrangements. Southern Company expects the adoption of ASC 606 will not result in a significant shift from the current timing of revenue recognition for such transactions.

~~Southern Company's ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements, such as certain PPAs~~, ~~energy-related derivatives~~, and alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Southern Company's financial statements. In addition, the power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Southern Company expects CIAC to be out of the scope of ASC 606.recently adopted accounting standards.

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Southern Company intends to use the modified retrospective method of adoption effective January 1, 2018. Southern Company has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized in Southern Company's financial statements, Southern Company will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.

~~On January 26, 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~ (ASU 2017-04). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with the carrying amount as part of Step 2 of the goodwill impairment test. Under the new standard, the goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value, not exceeding the total amount of goodwill allocated to that reporting unit, which may increase the frequency of goodwill impairment charges if a future goodwill impairment test does not pass the Step 1 evaluation. ASU 2017-04 is effective prospectively for annual and interim periods beginning on or after December 15, 2019, and early adoption is permitted on testing dates after January 1, 2017.

~~On March 10, 2017, the FASB issued ASU No. 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Southern Company is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Southern Company's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Southern Company's financial statements.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company's financial condition remained stable at ~~June 30, 2017.~~March 31, 2018. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

Net cash provided from operating activities totaled ~~$2.7~~$1.5 billion for the first ~~six~~three months of ~~2017,~~2018, an increase of $0.6 billion from the corresponding period in ~~2016.~~2017. The increase in net cash provided from operating activities was primarily due to ~~$1.2 billion of net cash provided from operating activities of Southern Company Gas, which was acquired on July 1, 2016, partially offset by~~ the timing of vendor payments and an increase in ~~under-recovered~~ fuel ~~costs.~~cost recovery. Net cash used for investing activities totaled ~~$4.9~~$2.0 billion for the first ~~six~~three months of ~~2017~~2018 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, and Southern Power's payments for renewable acquisitions.~~programs. Net cash provided from financing activities totaled ~~$1.6~~$0.6 billion for the first ~~six~~three months of ~~2017~~2018 primarily due to net issuances of long-term and short-term debt and an increase in commercial paper borrowings, partially offset by ~~redemptions of long-term debt and~~ common stock dividend payments. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017~~2018 include an increase of $1.8 billion in notes payable primarily related to increased commercial paper borrowings and issuances of short-term bank debt for general corporate purposes; an increase of $1.1 billion in total property, plant, and equipment ~~in service, net of depreciation~~ primarily related to the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities, Southern Company Gas' infrastructure replacement programs, and Southern Power's ~~renewable acquisitions;~~construction projects and acquisition of a solar facility; a decrease of ~~$1.5~~$0.7 billion in ~~CWIP~~securities due within one year related to the repayment of long-term debt; an increase of $0.5 billion in total common stockholders' equity primarily related to earnings for the ~~estimated probable losses on the Kemper IGCC;~~three months ended March 31, 2018, partially offset by common stock dividend payments; a decrease of $0.5 billion in ~~cash~~accrued compensation due to the timing of payments; and ~~cash equivalents primarily related to acquisition payments at Southern Power;~~ a decrease of ~~$1.4~~$0.4 billion in ~~total common stockholder's equity~~natural gas for sale primarily related to the ~~estimated probable losses on the Kemper IGCC, partially offset by the issuance~~use of additional shares of common stock; an increase of $1.3 billion in long-term debt (excluding amounts due within a year) to fund the Southern Company system's continuous construction programs and for general corporate purposes; and an increase of $1.0 billion in notes payable primarily due to issuances of short-term bank debt for general corporate purposes.stored natural gas.

At the end of the ~~second~~first quarter ~~2017,~~2018, the market price of Southern Company's common stock was ~~$47.88~~$44.66 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was ~~$23.38~~$24.39 per share, representing a market-to-book ratio of ~~205%~~183%, compared to ~~$49.19, $25.00,~~$48.09, $23.99, and ~~197%~~201%, respectively, at the end of ~~2016.~~2017. Southern Company's common stock dividend for the ~~second~~first quarter ~~2017~~2018 was $0.58 per share compared to $0.56 per share in the ~~second~~first quarter ~~2016.~~2017.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company in Item 7 of the Form 10-K for a description of Southern Company's capital requirements ~~for the construction programs~~and contractual obligations. Subsequent to March 31, 2018, Georgia Power redeemed all $250 million aggregate principal amount of the Southern Company system, including estimated capital expenditures for new electric generating facilities and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, pipeline charges, storage capacity, and gas supply, asset management agreements, standby letters of credit and performance/surety bonds, trust funding requirements, and unrecognized tax benefits. Approximately $3.0its Series 2008B 5.40% Senior Notes due June 1, 2018. An additional $3.1 billion will be required through ~~June 30, 2018~~March 31, 2019 to fund announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.

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The Southern Company system's construction program is currently estimated to total approximately $8.6 billion for 2018, $7.8 billion for 2019, $7.2 billion for 2020, $6.8 billion for 2021, and $6.4 billion for 2022. These amounts include expenditures of approximately $1.2 billion, $1.0 billion, $0.9 billion, $0.7 billion, and $0.4 billion for the construction of Plant Vogtle Units 3 and 4 in 2018, 2019, 2020, 2021, and 2022, respectively, and an average of approximately $0.5 billion per year for 2018 through 2022 for Southern Power's planned expenditures for plant acquisitions and placeholder growth, as revised post-tax reform. 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 $1.1 billion, $0.3 billion, $0.4 billion, $0.5 billion, and $0.5 billion for 2018, 2019, 2020, 2021, and 2022, respectively. These estimated expenditures do not include any potential compliance costs associated with the regulation of CO₂ emissions from fossil fuel-fired electric generating units.

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 could change as the Southern Company system continues to refine its assumptions underlying the cost estimates and evaluate the method and timing of compliance activities, are estimated to be approximately $0.3 billion, $0.3 billion, $0.4 billion, $0.5 billion, and $0.4 billion for 2018, 2019, 2020, 2021, and 2022, respectively. See Note 1 to the financial statements of Southern Company under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K 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 ~~statutes~~laws and regulations; the outcome of any legal challenges to ~~the~~ 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 12 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K and Note ~~(I)~~(J) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions.

In addition, the construction program includes the development and construction of new electric generating facilities with designs that have not been previously constructed, which may result in revised estimates during construction. The ability to control costs and avoid cost 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 and productivity, adverse weather conditions, shortages and 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, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance. See Note 3 to the financial statements of Southern Company under ~~"Regulatory Matters – Georgia Power – Nuclear~~"Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Georgia Power~~ – Nuclear Construction" herein for information regarding Plant Vogtle Units 3 and 4 and additional factors that may impact construction ~~expenditures, including Georgia Power's preliminary cost-to-complete and cancellation cost assessments for Plant Vogtle Units 3 and 4.~~expenditures.

Sources of Capital

Southern Company intends to meet its future capital needs through operating cash flows, ~~short-term~~borrowings from financial institutions, and debt ~~term loans,~~ and ~~external security issuances.~~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 ~~capital~~ and debt issuances in ~~2017,~~2018, 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

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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, ~~term loans, short-term~~ 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 any potential sale of a 33% equity interest in a newly-formed holding company that owns substantially all of its solar assets, if completed. Southern Company Gas also plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information.

In addition, in 2014, Georgia Power ~~has~~ entered into ~~a loan guarantee agreement (Loan~~the Loan Guarantee ~~Agreement)~~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. ~~Eligible Project Costs incurred through June 30, 2017 would allow for borrowings~~As of ~~up to $3.1~~March 31, 2018, Georgia Power had borrowed $2.6 billion under the FFB Credit ~~Facility, of which Georgia Power has borrowed $2.6 billion; however, on~~Facility. In July ~~27,~~ 2017, Georgia Power entered into an amendment to the Loan Guarantee Agreement, ~~(LGA Amendment) to clarify~~which provides that further advances are conditioned upon the ~~operation~~DOE's approval of any agreements entered into in replacement of the ~~Loan Guarantee Agreement pending Georgia Power's completion of its comprehensive schedule, cost-to-complete, and cancellation cost assessments (Cost Assessments) for Plant~~ Vogtle ~~Units~~ 3 and ~~4. Under~~4 Agreement and satisfaction of certain other conditions.

In September 2017, the ~~terms of the LGA Amendment,~~DOE issued a conditional commitment to Georgia Power ~~will not request any advances~~for up to approximately $1.67 billion of additional guaranteed loans under the Loan Guarantee ~~Agreement unless~~Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and ~~until such time as Georgia Power has completed~~issuance of these additional loan guarantees by the ~~Cost Assessments~~DOE cannot be assured and ~~made a determination~~are subject to ~~continue construction~~the negotiation of ~~Plant Vogtle Units 3~~definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and ~~4 and satisfied certain~~satisfaction of other ~~conditions related to continuing construction.~~conditions. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K ~~and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein~~ for additional information regarding the Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and additional conditions to borrowing. Also

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

see Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Georgia Power~~ – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.

As of ~~June 30, 2017,~~March 31, 2018, Southern Company's current liabilities exceeded current assets by ~~$3.9~~$4.1 billion due to notes payable of $3.3 billion (comprised of approximately $0.9 billion at the parent company, $1.2 billion at Georgia Power, $0.1 billion at Gulf Power, $0.4 billion at Southern Power, and $0.6 billion at Southern Company Gas) and long-term debt that is due within one year of ~~$3.0~~$3.2 billion (comprised of approximately ~~$0.4~~$1.0 billion at the parent company, ~~$0.4~~$0.2 billion at Alabama Power, ~~$0.3~~$0.8 billion at Georgia Power, ~~$1.0~~$0.2 billion at Mississippi Power, ~~and $0.9~~$0.8 billion at Southern ~~Power)~~Power, and $0.2 billion at Southern Company Gas) and notes payable of $4.3 billion (comprised of approximately $2.5 billion at the parent company, $0.2 billion at Alabama Power, $0.1 billion at Gulf Power, $0.3 billion at Mississippi Power, $0.1 billion at Southern Power, and $1.0 billion at Southern Company Gas). 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.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At ~~June 30, 2017,~~March 31, 2018, Southern Company and its subsidiaries had approximately ~~$1.4~~$2.3 billion of cash and cash equivalents. Committed credit arrangements with banks at ~~June 30, 2017~~March 31, 2018 were as follows:


	Expires														Executable Term Loans				Expires Within One Year				Expires												Executable Term Loans				Expires Within One Year
Company	2017		2018		2019		2020		2022		Total		Unused		One Year		Two Years		Term Out		No Term Out		2018		2019		2020		2022		Total		Unused		One Year		Two Years		Term Out		No Term Out
	(in millions)																						(in millions)
Southern Company^(a)	$	—	$	—	$	—	$	—	$	2,000	$	2,000	$	2,000	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	2,000	$	2,000	$	1,999	$	—	$	—	$	—	$	—
Alabama Power	3		532		—		—		800		1,335		1,335		—		—		—		35		35		—		500		800		1,335		1,335		—		—		—		35
Georgia Power	—		—		—		—		1,750		1,750		1,732		—		—		—		—		—		—		—		1,750		1,750		1,736		—		—		—		—
Gulf Power	30		195		25		30		—		280		280		45		—		—		40		20		25		235		—		280		280		45		—		20		—
Mississippi Power	113		—		—		—		—		113		100		—		13		13		100		100		—		—		—		100		100		—		—		—		100
Southern Power Company(b)	—		—		—		—		750		750		675		—		—		—		—		—		—		—		750		750		728		—		—		—		—
Southern Company Gas^(b)(c)	—		—		—		—		1,900		1,900		1,849		—		—		—		—		—		—		—		1,900		1,900		1,890		—		—		—		—
Other	10		30		—		—		—		40		40		20		—		20		20		30		—		—		—		30		30		20		—		20		10
Southern Company Consolidated	$	156	$	757	$	25	$	30	$	7,200	$	8,168	$	8,011	$	65	$	13	$	33	$	195	$	185	$	25	$	735	$	7,200	$	8,145	$	8,098	$	65	$	—	$	40	$	145


(a)	Represents the Southern Company parent entity.


(b)	Does not include Southern Power's $120 million continuing letter of credit facility for standby letters of credit expiring in 2019, of which $21 million remains unused at March 31, 2018.


(c)	Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $~~1.2~~1.4 billion of these arrangements. Southern Company Gas' committed credit arrangements also include $~~700~~500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas.

See Note 6 to the financial statements of Southern Company under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

As reflected in the table above, in May 2017, Southern Company, Alabama Power, Georgia Power, and Southern Power Company each amended certain of their multi-year credit arrangements, which, among other things, extended the maturity dates from 2020 to 2022. Southern Company and Southern Power Company increased their borrowing ability under these arrangements to $2.0 billion from $1.25 billion and to $750 million from $600 million, respectively. Southern Company also terminated its $1.0 billion facility maturing in 2018. Also in May 2017, Southern Company Gas Capital and Nicor Gas terminated their existing credit arrangements for $1.3 billion and $700 million, respectively, which were to mature in 2017 and 2018, and entered into a new multi-year credit arrangement currently allocated for $1.2 billion and $700 million, respectively, with a maturity date of 2022.

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~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Most of these bank credit arrangements, as well as the term loan arrangements of Southern Company, Alabama Power, ~~Georgia Power,~~ Mississippi Power, ~~and~~ Southern Power Company, and Pivotal Utility Holdings 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 ~~June 30, 2017,~~March 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~~All but $40 million of the bank credit arrangements do not 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 ~~pollution control~~ 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 ~~pollution control~~ revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of ~~June 30, 2017~~March 31, 2018 was approximately ~~$1.6~~$1.5 billion. ~~In June 2017, Georgia Power remarketed $318 million of variable rate pollution control bonds in index rate modes, reducing the liquidity support utilized under Georgia Power's bank credit arrangement.~~ In addition, at ~~June 30, 2017,~~March 31, 2018, the traditional electric operating companies had approximately ~~$626~~$437 million of ~~pollution control~~ revenue bonds outstanding that were required to be remarketed within the next 12 months.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southern Company, the traditional electric operating companies (other than Mississippi Power), Southern Power Company, Southern Company Gas, and Nicor Gas make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Short-term borrowings are included in notes payable in the balance sheets.

Details of short-term borrowings were as follows:


	Short-term Debt at June 30, 2017				Short-term Debt During the Period^(*)						Short-term Debt at March 31, 2018				Short-term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding		Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)				(in millions)		(in millions)				(in millions)				(in millions)
Commercial paper	$	2,257	1.5	%	$	2,519	1.3	%	$	2,946	$	2,618	2.4	%	$	2,232	2.0	%	$	2,746
Short-term bank debt	1,017		2.0	%	321		2.0	%	1,017		1,653		3.1	%	563		2.5	%	1,653
Total	$	3,274	1.7	%	$	2,840	1.4	%			$	4,271	2.6	%	$	2,795	2.1	%


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017.~~March 31, 2018.

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

Credit Rating Risk

At ~~June 30, 2017,~~March 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,

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~~SOUTHERN COMPANY AND SUBSIDIARY COMPANIES~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

transmission, interest rate management, and ~~foreign currency risk management, and, at June 30, 2017, included contracts related to the~~ construction of new generation at Plant Vogtle Units 3 and 4.

The maximum potential collateral requirements under these contracts at ~~June 30, 2017~~March 31, 2018 were as follows:


Credit Ratings	Maximum Potential Collateral Requirements		Maximum Potential Collateral Requirements
	(in millions)		(in millions)
At BBB and/or Baa2	$	39	$	38
At BBB- and/or Baa3	$	642	$	601
At BB+ and/or Ba1^(*)	$	2,555	$	2,201


(*)	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 ~~March 1, 2017,~~February 26, 2018, Moody's revised its rating outlook for Mississippi Power from stable to positive.

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 March 14, 2018, S&P upgraded the senior unsecured long-term debt rating of Mississippi Power to ~~Ba1~~A- from ~~Baa3.~~

~~On March 20, 2017, Moody's revised its rating outlook for Georgia Power from stable to negative.~~

On March 24, 2017, S&P revised its consolidated credit rating outlook for Southern Company and its subsidiaries (including the traditional electric operating companies, Southern Power, Southern Company Gas, Southern Company Gas Capital, and Nicor Gas) from stable to negative.

~~On March 30, 2017, Fitch placed the ratings of Southern Company, Georgia Power, and Mississippi Power on rating watch negative.~~

~~On June 22, 2017, Moody's placed the ratings of Mississippi Power on review for downgrade.~~

~~Financing Activities~~

During the first six months of 2017, Southern Company issued approximately 7.8 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $352 million.

In addition, during the second quarter 2017, Southern Company issued approximately 1.3 million shares 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 $65 million, net of $553,000 in fees and commissions.BBB+ with a negative outlook.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

While it is unclear how the credit rating agencies, the FERC, and certain of the relevant state regulatory bodies may respond to 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. Absent actions by Southern Company and its subsidiaries to mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets, the credit ratings of Southern Company and certain of its subsidiaries could be negatively affected. See Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information related to state PSC or other regulatory agency actions related to the Tax Reform Legislation, including recent approvals of capital structure adjustments for Alabama Power, Georgia Power, and Gulf Power by their respective state PSCs, which are expected to help mitigate the potential adverse impacts to certain of their credit metrics.

Financing Activities

During the first three months of 2018, Southern Company issued approximately 4.1 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $113 million.

The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first ~~six~~three months of ~~2017:~~2018:

Company
Senior
Note Issuances

Senior
Note Maturities and Redemptions

Revenue
Bond
Maturities, Redemptions, and
Repurchases

Other
Long-Term
Debt
Issuances

Other
Long-Term
Debt Redemptions
and
Maturities^(a)
(in millions)
Southern Company^(b)
$ 300
$ —
$ —
$ 500
$ 400
Alabama Power 550
200
—
—
—
Georgia Power 850
450
27
—
3
Gulf Power 300
85
—
6
—
Mississippi Power —
—
—
40
893
Southern Power —
—
—
3
3
Southern Company Gas^(c)
450
—
—
—
—
Other —
—
—
—
8
Elimination^(d)
—
—
—
(40 ) (591 )
Southern Company Consolidated $ 2,450
$ 735
$ 27
$ 509
$ 716



Company	Senior Note Issuances		Revenue Bond Maturities, Redemptions, and Repurchases		Other Long-Term Debt Redemptions and Maturities^(*)
	(in millions)
Georgia Power	$	—	$	278	$	102
Mississippi Power	600		—		900
Other	—		—		3
Southern Company Consolidated	$	600	$	278	$	1,005


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


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


~~(c)~~	~~The senior notes were issued by Southern Company Gas Capital and guaranteed by the Southern Company Gas parent entity.~~


~~(d)~~	~~Intercompany loans from Southern Company to Mississippi Power eliminated in Southern Company's Consolidated Financial Statements.~~

In March ~~2017, Southern Company repaid at maturity a $400 million 18-month floating rate bank loan.~~

In June 2017, Southern Company issued $500 million aggregate principal amount of Series 2017A 5.325% Junior Subordinated Notes due June 21, 2057. The proceeds were used to repay short-term indebtedness and for other general corporate purposes.

Also in June 2017, Southern Company issued $300 million aggregate principal amount of Series 2017A Floating Rate Senior Notes due September 30, 2020, which bear interest at a floating rate based on three-month LIBOR. The proceeds were used to repay short-term indebtedness and for other general corporate purposes.

~~Also in June 2017,~~2018, Southern Company entered into ~~two $100~~a $900 million ~~aggregate principal amount~~short-term floating rate bank ~~term~~ loan ~~agreements, which mature on June 21, 2018 and June 29, 2018 and bear~~bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes.

~~Except as described herein,~~Subsequent to March 31, 2018, Southern ~~Company's subsidiaries used~~Company borrowed $250 million pursuant to a short-term uncommitted bank credit arrangement, which bears interest at a rate agreed upon by Southern Company and the ~~proceeds of~~bank from time to time and is payable on no less than 30 days' demand by the ~~debt issuances shown in the table above for their redemptions and maturities shown in the table above, to repay~~bank.

In January 2018, Georgia Power repaid its outstanding $150 million short-term ~~indebtedness, and for general corporate purposes, including their continuous construction programs.~~

A portion of the proceeds of Gulf Power's senior note issuances was used in June 2017 to redeem 550,000 shares ($55 million aggregate liquidation amount) of Gulf Power's 6.00% Series Preference Stock, 450,000 shares ($45 million aggregate liquidation amount) of Gulf Power's Series 2007A 6.45% Preference Stock, and 500,000 shares ($50 million aggregate liquidation amount) of Gulf Power's Series 2013A 5.60% Preference Stock.floating rate bank loan due May 31, 2018.

In March ~~2017, Gulf~~2018, Mississippi Power ~~extended the maturity of~~entered into a ~~$100~~$300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, ~~from April 2017~~of which $125 million was repaid subsequent to ~~October 2017 and subsequently repaid~~March 31, 2018. The proceeds of this loan, together with the ~~loan in May 2017.~~proceeds of Mississippi Power's $600 million senior notes issuances, were used to repay Mississippi Power's entire $900 million unsecured floating rate term loan.

~~In June 2017,~~Subsequent to March 31, 2018, Georgia Power ~~entered into three floating rate bank loans in~~redeemed all $250 million aggregate principal ~~amounts~~amount of ~~$50 million, $150 million, and $100 million, which mature on December~~its Series 2008B 5.40% Senior Notes due June 1, ~~2017, May~~2018.

At March 31, 2018, Pivotal Utility Holdings had $200 million of gas facility revenue bonds issued for its benefit outstanding. The Elizabethtown Gas asset sale agreement requires that bonds representing $180 million of the total that are currently eligible for redemption at par be redeemed on or prior to consummation of the sale. Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds to be redeemed and ~~June 28,~~provided notice of its intent to cause, on May 23, 2018, the remaining $180 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. Subsequent to March

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~respectively,~~31, 2018, Pivotal Utility Holdings, as borrower, and ~~bear interest based~~Southern Company Gas, as guarantor, entered into a $181 million short-term delayed draw floating rate bank term loan agreement. Pivotal Utility Holdings has the right to borrow up to $181 million on ~~one-month LIBOR. Also in June 2017, Georgia Power borrowed $500 million pursuant~~or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds to an uncommitted bank credit arrangement, which bears interest at a rate agreed upon by Georgia Power and the bank from time to time and is payable on no less than 30 days' demand by the bank. The proceeds from these bank loans werebe used to repay ~~a portion of Georgia Power's existing indebtedness and for working capital and other general corporate purposes, including Georgia Power's continuous construction program.~~

~~In June 2017, Mississippi Power prepaid $300~~the remaining $180 million of gas facility revenue bonds. See Note 6 to the ~~outstanding principal amount~~financial statements of Southern Company under ~~its $1.2 billion unsecured term loan, which matures on March 30, 2018.~~

~~Subsequent~~"Gas Facility Revenue Bonds" in Item 8 of the Form 10-K and Note (J) to ~~June 30, 2017, Nicor~~the Condensed Financial Statements under "Southern Company Gas ~~agreed to issue $400 million aggregate principal amount~~– Proposed Sale of ~~First Mortgage Bonds in a private placement, $200 million of which is expected to be issued in each of August 2017~~Elizabethtown Gas and ~~November 2017.~~Elkton Gas" herein for additional information.

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

PART I

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, there were no material changes to Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, and Southern Power's disclosures about market risk. For additional market risk disclosures relating to ~~Gulf Power and~~ Southern Company Gas, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of ~~Gulf Power and~~ Southern Company Gas ~~respectively,~~ herein. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K and Note 1 to the financial statements of each registrant under "Financial Instruments," Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power, Mississippi Power, and Southern Company Gas, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also see Note ~~(C)~~(D) and Note ~~(H)~~(I) to the Condensed Financial Statements herein for information relating to derivative instruments.

Item 4. Controls and Procedures.


(a)	Evaluation of disclosure controls and procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.


(b)	Changes in internal controls over financial reporting.

There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the ~~second~~first quarter ~~2017~~2018 that have materially affected or are reasonably likely to materially affect Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting.

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	1,333		$	1,316		$	2,560		$	2,510		$	1,285		$	1,227
Wholesale revenues, non-affiliates	68			67			133			130			74			66
Wholesale revenues, affiliates	32			9			65			31			51			33
Other revenues	51			52			108			105			63			56
Total operating revenues	1,484			1,444			2,866			2,776			1,473			1,382
Operating Expenses:
Fuel	303			295			601			564			326			298
Purchased power, non-affiliates	40			40			75			76			64			34
Purchased power, affiliates	34			55			62			88			37			28
Other operations and maintenance	375			355			743			747			387			384
Depreciation and amortization	183			175			364			347			189			181
Taxes other than income taxes	95			94			191			191			98			96
Total operating expenses	1,030			1,014			2,036			2,013			1,101			1,021
Operating Income	454			430			830			763			372			361
Other Income and (Expense):
Allowance for equity funds used during construction	8			6			16			16			13			8
Interest expense, net of amounts capitalized	(77		)	(74		)	(153		)	(147		)	(79		)	(75		)
Other income (expense), net	1			(4		)	(4		)	(11		)	5			10
Total other income and (expense)	(68		)	(72		)	(141		)	(142		)	(61		)	(57		)
Earnings Before Income Taxes	386			358			689			621			311			304
Income taxes	151			140			277			242			82			126
Net Income	235			218			412			379			229			178
Dividends on Preferred and Preference Stock	5			5			9			9			4			4
Net Income After Dividends on Preferred and Preference Stock	$	230		$	213		$	403		$	370		$	225		$	174

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,					For the Three Months Ended March 31,
	2017		2016		2017		2016			2018		2017
	(in millions)				(in millions)					(in millions)
Net Income	$	235	$	218	$	412	$	379		$	229	$	178
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $-, $-, $-, and $(1), respectively	—		—		—		(2		)
Reclassification adjustment for amounts included in net income, net of tax of $1, $-, $1, and $1, respectively	1		1		2		2
Reclassification adjustment for amounts included in net income, net of tax of $1 and $1, respectively										1		1
Total other comprehensive income (loss)	1		1		2		—			1		1
Comprehensive Income	$	236	$	219	$	414	$	379		$	230	$	179

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Net income	$	412		$	379		$	229		$	178
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	442			419			228			219
Deferred income taxes	192			175			32			59
Pension, postretirement, and other employee benefits	(24		)	(23		)
Other, net	4			(33		)	(22		)	(3		)
Changes in certain current assets and liabilities —
-Receivables	(58		)	64
-Fossil fuel stock	13			(32		)
-Prepayments							(82		)	(76		)
-Materials and supplies							(27		)	(10		)
-Other current assets	(75		)	(67		)	19			39
-Accounts payable	(154		)	(75		)	(216		)	(214		)
-Accrued taxes	52			102			57			77
-Accrued compensation	(74		)	(50		)	(108		)	(96		)
-Retail fuel cost over recovery	(65		)	(60		)	—			(36		)
-Other current liabilities	7			8			45			(9		)
Net cash provided from operating activities	672			807			155			128
Investing Activities:
Property additions	(738		)	(645		)	(490		)	(306		)
Nuclear decommissioning trust fund purchases	(117		)	(200		)	(50		)	(63		)
Nuclear decommissioning trust fund sales	117			200			51			63
Cost of removal, net of salvage	(54		)	(51		)	(19		)	(26		)
Change in construction payables	48			(27		)	(50		)	5
Other investing activities	(15		)	(18		)	(6		)	(2		)
Net cash used for investing activities	(759		)	(741		)	(564		)	(329		)
Financing Activities:
Increase in notes payable, net							245			—
Proceeds —
Senior notes	550			400			—			550
Capital contributions from parent company	327			237			484			314
Other long-term debt	—			45
Redemptions — Senior notes	(200		)	(200		)	—			(200		)
Payment of common stock dividends	(357		)	(382		)	(202		)	(179		)
Other financing activities	(14		)	(17		)	(9		)	(8		)
Net cash provided from financing activities	306			83			518			477
Net Change in Cash and Cash Equivalents	219			149
Cash and Cash Equivalents at Beginning of Period	420			194
Cash and Cash Equivalents at End of Period	$	639		$	343
Net Change in Cash, Cash Equivalents, and Restricted Cash							109			276
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							544			420
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	653		$	696
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $6 and $7 capitalized for 2017 and 2016, respectively)	$	140		$	131
Cash paid during the period for —
Interest (net of $5 and $3 capitalized for 2018 and 2017, respectively)							$	84		$	84
Income taxes, net	88			(122		)	9			—
Noncash transactions — Accrued property additions at end of period	132			94			195			90

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Assets:
Cash and cash equivalents	$	639		$	420		$	653		$	544
Receivables —
Customer accounts receivable	357			348			345			355
Unbilled revenues	161			146			131			162
Affiliated							57			43
Other accounts and notes receivable	36			27			36			55
Affiliated	33			40
Accumulated provision for uncollectible accounts	(9		)	(10		)	(10		)	(9		)
Fossil fuel stock	191			205			165			184
Materials and supplies	443			435			492			458
Prepaid expenses	86			34			133			85
Other regulatory assets, current	135			149			131			124
Other current assets	7			11			3			5
Total current assets	2,079			1,805			2,136			2,006
Property, Plant, and Equipment:
In service	26,466			26,031			27,520			27,326
Less: Accumulated provision for depreciation	9,354			9,112			9,693			9,563
Plant in service, net of depreciation	17,112			16,919			17,827			17,763
Nuclear fuel, at amortized cost	333			336			358			339
Construction work in progress	668			491			1,126			908
Total property, plant, and equipment	18,113			17,746			19,311			19,010
Other Property and Investments:
Equity investments in unconsolidated subsidiaries	67			66			66			67
Nuclear decommissioning trusts, at fair value	848			792			897			903
Miscellaneous property and investments	119			112			123			124
Total other property and investments	1,034			970			1,086			1,094
Deferred Charges and Other Assets:
Deferred charges related to income taxes	526			525			233			239
Deferred under recovered regulatory clause revenues	6			150			101			54
Other regulatory assets, deferred	1,209			1,157			1,257			1,272
Other deferred charges and assets	166			163			193			189
Total deferred charges and other assets	1,907			1,995			1,784			1,754
Total Assets	$	23,133		$	22,516		$	24,317		$	23,864

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholder's Equity	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Liabilities:
Securities due within one year	$	361		$	561		$	200		$	—
Notes payable							248			3
Accounts payable —
Affiliated	242			297			251			327
Other	317			433			398			585
Customer deposits	91			88			94			92
Accrued taxes —
Accrued income taxes	39			45
Other accrued taxes	97			42
Accrued taxes							77			54
Accrued interest	81			78			65			77
Accrued compensation	125			193			96			205
Other regulatory liabilities, current	15			85			59			1
Other current liabilities	63			76			57			56
Total current liabilities	1,431			1,898			1,545			1,400
Long-term Debt	7,082			6,535			7,429			7,628
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	4,842			4,654			2,792			2,760
Deferred credits related to income taxes	64			65			2,067			2,082
Accumulated deferred ITCs	113			110			111			112
Employee benefit obligations	269			300			297			304
Asset retirement obligations	1,543			1,503			1,709			1,702
Other cost of removal obligations	648			684			596			609
Other regulatory liabilities, deferred	84			100			75			84
Other deferred credits and liabilities	69			63			70			63
Total deferred credits and other liabilities	7,632			7,479			7,717			7,716
Total Liabilities	16,145			15,912			16,691			16,744
Redeemable Preferred Stock	85			85			291			291
Preference Stock	196			196
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			1,222			1,222
Paid-in capital	2,950			2,613			3,474			2,986
Retained earnings	2,564			2,518			2,670			2,647
Accumulated other comprehensive loss	(29		)	(30		)	(31		)	(26		)
Total common stockholder's equity	6,707			6,323			7,335			6,829
Total Liabilities and Stockholder's Equity	$	23,133		$	22,516		$	24,317		$	23,864

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

Alabama Power operates as a vertically integrated utility providing electric service to retail and wholesale customers within its traditional service territory located in the State of Alabama in addition to wholesale customers in the Southeast.

Many factors affect the opportunities, challenges, and risks of Alabama Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, reliability, fuel, capital expenditures, and restoration following major storms. Alabama Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future. On May 1, 2018, the Alabama PSC approved modifications to Rate RSE and other commitments designed to position Alabama Power to address the retail rate impact and the growing pressure on its credit quality resulting from the Tax Reform Legislation. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" herein for additional information and Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate RSE" in Item 8 of the Form 10-K for additional information on Alabama Power's established retail tariff.

Alabama Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net income after dividends on preferred ~~and preference~~ stock.

RESULTS OF OPERATIONS

Net Income

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions)
(% change)
(change in millions)
(% change)
$17 8.0 $33 8.9



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$51		29.3

Alabama Power's net income after dividends on preferred and preference stock for the ~~second~~first quarter ~~2017~~2018 was ~~$230~~$225 million compared to ~~$213~~$174 million for the corresponding period in ~~2016.~~2017. The increase was primarily related to an increase in rates under Rate RSE effective January 1, 2017 and an increase in other income (expense), net. These increases were partially offset by an increase in operations and maintenance expenses and a decrease in retail revenues associated with ~~milder~~colder weather ~~and lower customer usage~~experienced in Alabama Power's service territory in the ~~second~~first quarter ~~2017~~2018 compared to the corresponding period in ~~2016.~~

~~Alabama Power's net~~2017 and a decrease in income after dividends on preferred and preference stock for year-to-date 2017 was $403 million compared to $370 million for the corresponding period in 2016. The increase was primarily related to an increase in rates under Rate RSE effective January 1, 2017,tax expense, partially offset by revenues deferred as a ~~decrease in retail revenues associated with milder weather~~regulatory liability for ~~year-to-date 2017 compared~~an expected adjustment to customer billings related to the ~~corresponding period~~Tax Reform Legislation. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" herein and Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate RSE" in ~~2016.~~Item 8 of the Form 10-K for additional information.

Retail Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$17 1.3 $50 2.0



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$58		4.7

In the ~~second~~first quarter ~~2017,~~2018, retail revenues were ~~$1.33~~$1.29 billion compared to ~~$1.32~~$1.23 billion for the corresponding period in ~~2016. For year-to-date 2017, retail revenues were $2.56 billion compared to $2.51 billion for the corresponding period in 2016.~~2017.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the changes in retail revenues were as follows:


	Second Quarter 2017					Year-to-Date 2017					First Quarter 2018
	(in millions)			(% change)		(in millions)			(% change)		(in millions)			(% change)
Retail – prior year	$	1,316				$	2,510				$	1,227
Estimated change resulting from –
Rates and pricing	75			5.7		154			6.2		(52		)	(4.2	)
Sales decline	(11		)	(0.8	)	(12		)	(0.5	)
Sales growth											2			0.1
Weather	(11		)	(0.8	)	(66		)	(2.6	)	64			5.2
Fuel and other cost recovery	(36		)	(2.8	)	(26		)	(1.1	)	44			3.6
Retail – current year	$	1,333		1.3	%	$	2,560		2.0	%	$	1,285		4.7	%

Revenues attributable to changes in sales ~~decreased~~increased in the ~~second~~first quarter and year-to-date 2017 when compared to the corresponding periods in 2016. Weather-adjusted residential KWH sales decreased 1.1% and 0.2% for the second quarter and year-to-date 2017, respectively, primarily due to lower customer usage resulting from an increase in efficiency improvements in residential appliances and lighting, partially offset by customer growth. Weather-adjusted commercial KWH sales decreased 0.4% and 0.8% for the second quarter and year-to-date 2017, respectively, primarily due to lower customer usage. Industrial KWH sales increased 1.0% for the second quarter 20172018 when compared to the corresponding period in ~~2016~~2017. Industrial KWH sales increased 4.5% for the first quarter 2018 as a result of an increase in demand resulting from changes in production levels primarily in the chemicals, pipelines, and ~~mining~~primary metals sectors, partially offset by a decrease in demand ~~from~~in the paper ~~primary metals, pipelines,~~sector. Weather-adjusted commercial and ~~lumber sectors. Industrial~~residential KWH sales ~~remained flat year-to-date 2017 when compared~~decreased 0.8% and 0.5%, respectively, for the first quarter 2018 primarily due to the corresponding period in 2016 as a result of an increase in demand resulting from changes in production levels primarily in the chemicals and mining sectors, offset by a decrease in demand from the pipelines, lumber, and stone, clay, and glass sectors.lower customer usage.

Revenues resulting from changes in weather ~~decreased~~increased in the ~~second~~first quarter ~~and year-to-date 2017~~2018 due to ~~milder~~colder weather experienced in Alabama Power's service territory compared to the corresponding ~~periods~~period in ~~2016.~~2017. For the ~~second~~first quarter ~~2017,~~2018, the resulting ~~decreases~~increases were ~~1.5%~~10.3% and ~~0.7% for residential and commercial sales revenues, respectively. For year-to-date 2017, the resulting decreases were 5.2% and 1.4%~~3.2% for residential and commercial sales revenues, respectively.

Fuel and other cost recovery revenues ~~decreased~~increased in the ~~second~~first quarter ~~2017 and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to ~~an increase~~increases in ~~wholesale revenues to affiliates, which offsets retail fuel~~KWH generation and the average cost ~~recovery.~~ of fuel.

Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information.

Wholesale Revenues – Non-Affiliates



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$8		12.1

Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not affect net income. Short-term opportunity energy sales are also included in wholesale energy sales to non-affiliates. These opportunity sales are made at market-based rates that generally provide a margin above Alabama Power's variable cost to produce the energy.

In the first quarter 2018, wholesale revenues from sales to non-affiliates were $74 million compared to $66 million for the corresponding period in 2017. The increase was primarily due to a 12.4% increase in the price of energy and

Table of Contents

ALABAMA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

a 1.2% increase in KWH sales as a result of increased demand due to colder weather in the first quarter 2018 compared to the corresponding period in 2017.

Wholesale Revenues –Affiliates

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$23 255.6 $34 109.7



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$18		54.5

~~Table of Contents~~

~~ALABAMA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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 ~~clauses.~~clause.

In the ~~second~~first quarter ~~2017,~~2018, wholesale revenues from sales to affiliates were ~~$32~~$51 million compared to $9$33 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~175.0%~~29.8% increase in KWH sales ~~as a result of lower cost Alabama Power-owned generation available to the Southern Company system~~ and ~~a 29.3%~~an 18.8% increase in the price of energy due to ~~an increase~~increased demand as a result of colder weather in ~~natural gas prices. For year-to-date 2017, wholesale~~the first quarter 2018 compared to the corresponding period in 2017.

Other Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$7		12.5

In the first quarter 2018, other revenues ~~from sales to affiliates~~ were ~~$65~~$63 million compared to ~~$31~~$56 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to ~~an 83.5% increase in KWH~~revenues related to unregulated sales of products and services that were reclassified as other revenues as a result of ~~supporting Southern Company system~~the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606). In prior periods, these revenues were included in other income (expense), net. See Note (A) to the Condensed Financial Statements herein for additional information regarding Alabama Power's adoption of ASC 606. The increase was partially offset by decreases in open access transmission ~~reliability and a 15.5% increase in the price of energy due to an increase in natural gas prices.~~tariff revenues.

Fuel and Purchased Power Expenses


	Second Quarter 2017 vs. Second Quarter 2016				Year-to-Date 2017 vs. Year-to-Date 2016					First Quarter 2018 vs. First Quarter 2017
	(change in millions)			(% change)	(change in millions)			(% change)		(change in millions)		(% change)
Fuel	$	8		2.7	$	37		6.6		$	28	9.4
Purchased power – non-affiliates	—			—	(1		)	(1.3	)	30		88.2
Purchased power – affiliates	(21		)	(38.2)	(26		)	(29.5	)	9		32.1
Total fuel and purchased power expenses	$	(13	)		$	10				$	67

In the ~~second~~first quarter ~~2017,~~2018, fuel and purchased power expenses were ~~$377~~$427 million compared to ~~$390~~$360 million for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to a ~~$55 million decrease in the volume of KWHs purchased. This decrease was partially offset by a $24 million net increase related to the average cost of purchased power and fuel and an $18~~$35 million increase related to the volume of KWHs ~~generated.~~

~~For year-to-date 2017, fuel~~generated and purchased, ~~power expenses were $738 million compared to $728 million for the corresponding period in 2016. The increase was primarily due to~~ a ~~$58~~$22 million increase in the ~~volume~~average cost of ~~KWHs generated~~purchased power, and a ~~$31~~$10 million ~~net~~ increase related to the average cost of ~~purchased power and~~ fuel. ~~These increases were partially offset by a $79 million decrease in the volume of KWHs purchased.~~

Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate ECR" in Item 8 of the Form 10-K for additional information.

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ALABAMA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
Total generation (in billions of KWHs)	15	13	30	28	16	15
Total purchased power (in billions of KWHs)	1	3	2	4	1	1
Sources of generation (percent) —
Coal	47	53	48	46	50	49
Nuclear	25	23	26	25	23	26
Gas	20	20	20	19	18	20
Hydro	8	4	6	10	9	5
Cost of fuel, generated (in cents per net KWH) —
Coal	2.63	2.84	2.61	2.85	2.69	2.60
Nuclear	0.76	0.79	0.75	0.78	0.75	0.74
Gas	2.75	2.52	2.76	2.49	2.87	2.77
Average cost of fuel, generated (in cents per net KWH)^(a)	2.14	2.28	2.13	2.20	2.23	2.13
Average cost of purchased power (in cents per net KWH)^(b)	7.11	3.94	6.92	4.37	7.10	5.59


(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

~~For year-to-date 2017,~~In the first quarter 2018, fuel expense was ~~$601~~$326 million compared to ~~$564~~$298 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to ~~increases of 11.0% and 8.4%~~a 10.9% increase in the volume of KWHs generated by coal, ~~and natural gas, respectively,~~ a ~~10.8%~~3.6% increase in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements, a 3.5% increase in the average cost of coal per KWH generated, and a ~~28.1%~~1.3% increase in the average cost of nuclear per KWH generated. These increases were partially offset by a 77.3% increase in the volume of KWHs generated by hydro facilities and a 3.4% decrease in the volume of KWHs generated by ~~hydro~~nuclear facilities. ~~The increase was partially offset by an 8.4% decrease in the average cost of coal per KWH generated.~~

Purchased Power – ~~Affiliates~~Non-Affiliates

In the ~~second~~first quarter ~~2017,~~2018, purchased power expense from ~~affiliates~~non-affiliates was ~~$34~~$64 million compared to ~~$55~~$34 million for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily related to a ~~61.1% decrease in the amount of energy purchased as a result of lower cost Alabama Power-owned generation, partially offset by a 60.3%~~38.3% increase in the average cost of purchased power per KWH and a 34.8% increase in the amount of energy purchased to meet the demand as a result of ~~higher natural gas prices.~~colder weather in the first quarter 2018 compared to the corresponding period in 2017.

~~For year-to-date 2017,~~Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.

Purchased Power – Affiliates

In the first quarter 2018, purchased power expense from affiliates was ~~$62~~$37 million compared to ~~$88~~$28 million for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily related to a ~~56.1% decrease~~16.6% increase in the amount of energy purchased ~~due to an increase in generation as~~and a ~~result of supporting Southern Company system transmission reliability, partially offset by a 60.0%~~14.4% increase in the average cost of purchased power per KWH due to an increase in demand as a result of ~~higher natural gas prices.~~colder weather in the first quarter 2018 compared to the corresponding period in 2017.

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.

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ALABAMA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other ~~Operations and Maintenance Expenses~~Income (Expense), Net

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$20 5.6 $(4) (0.5)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(5)		(50.0)

In the ~~second~~first quarter ~~2017,~~2018, other ~~operations and maintenance expenses were $375~~income (expense), net was $5 million compared to ~~$355~~$10 million for the corresponding period in ~~2016.~~2017. The ~~increase~~decrease was primarily due to ~~increases~~the reclassification of ~~$13 million in vegetation management costs, $7 million in nuclear generation plant improvement costs,~~revenues and ~~$3 million in employee benefit costs. The increase was partially offset by~~expenses associated with unregulated sales of products and services to other revenues and operations and maintenance expense, respectively, as a ~~$4 million decrease in scheduled other power generation outage costs.~~result of the adoption of ASC 606. See Note (A) to the Condensed Financial Statements herein for additional information regarding Alabama Power's adoption of ASC 606.

~~Depreciation and Amortization~~Income Taxes

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$8 4.6 $17 4.9



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(44)		(34.9)

In the ~~second~~first quarter ~~2017, depreciation and amortization was $183~~2018, income taxes were $82 million compared to ~~$175~~$126 million for the corresponding period in 2016. For year-to-date 2017, depreciation and amortization was $364 million compared to $347 million for the corresponding period in 2016. These increases were primarily due to additional plant in service related to distribution, steam generation, and transmission assets. In addition, there was an increase in depreciation rates, effective January 1, 2017, associated with compliance-related steam projects, asset retirement obligation recovery, and other generation assets, partially offset by a2017. The decrease ~~in distribution-related rates. See Note 1 to the financial statements of Alabama Power under "Depreciation and Amortization" in Item 8 of the Form 10-K for additional information.~~

~~Other Income (Expense), Net~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$5 125.0 $7 63.6

In the second quarter 2017, other income (expense), net was $1 million compared to $(4) million for the corresponding period in 2016. For year-to-date 2017, other income (expense), net was $(4) million compared to $(11) million for the corresponding period in 2016. The changes were primarily due to decreases in donations and increases in sales of non-utility property and unregulated lighting services in 2017.

~~Income Taxes~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$11 7.9 $35 14.5

~~In the second quarter 2017, income taxes were $151 million compared to $140 million for the corresponding period in 2016. The increase~~ was primarily due to ~~higher pre-tax earnings.~~

~~For year-to-date 2017, income taxes were $277 million compared to $242 million for~~ the ~~corresponding period~~reduction in ~~2016. The increase was primarily due to higher pre-tax earnings and unrecognized tax benefits related to certain state deductions for~~the federal income ~~taxes.~~tax rate as a result of the Tax Reform Legislation. See Note (H) to the Condensed Financial Statements under "Effective Tax Rate" herein for additional information.

~~Table of Contents~~

~~ALABAMA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power's future earnings potential. The level of Alabama Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power's primary business of providing electric service. These factors include Alabama Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. Future earnings will be ~~driven primarily~~impacted by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce ~~transactions.~~transactions, both of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power's service territory. Demand for electricity is primarily driven by ~~economic growth. The~~the pace of economic growth ~~and electricity demand~~that may be affected by changes in regional and global economic conditions, which may impact future earnings. Current proposals related to potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Alabama Power's financial statements. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Environmental Matters

~~Compliance~~Alabama Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Alabama Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs ~~related~~associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to ~~federal and state~~comply with environmental ~~statutes~~laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be

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recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of Alabama Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Environmental compliance costs are recovered through Rate CNP Compliance. ~~See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate CNP Compliance" in Item 8 of the Form 10-K for additional information.~~ Further, ~~higher~~increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under "Environmental Matters" and "Retail Regulatory Matters – Rate CNP Compliance" in Item 8 of the Form 10-K for additional information.

Environmental ~~Statutes~~Laws and Regulations

~~Water Quality~~Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental ~~Statutes~~Laws and Regulations – ~~Water Quality"~~ Coal Combustion Residuals" of Alabama Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final ~~effluent guidelines~~ rule and the ~~final rule revising the regulatory definition~~outcome of ~~waters of the U.S. for all Clean Water Act (CWA) programs.~~any legal challenges and cannot be determined at this time.

On April ~~25, 2017,~~20, 2018, the Alabama Environmental Management Commission approved a state CCR rule that will be provided to the EPA ~~published~~for a ~~notice announcing it would reconsider~~six-month review period. This state CCR rule is generally consistent with the effluent guidelines rule, which had been finalized in November 2015. On June 6, 2017, the EPA proposed a rule establishing a stay of the compliance deadlines for certain effluent limitations and pretreatment standards under the rule.

On June 27, 2017, the EPA and the U.S. Army Corps of Engineers proposed to rescind the final rule that revised the regulatory definition of waters of the U.S. for all CWA programs. The final rule has been stayed since October 2015 by the U.S. Court of Appeals for the Sixth Circuit.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

federal CCR Rule. The ultimate outcome of ~~these matters~~this matter cannot be determined at this time.

Global Climate Issues

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Alabama Power in Item 7 of the Form 10-K for additional information.

~~On March 28,~~Through 2017, the ~~U.S. President signed~~Southern Company system has achieved an ~~executive order directing agencies~~estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to ~~review actions that potentially burden~~no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, ~~or use~~deployment, and advancement of ~~domestically produced~~relevant energy resources. The executive order specifically directs the EPA to review the Clean Power Plan and final greenhouse gas emission standards for new, modified, and reconstructed electric generating units and, if appropriate, take action to suspend, revise, or rescind those rules.

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

~~FERC Matters~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – "FERC Matters" of Alabama Power in Item 7 of the Form 10-K for additional information regarding the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.

On May 17, 2017, the FERC accepted the traditional electric operating companies' (including Alabama Power's) and Southern Power's compliance filing accepting the terms of the FERC's February 2, 2017 order regarding an amendment by the traditional electric operating companies (including Alabama Power) and Southern Power to their market-based rate tariff. While the FERC's order references the traditional electric operating companies' (including Alabama Power's) and Southern Power's market power proceeding, it remains a separate, ongoing matter.

Retail Regulatory Matters

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orders to address current events impacting Alabama Power. See Notes 1 and 3 to the financial statements of Alabama Power under "Nuclear Outage Accounting Order" and "Retail Regulatory Matters," respectively, in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information regarding Alabama Power's rate mechanisms, accounting orders, and ~~accounting orders. The~~the recovery balance of each regulatory clause for Alabama Power.

On May 1, 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 plans 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 ~~reported~~to achieve an equity ratio of approximately 55% by the end of 2025. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Federal Tax Reform Legislation" of Alabama Power in Item 7 of the Form 10-K for additional information.

Rate RSE

Rate ECR

On May 1, 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 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. The ultimate outcome of this matter cannot be determined at this time.

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to the financial statements of Alabama Power under "Federal Tax Reform Legislation" and "Current and Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY –

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"Credit Rating Risk," Note (B) to the Condensed Financial Statements ~~herein.~~under "Regulatory Matters – Alabama Power," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.

Other Matters

Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, 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.

Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstAlabama Power~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power's financial statements. See Note (B) to the Condensed Financial

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

On March 2, 2018, the Alabama Department of Environmental Management (ADEM) issued proposed administrative orders assessing a penalty of $1.25 million to Alabama Power for unpermitted discharge of fluids and/or pollutants to groundwater at five electric generating plants. The proposed orders also require the submission to the ADEM of a plan with a schedule for implementation of a comprehensive groundwater investigation, including an assessment of corrective measures, a report evaluating any deficiencies at the facilities that may have led to the unpermitted discharges, and quarterly progress reports. Alabama Power is awaiting finalization of the orders. The ultimate outcome of this matter cannot be determined at this time.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power's critical accounting policies and ~~estimates related to Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, and Contingent Obligations.~~estimates.

Recently Issued Accounting Standards

~~In 2014, the FASB issued ASC 606,~~ ~~Revenue from Contracts with Customers~~ (ASC 606), replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principleSee MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Alabama Power in Item 7 of the ~~standard is~~Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to ~~recognize revenue to depict~~ the ~~transfer of goods or services to customers at the amount expected to be collected. The new standard also requires enhanced disclosures~~Condensed Financial Statements herein for information regarding ~~the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers.~~Alabama Power's recently adopted accounting standards.

~~While~~

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Alabama Power ~~expects most~~in Item 7 of ~~its revenue to be included in~~ the ~~scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of~~Form 10-K for additional information. Alabama Power's revenue, including energy provided to customers, is from tariff offerings that provide electricity without a defined contractual term, as well as longer-term contractual commitments, including PPAs. Alabama Power expects that the revenue from contracts with these customers will not result in a significant shift in the timing of revenue recognition for such sales.

Alabama Power's ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements, such as alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Alabama Power's financial statements, if material. In addition, the power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Alabama Power expects CIAC to be out of the scope of ASC 606.

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Alabama Power intends to use the modified retrospective method of adoption effective January 1, 2018. Alabama Power has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized in Alabama Power's financial statements, Alabama Power will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.

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as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Alabama Power is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Alabama Power's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Alabama Power's financial statements.

~~FINANCIAL CONDITION AND LIQUIDITY~~

~~Overview~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power's financial~~ condition remained stable at ~~June 30, 2017.~~March 31, 2018. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

Net cash provided from operating activities totaled ~~$672~~$155 million for the first ~~six~~three months of ~~2017, a decrease~~2018, an increase of ~~$135~~$27 million as compared to the first ~~six~~three months of ~~2016.~~2017. The ~~decrease~~increase in net cash provided from operating activities was primarily due to higher retail revenues associated with colder weather and the ~~receipt~~timing of ~~income tax refunds in 2016 as a result of bonus depreciation.~~the expected reduction to customer billings related to the Tax Reform Legislation. Net cash used for investing activities totaled ~~$759~~$564 million for the first ~~six~~three months of ~~2017~~2018 primarily due to gross property additions related to distribution, environmental, and transmission ~~and steam generation.~~assets. Net cash provided from financing activities totaled ~~$306~~$518 million for the first ~~six~~three months of ~~2017~~2018 primarily due to ~~an issuance of long-term debt and~~ additional capital contributions from Southern Company and net issuances of short-term debt included in notes payable, partially offset by a common stock dividend ~~payments and a redemption of long-term debt.~~payment. Fluctuations in cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017~~2018 include increases of $547 million in long-term debt, primarily due to the issuance of additional senior notes, $367 million in property, plant, and equipment, primarily due to additions to distribution, steam generation, and transmission, $337$488 million in additional paid-in capital due to capital contributions from Southern Company, ~~and $219~~$301 million in ~~cash~~property, plant, and ~~cash equivalents, as well as a decrease of~~equipment primarily due to additions to environmental, distribution, and transmission assets, $245 million in notes payable primarily due to additional short-term borrowings, $200 million in securities due within one ~~year.~~year reclassified from long-term debt, and $109 million in cash and cash equivalents. Other significant changes include a decrease of $187 million in other accounts payable primarily due to the timing of vendor payments.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power's capital requirements ~~for its construction program, including estimated capital expenditures to comply with existing environmental statutes~~ and regulations, scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements.contractual obligations. Approximately ~~$361~~$200 million will be required through ~~June 30, 2018~~March 31, 2019 to fund maturities of long-term debt.

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental ~~Matters – Environmental Statutes and Regulations – General" and " – Global Climate Issues"~~Matters" of Alabama Power in Item 7 of the Form 10-K for additional information on Alabama Power's environmental compliance strategy.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental ~~statutes~~laws and regulations; the outcome of any legal challenges to ~~the~~ environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance program; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Alabama Power plans to obtain the funds to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, ~~short-term debt, term loans,~~ external security issuances, borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Alabama Power in Item 7 of the Form 10-K for additional information.

Alabama Power's current liabilities sometimes exceed current assets because of long-term debt maturities and the periodic use of short-term debt as a funding source, as well as significant seasonal fluctuations in cash needs.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At ~~June 30, 2017,~~March 31, 2018, Alabama Power had approximately ~~$639~~$653 million of cash and cash equivalents. Committed credit arrangements with banks at ~~June 30, 2017~~March 31, 2018 were as follows:


Expires	Expires									Expires Within One Year				Expires									Expires Within One Year
2017		2018		2022		Total		Unused		Term Out		No Term Out
2018														2018	2020		2022		Total		Unused		Term Out		No Term Out
(in millions)
$	3	$	532	$	800	$	1,335	$	1,335	$	—	$	35	35	$	500	$	800	$	1,335	$	1,335	$	—	$	35

See Note 6 to the financial statements of Alabama Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

~~As reflected in the table above, in May 2017, Alabama Power amended its $800 million multi-year credit arrangement, which, among other things, extended the maturity date from 2020 to 2022.~~

Most of these bank credit arrangements, as well as Alabama Power's term loan arrangements, contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Alabama Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Alabama Power defaulted on indebtedness, the payment of which was then accelerated. At ~~June 30, 2017,~~March 31, 2018, Alabama Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.

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

A portion of the unused credit with banks is allocated to provide liquidity support to Alabama Power's pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support was approximately ~~$890~~$854 million as of ~~June 30, 2017.~~March 31, 2018. At ~~June 30, 2017,~~March 31, 2018, Alabama Power had no$120 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.

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~~ALABAMA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Alabama Power also has substantial cash flow from operating activities and access to capital markets, including a commercial paper program, to meet liquidity needs. Alabama Power may meet short-term cash needs through its commercial paper program. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable in the balance sheets.

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

Short-term Debt During the Period^(*)

Average
Amount
Outstanding

Weighted
Average
Interest Rate

Maximum
Amount
Outstanding
(in millions) (in millions)
Commercial paper $ 28
1.1 % $ 200



	Short-term Debt at March 31, 2018				Short-term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)				(in millions)
Commercial paper	$	245	2.3	%	$	37	1.9	%	$	255
Short-term bank loan	3		3.7	%	3		3.7	%	3
Total	$	248	2.4	%	$	40	2.1	%


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017. No short-term debt was outstanding at June 30, 2017.~~March 31, 2018.

Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.

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Credit Rating Risk

At ~~June 30, 2017,~~March 31, 2018, Alabama Power did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2 or below. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, energy price risk management, and transmission.

The maximum potential collateral requirements under these contracts at ~~June 30, 2017~~March 31, 2018 were as follows:


Credit Ratings	Maximum Potential Collateral Requirements		Maximum Potential Collateral Requirements
	(in millions)		(in millions)
At BBB and/or Baa2	$	1	$	1
At BBB- and/or Baa3	$	2	$	1
Below BBB- and/or Baa3	$	326	$	280

Included in these amounts are certain agreements that could require collateral in the event that either Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Alabama Power to access capital markets and would be likely to impact the cost at which it does so.

~~On March 24, 2017, S&P revised its consolidated~~While it is unclear how the credit rating ~~outlook for~~agencies and the FERC may respond to 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~~including Alabama ~~Power) from stable~~Power, may be negatively impacted. The modifications to ~~negative.~~Rate RSE and other commitments approved by the Alabama PSC are expected to help mitigate these potential adverse impacts to certain credit metrics and will help Alabama Power meet its goal of achieving an equity ratio of approximately 55% by the end of 2025. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate RSE" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Alabama Power – Rate RSE" herein for additional information.

Financing Activities

~~In February 2017,~~ Alabama Power ~~repaid at maturity $200 million aggregate principal amount of Series 2007A 5.55% Senior Notes.~~

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Indid not issue or redeem any securities during the three months ended March 2017, Alabama Power issued $550 million aggregate principal amount of Series 2017A 2.45% Senior Notes due March 30, 2022. The proceeds were used to repay Alabama Power's short-term indebtedness and for general corporate purposes, including Alabama Power's continuous construction program.

Subsequent to June 30, 2017, Alabama Power repaid at maturity $36.1 million aggregate principal amount of Series 1993-A, 1993-B, and 1993-C Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Refunding Bonds (Alabama Power Company Project).31, 2018.

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

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	1,904		$	1,907		$	3,593		$	3,624		$	1,798		$	1,689
Wholesale revenues, non-affiliates	40			40			79			82			44			39
Wholesale revenues, affiliates	9			10			17			15			10			8
Other revenues	95			94			191			202			109			96
Total operating revenues	2,048			2,051			3,880			3,923			1,961			1,832
Operating Expenses:
Fuel	445			439			815			815			412			371
Purchased power, non-affiliates	103			92			191			175			121			88
Purchased power, affiliates	138			111			310			250			171			172
Other operations and maintenance	399			439			781			896			408			399
Depreciation and amortization	223			214			444			425			228			221
Taxes other than income taxes	101			100			199			197			108			98
Total operating expenses	1,409			1,395			2,740			2,758			1,448			1,349
Operating Income	639			656			1,140			1,165			513			483
Other Income and (Expense):
Interest expense, net of amounts capitalized	(104		)	(99		)	(205		)	(193		)	(106		)	(101		)
Other income (expense), net	16			8			36			26			38			38
Total other income and (expense)	(88		)	(91		)	(169		)	(167		)	(68		)	(63		)
Earnings Before Income Taxes	551			565			971			998			445			420
Income taxes	199			211			355			371			93			156
Net Income	352			354			616			627			352			264
Dividends on Preferred and Preference Stock	5			5			9			9			—			4
Net Income After Dividends on Preferred and Preference Stock	$	347		$	349		$	607		$	618		$	352		$	260

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(in millions)				(in millions)				(in millions)
Net Income	$	352	$	354	$	616	$	627	$	352	$	264
Other comprehensive income (loss):
Qualifying hedges:
Reclassification adjustment for amounts included in net income, net of tax of $-, $-, $1, and $1, respectively	1		1		2		1
Reclassification adjustment for amounts included in net income, net of tax of $- and $-, respectively									1		1
Total other comprehensive income (loss)	1		1		2		1		1		1
Comprehensive Income	$	353	$	355	$	618	$	628	$	353	$	265

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Net income	$	616		$	627		$	352		$	264
Adjustments to reconcile net income to net cash provided from operating activities --
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	543			530			280			271
Deferred income taxes	159			157			(38		)	71
Allowance for equity funds used during construction	(25		)	(24		)
Deferred expenses	41			39			35			38
Pension, postretirement, and other employee benefits	(45		)	(28		)	(19		)	(21		)
Settlement of asset retirement obligations	(62		)	(52		)	(23		)	(22		)
Other, net	(39		)	36			(7		)	(42		)
Changes in certain current assets and liabilities —
-Receivables	(150		)	(25		)	135			142
-Fossil fuel stock	(32		)	61			24			(38		)
-Prepaid income taxes							84			5
-Other current assets	(22		)	10			9			(16		)
-Accounts payable	(153		)	6			(180		)	(155		)
-Accrued taxes	(194		)	(137		)	(191		)	(235		)
-Accrued compensation	(65		)	(44		)	(85		)	(87		)
-Retail fuel cost over recovery	(84		)	1			—			(66		)
-Other current liabilities	(6		)	16			(3		)	2
Net cash provided from operating activities	482			1,173			373			111
Investing Activities:
Property additions	(1,284		)	(1,058		)	(681		)	(556		)
Nuclear decommissioning trust fund purchases	(271		)	(386		)	(255		)	(161		)
Nuclear decommissioning trust fund sales	266			380			250			155
Cost of removal, net of salvage	(32		)	(34		)	(26		)	(17		)
Change in construction payables, net of joint owner portion	1			(75		)	(47		)	(36		)
Payments pursuant to LTSAs	(56		)	(14		)	(43		)	(22		)
Sale of property	63			—
Asset dispositions							134			63
Other investing activities	(12		)	17			—			8
Net cash used for investing activities	(1,325		)	(1,170		)	(668		)	(566		)
Financing Activities:
Increase in notes payable, net	37			39
Decrease in notes payable, net							—			(391		)
Proceeds —
Capital contributions from parent company	380			239			1,474			345
Senior notes	850			650			—			850
FFB loan	—			300
Short-term borrowings	800			—
Redemptions and repurchases —
Pollution control revenue bonds	(27		)	(4		)	(278		)	—
Senior notes	(450		)	(500		)
Short-term borrowings							(150		)	—
Other long-term debt							(100		)	—
Payment of common stock dividends	(640		)	(653		)	(339		)	(320		)
Other financing activities	(19		)	(20		)	(6		)	(11		)
Net cash provided from financing activities	931			51			601			473
Net Change in Cash and Cash Equivalents	88			54
Cash and Cash Equivalents at Beginning of Period	3			67
Cash and Cash Equivalents at End of Period	$	91		$	121
Net Change in Cash, Cash Equivalents, and Restricted Cash							306			18
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							852			3
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	1,158		$	21
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $11 and $10 capitalized for 2017 and 2016, respectively)	$	186		$	174
Cash paid (received) during the period for —
Interest (net of $6 and $5 capitalized for 2018 and 2017, respectively)							$	115		$	88
Income taxes, net	213			78			—			(5		)
Noncash transactions — Accrued property additions at end of period	348			288			525			320

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Assets:
Cash and cash equivalents	$	91		$	3		$	1,158		$	852
Receivables —
Customer accounts receivable	565			523			471			544
Unbilled revenues	251			224			189			255
Under recovered fuel clause revenues							156			165
Joint owner accounts receivable	199			57			226			262
Affiliated							24			24
Other accounts and notes receivable	62			81			77			76
Affiliated	22			18
Accumulated provision for uncollectible accounts	(3		)	(3		)	(2		)	(3		)
Fossil fuel stock	330			298			290			314
Materials and supplies	477			479			499			504
Prepaid expenses	55			105			117			216
Other regulatory assets, current	193			193			198			205
Other current assets	22			38			39			14
Total current assets	2,264			2,016			3,442			3,428
Property, Plant, and Equipment:
In service	34,410			33,841			35,177			34,861
Less: Accumulated provision for depreciation	11,502			11,317			11,818			11,704
Plant in service, net of depreciation	22,908			22,524			23,359			23,157
Nuclear fuel, at amortized cost	559			569			550			544
Construction work in progress	5,422			4,939			4,800			4,613
Total property, plant, and equipment	28,889			28,032			28,709			28,314
Other Property and Investments:
Equity investments in unconsolidated subsidiaries	56			60			52			53
Nuclear decommissioning trusts, at fair value	874			814			930			929
Miscellaneous property and investments	51			46			59			59
Total other property and investments	981			920			1,041			1,041
Deferred Charges and Other Assets:
Deferred charges related to income taxes	675			676			517			516
Other regulatory assets, deferred	2,790			2,774			2,940			2,932
Other deferred charges and assets	589			417			550			548
Total deferred charges and other assets	4,054			3,867			4,007			3,996
Total Assets	$	36,188		$	34,835		$	37,199		$	36,779

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholder's Equity	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Liabilities:
Securities due within one year	$	261		$	460		$	757		$	857
Notes payable	1,228			391			—			150
Accounts payable —
Affiliated	367			438			349			493
Other	657			589			742			834
Customer deposits	269			265			273			270
Accrued taxes	212			407			129			344
Accrued interest	115			106			110			123
Accrued compensation	141			224			110			219
Asset retirement obligations, current	251			299			213			270
Other regulatory liabilities, current							232			191
Other current liabilities	185			297			215			198
Total current liabilities	3,686			3,476			3,130			3,949
Long-term Debt	10,793			10,225			10,797			11,073
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	6,163			6,000			3,140			3,175
Deferred credits related to income taxes	118			121			3,219			3,248
Accumulated deferred ITCs	251			256			269			248
Employee benefit obligations	652			703			651			659
Asset retirement obligations, deferred	2,340			2,233			2,425			2,368
Other deferred credits and liabilities	206			199			148			128
Total deferred credits and other liabilities	9,730			9,512			9,852			9,826
Total Liabilities	24,209			23,213			23,779			24,848
Preferred Stock	45			45
Preference Stock	221			221
Common Stockholder's Equity:
Common stock, without par value —
Authorized — 20,000,000 shares
Outstanding — 9,261,500 shares	398			398			398			398
Paid-in capital	7,274			6,885			8,805			7,328
Retained earnings	4,052			4,086			4,228			4,215
Accumulated other comprehensive loss	(11		)	(13		)	(11		)	(10		)
Total common stockholder's equity	11,713			11,356			13,420			11,931
Total Liabilities and Stockholder's Equity	$	36,188		$	34,835		$	37,199		$	36,779

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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Table of Contents

GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

Georgia Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located within the State of Georgia and to wholesale customers in the Southeast.

Many factors affect the opportunities, challenges, and risks of Georgia Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, reliability, fuel, capital expenditures, and restoration following major storms. Georgia Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms andappropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future.

On ~~March 29, 2017,~~April 3, 2018, the ~~EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. To provide for~~Georgia PSC approved a ~~continuation of work at Plant Vogtle Units 3 and 4, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an interim assessment~~settlement agreement ~~with the EPC Contractor (Interim Assessment Agreement), which the bankruptcy court approved on March 30, 2017. On June 9, 2017,~~between Georgia Power and the ~~other Vogtle Owners and Toshiba entered into a settlement agreement~~staff of the Georgia PSC regarding the Toshiba Guarantee (Guarantee Settlement Agreement). Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the amount of its obligation under the Toshiba Guarantee is $3.68 billion (Guarantee Obligations), of which Georgia Power's proportionate share is approximately $1.7 billion, and that the Guarantee Obligations exist regardless of whether Plant Vogtle Units 3 and 4 are completed. Additionally, on June 9, 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into a services agreement (Services Agreement), which was amended and restated on July 20, 2017, for the EPC Contractor to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear. On July 27, 2017, the Services Agreement, and the EPC Contractor's rejection of the Vogtle 3 and 4 Agreement, became effective upon approval by the DOE and the Interim Assessment Agreement expired pursuant to its terms. The Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.

~~Georgia Power and the other Vogtle Owners are continuing to conduct comprehensive schedule and cost-to-complete assessments, as well as cancellation cost assessments, to determine the~~retail rate impact of the ~~EPC Contractor's bankruptcy filing on the construction cost~~Tax Reform Legislation (Tax Reform Settlement Agreement). The Tax Reform Settlement Agreement provides for $330 million in refunds to customers for 2018 and ~~schedule for Plant Vogtle Units 3 and 4. Georgia Power will continue working with the Georgia PSC~~2019 and the ~~other Vogtle Owners~~deferral of certain revenues and tax benefits to ~~determine future actions related to Plant Vogtle Units 3 and 4, including, but not limited to, the status of construction and~~be addressed in Georgia Power's next base rate ~~recovery, and currently expects to include its recommendation in its seventeenth Vogtle Construction Monitoring (VCM) report~~case, which is expected to be filed ~~with the~~by July 1, 2019. The Georgia PSC ~~in late August 2017.~~

~~An inability or other failure by Toshiba~~also approved an increase to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4 and, therefore, on Georgia Power's ~~financial statements. The ultimate outcome of these matters also is dependent on~~retail equity ratio to address the ~~completion~~negative cash flow and credit metric impacts of the ~~assessments described above, as well as the related regulatory treatment, and cannot be determined at this time.~~Tax Reform Legislation. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – ~~Nuclear Construction~~"Rate Plans" herein for additional information on ~~Plant Vogtle Units 3 and 4, including Georgia Power's preliminary cost-to-complete and cancellation cost assessments for Plant Vogtle Units 3 and 4.~~the Tax Reform Settlement Agreement.

~~Table of Contents~~

~~GEORGIA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Georgia Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, the execution of major construction projects, and net ~~income~~income.

Plant Vogtle Units 3 and 4 Status

In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Interim Assessment Agreement with the EPC Contractor to allow construction to continue. The Interim Assessment Agreement expired in July 2017 when the Vogtle Services Agreement became effective. In August 2017, following completion of comprehensive cost to complete and cancellation cost assessments, Georgia Power filed its seventeenth VCM report with the Georgia PSC, 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. In December 2017, the Georgia PSC approved Georgia Power's recommendation to continue construction.

Georgia Power expects Plant Vogtle Units 3 and 4 to be placed in service by November 2021 and November 2022, respectively. Georgia Power's capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after ~~dividends~~reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory liability in 2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was $3.6 billion at March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the 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 $1.6 billion had been incurred through March 31, 2018.

Table of Contents

GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction" herein for additional information on ~~preferred~~Plant Vogtle Units 3 and ~~preference stock.~~4.

RESULTS OF OPERATIONS

Net Income

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(2) (0.6) $(11) (1.8)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$92		35.4

Georgia Power's net income after dividends on preferred and preference stock for the ~~second~~first quarter ~~2017~~2018 was ~~$347~~$352 million compared to ~~$349~~$260 million for the corresponding period in ~~2016. For year-to-date 2017, net income after dividends on preferred and preference stock~~2017. The increase was ~~$607 million~~primarily due to an increase in retail revenues associated with colder weather in the first quarter 2018 compared to ~~$618 million for~~ the corresponding period in ~~2016. The decreases were primarily~~2017 and a decrease in income tax expense due to ~~milder weather~~a lower federal income tax rate as ~~compared to~~a result of the ~~corresponding periods in 2016,~~Tax Reform Legislation. The increase was partially offset by ~~lower non-fuel operations and maintenance expenses.~~revenues deferred as a regulatory liability for future customer refunds related to the Tax Reform Legislation.

Retail Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(3) (0.2) $(31) (0.9)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$109		6.5

In the ~~second~~first quarter ~~2017,~~2018, retail revenues were ~~$1.90~~$1.80 billion compared to ~~$1.91~~$1.69 billion for the corresponding period in ~~2016. For year-to-date 2017, retail revenues were $3.59 billion compared to $3.62 billion for the corresponding period in 2016.~~2017.

Details of the changes in retail revenues were as follows:


	Second Quarter 2017					Year-to-Date 2017					First Quarter 2018
	(in millions)			(% change)		(in millions)			(% change)		(in millions)			(% change)
Retail – prior year	$	1,907				$	3,624				$	1,689
Estimated change resulting from –
Rates and pricing	(7		)	(0.4	)	19			0.5		(50		)	(3.0	)
Sales growth (decline)	1			0.1		(11		)	(0.3	)
Sales growth											22			1.3
Weather	(38		)	(2.0	)	(110		)	(3.1	)	65			3.9
Fuel cost recovery	41			2.1		71			2.0		72			4.3
Retail – current year	$	1,904		(0.2	)%	$	3,593		(0.9	)%	$	1,798		6.5	%

Revenues associated with changes in rates and pricing decreased in the ~~second~~first quarter ~~and increased year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016. An increase~~2017 primarily due to revenues deferred as a regulatory liability for future customer refunds related to the Tax Reform Legislation, the rate pricing effect of increased customer usage, and a decrease in revenues related to the recovery of Plant Vogtle Units 3 and 4 construction financing costs under the NCCR tariff, ~~was more than offset~~also primarily related to the reduction in the ~~second quarter 2017~~federal income tax rate under the Tax Reform Legislation. The decrease was partially offset by ~~the rate~~higher contributions from variable demand-driven pricing ~~effect of decreased customer usage and lower contributions~~ from commercial and industrial ~~customers under a rate plan~~customers. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Rate Plans" herein for ~~variable demand-driven pricing. See~~additional information on regulatory actions related to the Tax Reform Legislation. Also, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear ~~Constructions"~~Construction" of Georgia Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Nuclear Construction – Regulatory Matters" herein for additional information related to the NCCR tariff.

Revenues attributable to changes in sales were essentially flat in the second quarter and decreased year-to-date 2017 when compared to the corresponding periods in 2016. Weather-adjusted residential KWH sales increased 0.3%, weather-adjusted commercial KWH sales increased 0.4%, and weather-adjusted industrial KWH sales decreased

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GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~1.3%~~Revenues attributable to changes in sales increased in the ~~second~~first quarter ~~2017~~2018 when compared to the corresponding period in ~~2016. For year-to-date 2017, weather-adjusted~~2017. Weather-adjusted residential and commercial KWH sales increased ~~0.8%~~2.1% and 2.4%, ~~weather-adjusted commercial KWH sales decreased 1.0%, and weather-adjusted~~respectively, for the first quarter 2018 largely due to customer growth. Weather-adjusted industrial KWH sales decreased 2.2% when compared to the corresponding period in 2016. An increase of approximately 29,000 residential customers since June 30, 2016 contributed to the increase in weather-adjusted residential KWH sales. A decline in average customer usage resulting from an increase in energy saving initiatives and electronic commerce transactions contributed to the decrease in weather-adjusted commercial KWH sales, partially offset by an increase of approximately 2,000 commercial customers since June 30, 2016. Decreased demandincreased 0.9% in the ~~chemicals, paper, and transportation sectors was the main contributor~~first quarter 2018 primarily due to ~~the decrease in weather-adjusted industrial KWH sales, partially offset by~~ increased demand in the ~~non-manufacturing~~utilities, stone, clay, and ~~rubber sectors.~~glass, and textiles sectors, partially offset by decreased demand in the paper sector. Despite a more stable dollar and improving global economy, the industrial sector remains constrained by economic policy uncertainty.

Fuel revenues and costs are allocated between retail and wholesale jurisdictions. ~~Retail~~In the first quarter 2018, retail fuel cost recovery revenues increased ~~$41~~$72 million ~~and $71 million in the second quarter and year-to-date 2017, respectively,~~ when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to ~~higher natural gas prices, partially offset by lower~~increased energy sales driven by colder weather, resulting ~~from milder weather as compared to the corresponding periods~~ in ~~2016.~~increased customer demand, and higher purchased power costs. Electric rates include provisions to periodically adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses and do not affect net income. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.

Other Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$1 1.1 $(11) (5.4)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$13		13.5

~~For year-to-date 2017,~~In the first quarter 2018, other revenues were ~~$191~~$109 million compared to ~~$202~~$96 million for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~a $14~~$15 million adjustment in 2016 for customer temporary facilities services revenues and an $8 million decrease in open access transmission tariff revenues, partially offset by a $7 million increase in outdoor lighting salesof revenues primarily ~~attributable~~from unregulated sales of products and services that were reclassified as other revenues as a result of the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606). In prior periods, these revenues were included in other income (expense), net. See Note (A) to ~~LED conversions and a $3 million increase in solar application fee revenue.~~the Condensed Financial Statements herein for additional information regarding Georgia Power's adoption of ASC 606.

Fuel and Purchased Power Expenses


	Second Quarter 2017 vs. Second Quarter 2016			Year-to-Date 2017 vs. Year-to-Date 2016			First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)	(change in millions)		(% change)	(change in millions)			(% change)
Fuel	$	6	1.4	$	—	—	$	41		11.1
Purchased power – non-affiliates	11		12.0	16		9.1	33			37.5
Purchased power – affiliates	27		24.3	60		24.0	(1		)	(0.6	)
Total fuel and purchased power expenses	$	44		$	76		$	73

In the ~~second~~first quarter ~~2017,~~2018, total fuel and purchased power expenses were ~~$686~~$704 million compared to ~~$642~~$631 million in the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~$45~~$55 million increase inrelated to the average cost of ~~fuel and~~ purchased power ~~primarily related to higher natural gas prices, slightly offset by~~and a ~~decrease~~net increase of $18 million related to the volume of KWHs generated and purchased due to ~~milder~~colder weather resulting in ~~lower customer demand.~~

For year-to-date 2017, total fuel and purchased power expenses were $1.32 billion compared to $1.24 billion in the corresponding period in 2016. The increase was primarily due to an $89 million increase in the average cost of fuel and purchased power primarily related to higher ~~natural gas prices, partially offset by a net decrease of $13 million~~

~~Table of Contents~~

~~GEORGIA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~related to the volume of KWHs generated and purchased due to milder weather, resulting in lower~~ customer demand.

Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues through Georgia Power's fuel cost recovery mechanism. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information.

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GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
Total generation (in billions of KWHs)	16	17	30	33	16	14
Total purchased power (in billions of KWHs)	6	6	13	12	6	7
Sources of generation (percent) —
Gas					44	45
Coal	36	36	32	33	29	27
Nuclear	25	24	25	24	24	26
Gas	37	38	41	40
Hydro	2	2	2	3	3	2
Cost of fuel, generated (in cents per net KWH) —
Gas					2.72	2.77
Coal	3.20	3.37	3.23	3.45	3.36	3.26
Nuclear	0.84	0.84	0.84	0.85	0.82	0.85
Gas	2.75	2.18	2.76	2.10
Average cost of fuel, generated (in cents per net KWH)	2.43	2.29	2.41	2.26	2.43	2.39
Average cost of purchased power (in cents per net KWH)^(*)	4.76	4.45	4.61	4.38	5.38	4.47


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

Fuel

In the ~~second~~first quarter ~~2017,~~2018, fuel expense was ~~$445~~$412 million compared to ~~$439~~$371 million in the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~26.2%~~15.1% increase ~~in the average cost of natural gas per KWH generated, partially offset by a 6.1% decrease~~ in the volume of KWHs generated ~~by coal and natural gas. For year-to-date 2017, fuel expense remained flat compared~~largely due to ~~the corresponding period~~colder weather resulting in ~~2016 primarily resulting from a 31.4% increase in the average cost of natural gas per KWH generated, offset by a 9.5% decrease in the volume of KWHs generated by coal and natural gas.~~higher customer demand.

Purchased Power – Non-Affiliates

In the ~~second~~first quarter ~~2017,~~2018, purchased power expense from non-affiliates was ~~$103~~$121 million compared to ~~$92~~$88 million in the corresponding period in ~~2016. For year-to-date 2017, purchased power expense from non-affiliates~~2017. The increase was ~~$191 million compared to $175 million in the corresponding period in 2016. The increases were~~ primarily due to ~~increases~~a 24.6% increase in the volume of KWHs purchased ~~of 13.4%~~primarily due to colder weather, resulting in higher customer demand, and ~~11.6%~~a 15.8% increase in the ~~second quarter and year-to-date 2017, respectively,~~average cost per KWH purchased primarily due to ~~unplanned outages at Georgia Power-owned generating units.~~higher natural gas prices.

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

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~~GEORGIA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Purchased Power – Affiliates

In the ~~second~~first quarter ~~2017,~~2018, purchased power expense from affiliates was ~~$138~~$171 million compared to ~~$111~~$172 million in the corresponding period in ~~2016.~~2017. The ~~increase~~decrease was primarily ~~the result of an 11.1% increase in the average cost per KWH purchased primarily resulting from higher natural gas prices and~~due to a ~~5.9% increase~~20.8% decrease in the volume of KWHs purchased due to ~~unplanned outages at Georgia Power-owned generating units and to support~~lower availability driven by colder weather, resulting in higher customer demand, within the Southern Company system, ~~transmission reliability.~~

~~For year-to-date 2017, purchased power expense from affiliates was $310 million compared to $250 million in the corresponding period in 2016. The increase was primarily the result of~~partially offset by a ~~10.1% increase in the volume of KWHs purchased due to unplanned outages at Georgia Power-owned generating units and to support Southern Company system transmission reliability and an 8.8%~~14.0% increase in the average cost per KWH purchased primarily resulting from higher natural gas prices.

Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by the FERC.

~~Other Operations and Maintenance Expenses~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(40) (9.1) $(115) (12.8)

In the second quarter 2017, other operations and maintenance expenses were $399 million compared to $439 million in the corresponding period in 2016. The decrease was primarily due to cost containment activities implemented in the third quarter 2016 that contributed to decreases of $14 million in generation maintenance costs and $9 million in transmission and distribution overhead line maintenance. Other factors include decreases of $9 million in customer accounts, service, and sales costs, $5 million in transmission station expenses, and $5 million in billing adjustments with integrated transmission system owners, partially offset by a $7 million increase in scheduled generation outage costs.

For year-to-date 2017, other operations and maintenance expenses were $781 million compared to $896 million in the corresponding period in 2016. The decrease was primarily due to cost containment activities implemented in the third quarter 2016 that contributed to decreases of $28 million in generation maintenance costs, $18 million in transmission and distribution maintenance costs, and $13 million in employee benefit costs. Other factors include a $19 million increase in gains from sales of integrated transmission system assets and a $14 million decrease in customer assistance expenses primarily in demand-side management costs related to the timing of new programs.

~~Depreciation and Amortization~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$9 4.2 $19 4.5

In the second quarter 2017, depreciation and amortization was $223 million compared to $214 million in the corresponding period in 2016. The increase was primarily due to a $7 million increase related to additional plant in service and a $4 million decrease in amortization of regulatory liabilities related to other cost of removal obligations that expired in December 2016.

For year-to-date 2017, depreciation and amortization was $444 million compared to $425 million in the corresponding period in 2016. The increase was primarily due to a $17 million increase related to additional plant in service and a $7 million decrease in amortization of regulatory liabilities related to other cost of removal obligations

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~~that expired in December 2016, partially offset by a $5 million decrease in depreciation related to generating unit retirements in 2016.~~

~~Interest Expense, Net of Amounts Capitalized~~Other Operations and Maintenance Expenses

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$5 5.1 $12 6.2



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$9		2.3

In the ~~second~~first quarter ~~2017, interest expense, net of amounts capitalized was $104~~2018, other operations and maintenance expenses were $408 million compared to ~~$99~~$399 million in the corresponding period in ~~2016. For year-to-date 2017, interest expense, net~~2017. The increase was primarily due to a $19 million decrease in gains from sales of ~~amounts capitalized was $205~~integrated transmission system assets and a $6 million increase in demand-side management costs, partially offset by decreases of $15 million in certain compensation and benefit costs, $6 million in scheduled generation outage costs, and $5 million in customer accounts and sales costs. Also contributing to the increase were $14 million of expenses from unregulated sales of products and services that were reclassified as other operations and maintenance expenses as a result of the adoption of ASC 606. In prior periods, these expenses were included in other income (expense), net. See Note (A) to the Condensed Financial Statements herein for additional information regarding Georgia Power's adoption of ASC 606.

Taxes Other Than Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$10		10.2

In the first quarter 2018, taxes other than income taxes were $108 million compared to ~~$193~~$98 million in the corresponding period in ~~2016.~~2017. The ~~increases were~~increase was primarily due to ~~senior notes issuances~~increases of $6 million in municipal franchise fees largely related to higher retail revenues and ~~additional long-term borrowings from~~$4 million in property taxes as a result of an increase in the ~~FFB.~~assessed value of property.

~~See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" herein for additional information on borrowings from the FFB.~~

~~Other~~ Income ~~(Expense), Net~~Taxes

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$8 100.0 $10 38.5



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(63)		(40.4)

In the ~~second~~first quarter ~~2017, other~~2018, income ~~(expense), net was $16~~taxes were $93 million compared to $8$156 million in the corresponding period in ~~2016. For year-to-date 2017, other income (expense), net~~2017. The decrease was ~~$36 million compared to $26 million in the corresponding period in 2016. The increases were~~ primarily due to ~~increases in gains on purchases~~a lower federal income tax rate as a result of ~~state tax credits.~~

~~Income Taxes~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(12) (5.7) $(16) (4.3)

In the ~~second quarter 2017, income taxes were $199 million compared~~Tax Reform Legislation. See Note (H) to ~~$211 million in~~ the corresponding period in 2016. For year-to-date 2017, income taxes were $355 million compared to $371 million in the corresponding period in 2016. The decreases were primarily due to increased state ITCs and lower pre-tax earnings.Condensed Financial Statements under "Effective Tax Rate" herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Georgia Power's future earnings potential. The level of Georgia Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power's business of providing electric service. These factors include Georgia Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. ~~Completing the cost assessments and determining future actions related to~~ Plant Vogtle Units 3 and 4 construction and rate recovery are also major factors. Future earnings will be driven primarily by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies, increasing volumes of electronic commerce transactions, and higher multi-family home ~~construction.~~construction, all of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia Power's service territory. Demand for electricity is primarily

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driven by ~~economic growth. The~~the pace of economic growth ~~and electricity demand~~that may be affected by changes in regional and global economic conditions, which may impact future earnings.

Current proposals related to potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals, including any potential changes to the availability of nuclear PTCs, is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Georgia Power's financial statements.

For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form ~~10-K and RISK FACTORS in Item 1A herein.~~10-K.

Environmental Matters

~~Compliance~~Georgia Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Georgia Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs ~~related~~associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to ~~federal and state~~comply with environmental ~~statutes~~laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of Georgia Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Georgia Power's Environmental Compliance Cost Recovery (ECCR) tariff allows for the recovery of capital and operations and maintenance costs related to environmental controls mandated by state and federal regulations. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, ~~higher~~increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

Environmental ~~Statutes~~Laws and Regulations

~~Air Quality~~Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental ~~Statutes~~Laws and Regulations – ~~Air Quality"~~ Coal Combustion Residuals" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's ~~eight-hour ozone National Ambient Air Quality Standard (NAAQS).~~

~~Water Quality~~Global Climate Issues

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – ~~Environmental Statutes and Regulations~~ – ~~Water Quality"~~Global Climate Issues" of Georgia Power in Item 7 of the Form 10-K for additional ~~information regarding the final effluent guidelines rule and the final rule revising the regulatory definition of waters of the U.S. for all Clean Water Act (CWA) programs.~~

On April 25, 2017, the EPA published a notice announcing it would reconsider the effluent guidelines rule, which had been finalized in November 2015. On June 6, 2017, the EPA proposed a rule establishing a stay of the compliance deadlines for certain effluent limitations and pretreatment standards under the rule.

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Through 2017, the Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, complete construction of Plant Vogtle Units 3 and 4, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the development, deployment, and advancement of relevant energy technologies. The ultimate outcome of ~~these matters~~this matter cannot be determined at this time.

~~Global Climate Issues~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Environmental Matters~~ – ~~Global Climate Issues" of Georgia Power in Item 7 of the Form 10-K for additional information.~~

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

~~FERC Matters~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – "FERC Matters" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.

On May 17, 2017, the FERC accepted the traditional electric operating companies' (including Georgia Power's) and Southern Power's compliance filing accepting the terms of the FERC's February 2, 2017 order regarding an amendment by the traditional electric operating companies (including Georgia Power) and Southern Power to their market-based rate tariff. While the FERC's order references the traditional electric operating companies' (including Georgia Power's) and Southern Power's market power proceeding, it remains a separate, ongoing matter.

Retail Regulatory Matters

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, ECCR tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to ~~the~~certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for additional information regarding fuel cost recovery.

~~Renewables~~Rate Plans

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – ~~Integrated Resource Plan" of Georgia Power in Item 7 of the Form 10-K for additional information regarding renewable energy projects.~~

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

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~~GEORGIA POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Integrated Resource Plan~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Integrated Resource Plan"~~Rate Plans" of Georgia Power in Item 7 of the Form 10-K for additional information regarding Georgia Power's ~~triennial Integrated Resource Plan.~~2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.

On ~~March 7, 2017,~~April 3, 2018, the Georgia PSC approved the Tax Reform Settlement Agreement. Pursuant to the Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's ~~decision~~next base rate case, which is scheduled to ~~suspend work at~~be filed by July 1, 2019. If there is not a ~~future generation site~~base rate case in ~~Stewart County,~~2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia ~~due to changing economics, including load forecasts~~Power's next base rate case.

To address the negative cash flow and ~~lower fuel costs. The timing~~credit metric impacts of ~~recovery for costs incurred of approximately $50 million will be determined by~~the Tax Reform Legislation, the Georgia PSC also approved an increase in ~~a future~~Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. ~~The ultimate outcome~~Benefits from reduced federal income tax rates in excess of ~~this matter cannot~~the amounts refunded to customers will be ~~determined at this time.~~retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.

Nuclear Construction

See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, VCM reports, and the NCCR ~~tariff, and the Contractor Settlement Agreement.~~

~~Vogtle 3 and 4 Agreement and EPC Contractor Bankruptcy~~

In 2008, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Vogtle 3 and 4 Agreement, pursuant to which the EPC Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4. Under the terms of the Vogtle 3 and 4 Agreement, the Vogtle Owners agreed to pay a purchase price subject to certain price escalations and adjustments, including fixed escalation amounts and index-based adjustments, as well as adjustments for change orders, and performance bonuses for early completion and unit performance. Georgia Power's proportionate share of Plant Vogtle Units 3 and 4 is 45.7%.

The Vogtle 3 and 4 Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million (approximately $420 million based on Georgia Power's ownership interest). Under the Toshiba Guarantee, Toshiba guaranteed certain payment obligations of the EPC Contractor, including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Vogtle Owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under the Vogtle 3 and 4 Agreement. The Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020 and require 60 days' written notice to Georgia Power in the event the Westinghouse Letters of Credit will not be renewed.

On March 29, 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. To provide for a continuation of work at Plant Vogtle Units 3 and 4, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Interim Assessment Agreement, which the bankruptcy court approved on March 30, 2017.

The Interim Assessment Agreement provided, among other items, that during the term of the Interim Assessment Agreement (i) Georgia Power was obligated to pay, on behalf of the Vogtle Owners, all costs accrued by the EPC Contractor for subcontractors and vendors for services performed or goods provided, with these amounts paid to the EPC Contractor, except that amounts accrued for Fluor Corporation (Fluor) were paid directly to Fluor; (ii) the EPC Contractor provided certain engineering, procurement, and management services for Plant Vogtle Units 3 and 4, to the same extent as contemplated by the Vogtle 3 and 4 Agreement, and Georgia Power, on behalf of the Vogtle Owners, made payments of $5.4 million per week for these services; (iii) Georgia Power had the right to make payments, on behalf of the Vogtle Owners, directly to subcontractors and vendors who had accounts past due with the EPC Contractor; (iv) the EPC Contractor used commercially reasonable efforts to provide information reasonably requested by Georgia Power as was necessary to continue construction and investigation of thetariff.

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~~completion status of Plant Vogtle Units 3 and 4; (v) the EPC Contractor rejected or accepted the~~ Vogtle 3 and 4 Agreement by the termination of the Interim Assessment Agreement; and (vi) Georgia Power did not exercise any remedies against Toshiba under the Toshiba Guarantee. Under the Interim Assessment Agreement, all parties expressly reserved all rights and remedies under the Vogtle 3 and 4 Agreement and all related security and collateral under applicable law.Contracts

~~The Interim Assessment Agreement, as amended, expired on~~Effective in July 27, 2017. Georgia Power's aggregate liability for the Vogtle Owners under the Interim Assessment Agreement totaled approximately $650 million, of which $552 million had been paid or accrued as of June 30, 2017. Georgia Power's proportionate share of this aggregate liability totaled approximately $297 million.

~~Additionally, on June 9,~~ 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into the Vogtle Services Agreement, ~~which was amended~~whereby Westinghouse will provide facility design and ~~restated~~engineering services, procurement and technical support, and staff augmentation on ~~July 20, 2017, for the EPC Contractor to transition construction management of Plant~~a time and materials cost basis. The Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear. On July 20, 2017, the bankruptcy court approved the EPC Contractor's motion seeking authorization to (i) enter into the Services Agreement, (ii) assume and assign to the Vogtle Owners certain project-related contracts, (iii) join the Vogtle Owners as counterparties to certain assumed project-related contracts, and (iv) reject the Vogtle 3 and 4 Agreement.

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~~The Services Agreement, and the EPC Contractor's rejection of the Vogtle 3 and 4 Agreement, became effective upon approval by the DOE on July 27, 2017. The~~ Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 isare 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, entered into a construction completion agreement with Bechtel, whereby Bechtel will serve as the primary contractor for the remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The ~~ultimate outcome~~Bechtel Agreement is 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 ~~these matters cannot~~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 ~~determined~~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 ~~this time.~~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. Pursuant to the Loan Guarantee Agreement between Georgia Power and the DOE, Georgia Power is required to obtain the DOE's approval of the Bechtel Agreement prior to obtaining any further advances under the Loan Guarantee Agreement.

In November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, among other conditions, additional Vogtle Owner approval requirements. Pursuant to the Vogtle Joint Ownership Agreements, 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 (i) the bankruptcy of Toshiba; (ii) termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power 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 because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. 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. 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.

Regulatory Matters

On ~~December~~March 20, ~~2016,~~2018, the Georgia PSC ~~voted~~approved a decrease to ~~approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving the following prudence matters: (i) none of the $3.3 billion~~ of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report will be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement is reasonable and prudent and none of the amounts paid or to be paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) financing costs on verified and approved capital costs will be deemed prudent provided they are incurred prior to December 31, 2019 and December 31, 2020 for Plant Vogtle Units 3 and 4, respectively; and (iv) (a) the in-service capital cost forecast will be adjusted to $5.680 billion (Revised Forecast), which includes a contingency of $240 million above Georgia Power's then current forecast of $5.440 billion, (b) capital costs incurred up to the Revised Forecast will be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, and (c) Georgia Power would have the burden to show that any capital costs above the Revised Forecast are reasonable and prudent. Under the terms of the Vogtle Cost Settlement Agreement, the certified in-service capital cost for purposes of calculating the NCCR tariff will remain at $4.418 billion. Construction capital costs above $4.418 billion will accrue AFUDC through the date each unit is placed in service. The ROE used to calculate the NCCR tariff was reduced from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00%of approximately $50 million, effective ~~January~~April 1, 2016. For purposes of the AFUDC calculation, the ROE on costs between $4.418 billion and $5.440 billion will also be 10.00% and the ROE on any amounts above $5.440 billion would be Georgia Power's average cost of long-term debt. If the Georgia PSC adjusts Georgia Power's ROE rate setting point in a rate case prior to Plant Vogtle Units 3 and 4 being placed into retail rate base, then the ROE for purposes of calculating both the NCCR tariff and AFUDC will likewise be 95 basis points lower than the revised ROE rate setting point. If Plant Vogtle Units 3 and 4 are not placed in service by December 31, 2020, then (i) the ROE for purposes of calculating the NCCR tariff will be reduced an additional 300 basis points, or $8 million per month, and may, at the Georgia PSC's discretion, be accrued to be used for the benefit of customers, until such time as the units are placed in service and (ii) the ROE used to calculate AFUDC will be Georgia Power's average cost of long-term debt.

Under the terms of the Vogtle Cost Settlement Agreement, the Georgia PSC will determine, for retail ratemaking purposes, the process of transitioning Plant Vogtle Units 3 and 4 from a construction project to an operating plant no later than Georgia Power's base rate case required to be filed by July 1, 2019.

The Georgia PSC has approved fifteen VCM reports covering the periods through June 30, 2016, including construction capital costs incurred, which through that date totaled $3.7 billion. Georgia Power filed its sixteenth VCM report, covering the period from July 1 through December 31, 2016, requesting approval of $222 million of construction capital costs incurred during that period, with the Georgia PSC on February 27, 2017.

~~The ultimate outcome of these matters cannot be determined at this time.~~2018.

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~~Revised Cost~~Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and ~~Schedule~~

August 31 each year. In 2013, in connection with the eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the ~~other Vogtle Owners are continuing to conduct comprehensive schedule and cost-to-complete assessments, as well as cancellation cost assessments, to determine the impact~~staff of the ~~EPC Contractor's bankruptcy filing on~~Georgia PSC to waive the ~~construction cost and schedule for Plant Vogtle Units 3 and 4. Georgia Power's preliminary assessment results indicate that its proportionate share of~~requirement to amend the ~~remaining estimated cost to complete~~ Plant Vogtle Units 3 and 4 ~~ranges as follows:~~

~~Georgia Power's estimates for cost to complete and schedule are based on preliminary analysis and remain subject to further refinement~~certificate in accordance with the 2009 certification order until the completion of ~~labor productivity and consumable and commodity quantities and costs.~~

~~Georgia Power's estimated financing costs during the construction period total approximately $3.1 billion to $3.5 billion, of which approximately $1.4 billion had been incurred through June 30, 2017.~~

Georgia Power's preliminary cancellation cost estimate results indicate that its proportionate share of the estimated cancellation costs is approximately $400 million. As a result, as of June 30, 2017, total estimated costs subject to evaluation by Georgia Power and the Georgia PSC in the event of a cancellation decision are as follows:

Preliminary Cancellation Cost Estimate
(in billions)
CWIP as of June 30, 2017 $ 4.5
Financing costs collected, net of tax 1.4
Cancellation costs^(*)
0.4
Total $ 6.3


~~(*)~~	The estimate for cancellation costs includes, but is not limited to, costs to terminate contracts for construction and other services, as well as costs to secure the Plant Vogtle Units 3 and 4 construction site.

~~The Guarantee Obligations continue to exist in the event of cancellation. In addition, under Georgia law, prudently incurred costs related to certificated projects cancelled~~Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC ~~are allowed recovery, including carrying costs, in future retail rates.~~and Georgia ~~Power will continue working with~~Power.

In 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving certain prudency matters in connection with the fifteenth VCM report. In December 2017, the Georgia PSC voted to approve (and issued its related order on January 11, 2018) certain recommendations made by Georgia Power in the seventeenth VCM report and modifying the ~~other~~ Vogtle ~~Owners to determine future actions~~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, including, but not limited~~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 ~~status~~Contractor Settlement Agreement should be disallowed from rate base on the basis of ~~construction and rate recovery, and currently expects~~imprudence; (iii) (a) capital costs incurred up to ~~include its recommendation in its seventeenth VCM report~~$5.68 billion would be presumed to be ~~filed~~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 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 ~~late August 2017.~~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 $25 million in 2017 and are estimated to have negative earnings impacts of approximately $100 million in 2018 and an aggregate of $585 million from 2019 to 2022. In its January 11, 2018 order, the Georgia PSC stated if other certain conditions and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, both Georgia Power and the Georgia PSC reserve the right to reconsider the decision to continue construction.

On February 12, 2018, Georgia Interfaith Power & Light, Inc. and Partnership for Southern Equity, Inc. 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 final decision and denial of Georgia Watch's motion for reconsideration. Georgia Power believes the two appeals have no merit; however, an adverse outcome in either appeal could have a material impact on Georgia Power's results of operations, financial condition, and liquidity.

The ~~ultimate outcome~~IRS has allocated PTCs to each of ~~these matters is dependent on the completion~~Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's portion of the ~~assessments described above, as well as~~PTCs is approximately $500 million per unit.

The Georgia PSC has approved seventeen VCM reports covering the ~~related regulatory treatment, and cannot be determined at this time.~~periods through June 30, 2017, including total construction capital costs incurred through that date of $4.4 billion. Georgia Power filed its eighteenth VCM report on February 28, 2018 requesting approval of $448 million of construction capital costs (excluding the $1.7 billion

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~~Other Matters~~received from Toshiba under the Guarantee Settlement Agreement and the $188 million in Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.

AsThe ultimate outcome of ~~June 30, 2017,~~ these matters cannot be determined at this time.

Cost and Schedule

Georgia ~~Power had borrowed $2.6 billion related~~Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 with in-service dates of November 2021 and November 2022, respectively, is as follows:



	(in billions)
Project capital cost forecast	$	7.3
Net investment as of March 31, 2018	(3.7		)
Remaining estimate to complete	$	3.6

Note: Excludes financing costs capitalized through AFUDC and is net of $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a ~~loan guarantee agreement between~~ regulatory liability in 2017.

Georgia Power ~~and the DOE and a multi-advance credit facility among Georgia Power, the DOE, and the FFB. See Note 6 to the financial statements~~estimates that its financing costs for construction of ~~Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.~~

~~The IRS has allocated PTCs to~~ Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which ~~require that~~$1.6 billion had been incurred through March 31, 2018.

Subsequent to the ~~applicable unit be placed~~EPC Contractor bankruptcy filing, a number of subcontractors to the EPC Contractor alleged non-payment by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3 and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, lawsuits against the EPC Contractor and the Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and other EPC Contractor pre-petition accounts payable have been paid or accrued as of March 31, 2018.

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

See RISK FACTORS of Georgia Power in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.

DOE Financing

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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. This conditional commitment expires on June 30, 2018, 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 ~~additional risks~~Note 6 to the financial statements of Georgia Power under "DOE Loan Guarantee Borrowings" in Item 1A8 of the Form 10-K for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.

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

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Georgia Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power," and Note (H) to the Condensed Financial Statements herein for information regarding the ~~EPC Contractor's bankruptcy.~~Tax Reform Legislation and related regulatory actions.

Other Matters

Georgia Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, 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.

Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstGeorgia Power~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Georgia Power's financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Georgia Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power's critical accounting policies and ~~estimates related to Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, and Contingent Obligations.~~estimates.

Recently Issued Accounting Standards

~~In 2014, the FASB issued ASC 606,~~ ~~Revenue from Contracts with Customers~~ (ASC 606), replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principleSee MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Georgia Power in Item 7 of the ~~standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. The new standard also requires enhanced disclosures~~Form 10-K for additional information regarding ~~the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers.~~

While Georgia Power expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of Georgia Power's revenue, including energy provided to customers, is from tariff offerings that provide electricity without a defined contractual term, as well as longer-term contractual commitments, including PPAs. Georgia Power expects that the revenue from contracts with these customers will not result in a significant shift in the timing of revenue recognition for such sales.

Georgia Power's ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Georgia Power's financial statements, if material. In addition, the power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Georgia Power expects CIAC to be out of the scope of ASC 606.

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Georgia Power intends to use the modified retrospective method of adoption effective January 1, 2018. Georgia Power has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized in Georgia Power's financial statements, Georgia Power will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.

~~On March 10, 2017, the FASB issued~~ ASU No. ~~2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the

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~~service cost component and~~2016-02, Leases (Topic 842). See Note (A) to the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effectiveCondensed Financial Statements herein for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Georgia Power is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease ininformation regarding Georgia Power's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Georgia Power's financial statements.recently adopted accounting standards.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Georgia Power in Item 7 of the Form 10-K for additional information. Georgia Power's financial condition remained stable at ~~June 30, 2017.~~March 31, 2018. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

Net cash provided from operating activities totaled ~~$482~~$373 million for the first ~~six~~three months of ~~2017~~2018 compared to ~~$1.17 billion~~$111 million for the corresponding period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to increased fuel cost recovery and the timing of ~~vendor payments~~fossil fuel stock purchases and ~~an increase in under-recovered fuel costs.~~property tax payments. Net cash used for investing activities totaled ~~$1.33 billion~~$668 million for the first ~~six~~three months of ~~2017 compared to $1.17 billion for the corresponding period in 2016~~2018 primarily related to installation of equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities. Net cash provided from financing activities totaled ~~$931~~$601 million for the first ~~six~~three months of ~~2017 compared to $51 million in the corresponding period in 2016. The increase in cash provided from financing activities is~~2018 primarily due to ~~an increase in short-term borrowings, higher issuances of senior notes, and higher~~ capital contributions ~~received~~ from Southern Company, partially offset by payments of a ~~decrease in borrowings from the FFB for construction of Plant Vogtle Units 3~~common stock dividend and 4.pollution control revenue bond repurchases. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017~~2018 include an increase of $1.5 billion in paid-in capital primarily due to capital contributions received from Southern Company, an increase of $395 million in property, plant, and equipment ~~of $857 million~~ to comply with environmental standards and the construction of generation, transmission, and distribution facilities, ~~an increase~~and a decrease of $376 million in ~~notes payable of $837 million~~long-term debt (including securities due within one year) primarily due to ~~issuances~~the repurchase of short-term bank debt, an increase in paid-in capital of $389 million primarily due to capital contributions received from Southern Company, and an increase in long-term debt of $369 million primarily due to issuances of senior notes.pollution control revenue bonds.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power's capital requirements ~~for~~and contractual obligations. Subsequent to March 31, 2018, Georgia Power redeemed all $250 million aggregate principal amount of its construction program, including estimated capital expenditures for Plant Vogtle Units 3 and 4 and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $261Series 2008B 5.40% Senior Notes due June 1, 2018. An additional $507 million will be required through ~~June 30, 2018~~March 31, 2019 to fund maturities of long-term debt. See "Sources of Capital" herein for additional information. Also see FUTURE EARNINGS POTENTIAL – ~~"Retail~~"Retail Regulatory Matters – Nuclear ~~Construction"~~Construction" for additional information regarding Plant Vogtle Units 3 and 4.

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environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in FERC rules and regulations; Georgia PSC approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. The construction program also includes Plant Vogtle Units 3 and 4, which may be subject to revised cost estimates during construction. The ability to control costs and avoid cost 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 and productivity, adverse weather conditions, shortages and 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,

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unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance. See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Georgia Power~~ – Nuclear Construction" herein for information regarding additional factors that may impact construction ~~expenditures, including Georgia Power's preliminary cost-to-complete and cancellation cost assessments for Plant Vogtle Units 3 and 4.~~expenditures.

Sources of Capital

Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, ~~short-term debt,~~ external security issuances, ~~term loans,~~borrowings from financial institutions, equity contributions from Southern Company, and ~~to the extent available,~~ borrowings from the FFB. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory ~~approval,~~approvals, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Georgia Power in Item 7 of the Form 10-K for additional information.

In 2014, Georgia Power ~~has~~ entered into ~~a loan guarantee agreement (Loan~~the Loan Guarantee ~~Agreement)~~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. ~~Eligible Project Costs incurred through June 30, 2017 would allow for borrowings~~As of ~~up to $3.1~~March 31, 2018, Georgia Power had borrowed $2.6 billion under the FFB Credit ~~Facility, of which Georgia Power has borrowed $2.6 billion; however, on~~Facility. In July ~~27,~~ 2017, Georgia Power entered into an amendment to the Loan Guarantee Agreement, ~~(LGA Amendment) to clarify~~which provides that further advances are conditioned upon the ~~operation~~DOE's approval of any agreements entered into in replacement of the ~~Loan Guarantee Agreement pending Georgia Power's completion of its comprehensive schedule, cost-to-complete, and cancellation cost assessments (Cost Assessments) for Plant~~ Vogtle ~~Units~~ 3 and ~~4. Under~~4 Agreement and satisfaction of certain other conditions.

In September 2017, the ~~terms of the LGA Amendment,~~DOE issued a conditional commitment to Georgia Power ~~will not request any advances~~for up to approximately $1.67 billion of additional guaranteed loans under the Loan Guarantee ~~Agreement unless~~Agreement. This conditional commitment expires on June 30, 2018, subject to any further extension approved by the DOE. Final approval and ~~until such time as Georgia Power has completed~~issuance of these additional loan guarantees by the ~~Cost Assessments~~DOE cannot be assured and ~~made a determination~~are subject to ~~continue construction~~the negotiation of ~~Plant Vogtle Units 3~~definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and ~~4 and satisfied certain~~satisfaction of other ~~conditions related to continuing construction.~~conditions. See Note 6 to the financial statements of Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K ~~and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein~~ for additional information regarding the Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and additional conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Georgia Power~~ – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.

~~At June 30, 2017, Georgia Power's current liabilities exceeded current assets by $1.42 billion.~~ Georgia Power's current liabilities frequently exceed current assets because of scheduled maturities of long-term debt ~~($261 million at June 30, 2017)~~ and the periodic use of short-term debt as a funding source, ~~($1.2 billion at June 30, 2017),~~ as well as significant seasonal fluctuations in cash needs. Georgia Power intends to utilize operating cash flows, ~~short-term debt,~~ external security issuances, ~~term loans,~~borrowings from financial institutions, equity contributions from Southern Company, and ~~to the extent available,~~ borrowings from the FFB to fund its short-term capital needs. Georgia Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.

At ~~June 30, 2017,~~March 31, 2018, Georgia Power had approximately ~~$91 million~~$1.16 billion of cash and cash equivalents. Georgia Power's committed credit arrangement with banks at ~~June 30, 2017~~March 31, 2018 was $1.75 billion of which ~~$1.73~~$1.74 billion was unused. ~~In May 2017, Georgia Power amended its multi-year~~This credit arrangement ~~which, among other things, extended the maturity date from 2020 to~~expires in 2022.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

This bank credit arrangement ~~as well as Georgia Power's term loan arrangements,~~ contains a covenant that limits debt levels and contains a cross-acceleration provision to other indebtedness (including guarantee obligations) of Georgia Power. Such cross-acceleration provision to other indebtedness would trigger an event of default if Georgia Power defaulted on indebtedness, the payment of which was then accelerated. At ~~June 30, 2017,~~March 31, 2018, Georgia Power was in compliance with this covenant. This bank credit arrangement does not contain a material adverse change clause at the time of borrowing.

Table of Contents

GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Subject to applicable market conditions, Georgia Power expects to renew or replace this credit arrangement, as needed, prior to expiration. In connection therewith, Georgia Power may extend the maturity date and/or increase or decrease the lending commitments thereunder.

See Note 6 to the financial statements of Georgia Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

A portion of the unused credit with banks is allocated to provide liquidity support to Georgia Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of ~~June 30, 2017~~March 31, 2018 was approximately $550 million. In ~~June 2017, Georgia Power remarketed $318 million of variable rate pollution control bonds in index rate modes, reducing the liquidity support utilized under Georgia Power's bank credit arrangement. In~~ addition, at ~~June 30, 2017,~~March 31, 2018, Georgia Power had ~~$436~~$192 million of pollution control revenue bonds outstanding that were required to be ~~reoffered~~remarketed within the next 12 months. Subsequent to March 31, 2018, Georgia Power purchased and held $55 million of pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.

Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Georgia Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Georgia Power are loaned directly to Georgia Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. ~~Commercial paper is~~Short-term borrowings are included in notes payable in the balance sheets.

Details of short-term borrowings were as follows:

Short-term Debt at
June 30, 2017

Short-term Debt During the Period^(*)

Amount
Outstanding

Weighted
Average
Interest
Rate

Average
Amount
Outstanding

Weighted
Average
Interest
Rate

Maximum
Amount
Outstanding
(in millions) (in millions) (in millions)
Commercial paper $ 428
1.5 % $ 280
1.4 % $ 760
Short-term bank debt 800
2.0 % 227
2.0 % 800
Total $ 1,228
1.8 % $ 507
1.6 %



	Short-term Debt During the Period^(*)
	Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)
Short-term bank debt	$	50	2.3	%	$	150


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017.~~March 31, 2018. No short-term debt was outstanding at March 31, 2018.

Georgia Power believes the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, short-term bank notes, and operating cash flows.

Credit Rating Risk

At ~~June 30, 2017,~~March 31, 2018, Georgia Power did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, ~~and~~ transmission, interest rate management, and ~~at June 30, 2017, included contracts related to the~~ construction of new generation at Plant Vogtle Units 3 and 4.

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



Credit Ratings	Maximum Potential Collateral Requirements
	(in millions)
At BBB- and/or Baa3	$	87
Below BBB- and/or Baa3	$	1,016

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GEORGIA POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~The maximum potential collateral requirements under these contracts at June 30, 2017 were as follows:~~

Credit Ratings Maximum Potential
Collateral
Requirements
(in millions)
At BBB- and/or Baa3 $ 87
Below BBB- and/or Baa3 $ 1,210

Included in these amounts are certain agreements that could require collateral in the event that Georgia Power or Alabama Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Georgia Power to access capital markets and would be likely to impact the cost at which it does so.

On ~~March 20, 2017, Moody's revised its~~February 28, 2018, Fitch downgraded the senior unsecured long-term debt rating ~~outlook for~~of Georgia Power to A from ~~stable to negative.~~A+ with a negative outlook.

~~On March 30, 2017, Fitch placed~~help mitigate these potential adverse impacts to certain credit metrics by allowing a higher retail equity ratio until Georgia Power's next base rate case. See Note 3 to the ~~ratings~~financial statements of Georgia Power ~~on rating watch negative.~~under "Retail Regulatory Matters – Rate Plans" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Rate Plans" herein for additional information.

Financing Activities

In ~~March 2017,~~January 2018, Georgia Power ~~issued $450~~repaid its outstanding $150 million and $100 million floating rate bank loans due May 31, 2018 and October 26, 2018, respectively.

In March 2018, Georgia Power purchased and held $104.6 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series ~~2017A 2.00% Senior Notes due March 30, 2020~~2013 and ~~$400~~$173 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series ~~2017B 3.25% Senior Notes due~~2009. Georgia Power may reoffer these bonds to the public at a later date.

Subsequent to March ~~30, 2027. The proceeds were used to repay a portion of Georgia Power's short-term indebtedness and for general corporate purposes, including Georgia Power's continuous construction program.~~

~~In April 2017,~~31, 2018, Georgia Power purchased and held ~~$27~~$55 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Fifth Series ~~1995.~~1994. Georgia Power may reoffer these bonds to the public at a later date.

~~In June 2017,~~Also subsequent to March 31, 2018, Georgia Power ~~repaid at maturity $450~~redeemed all $250 million aggregate principal amount of its Series ~~2007B 5.70%~~2008B 5.40% Senior ~~Notes.~~

InNotes due June ~~2017, Georgia Power entered into three floating rate bank loans in aggregate principal amounts of $50 million, $150 million, and $100 million, which mature on December~~ 1, 2017, May 31, 2018, and June 28, 2018, respectively, and bear interest based on one-month LIBOR. Also in June 2017, Georgia Power borrowed $500 million pursuant to an uncommitted bank credit arrangement, which bears interest at a rate agreed upon by Georgia Power and the bank from time to time and is payable on no less than 30 days' demand by the bank. The proceeds from these bank loans were used to repay a portion of Georgia Power's existing indebtedness and for working capital and other general corporate purposes, including Georgia Power's continuous construction program.2018.

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

GULF POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	318		$	319		$	596		$	602		$	290		$	279
Wholesale revenues, non-affiliates	12			15			30			31			13			17
Wholesale revenues, affiliates	10			15			47			36			28			37
Other revenues	17			16			34			31			17			17
Total operating revenues	357			365			707			700			348			350
Operating Expenses:
Fuel	88			107			196			201			82			108
Purchased power, non-affiliates	35			32			67			62
Purchased power, affiliates	9			4			11			5
Purchased power													46			34
Other operations and maintenance	87			77			171			155			76			86
Depreciation and amortization	35			42			53			80			47			18
Taxes other than income taxes	28			29			55			58			30			27
Loss on Plant Scherer Unit 3	—			—			33			—			—			33
Total operating expenses	282			291			586			561			281			306
Operating Income	75			74			121			139			67			44
Other Income and (Expense):
Interest expense, net of amounts capitalized	(13		)	(12		)	(24		)	(25		)	(13		)	(12		)
Other income (expense), net	(1		)	(1		)	(2		)	(2		)	1			2
Total other income and (expense)	(14		)	(13		)	(26		)	(27		)	(12		)	(10		)
Earnings Before Income Taxes	61			61			95			112			55			34
Income taxes	24			24			38			44			13			14
Net Income	37			37			57			68			42			20
Dividends on Preference Stock	2			3			4			5			—			2
Net Income After Dividends on Preference Stock	$	35		$	34		$	53		$	63		$	42		$	18

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018		2017
	(in millions)						(in millions)						(in millions)
Net Income	$	37		$	37		$	57		$	68		$	42	$	20
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $-, $(1), $(1), and $(3), respectively	(1		)	(1		)	(1		)	(4		)
Changes in fair value, net of tax of $- and $-, respectively													—		(1		)
Total other comprehensive income (loss)	(1		)	(1		)	(1		)	(4		)	—		(1		)
Comprehensive Income	$	36		$	36		$	56		$	64		$	42	$	19

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Net income	$	57		$	68		$	42		$	20
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	56			83			49			20
Deferred income taxes	19			16
Loss on Plant Scherer Unit 3	33			—			—			33
Other, net	(4		)	(3		)	1			3
Changes in certain current assets and liabilities —
-Receivables	(25		)	(6		)	46			(1		)
-Fossil fuel stock	4			34			(14		)	12
-Other current assets	10			1			5			6
-Accounts payable							(28		)	(8		)
-Accrued taxes	7			17			12			(4		)
-Accrued compensation	(17		)	(12		)	(21		)	(23		)
-Over recovered regulatory clause revenues	(19		)	5			(1		)	(18		)
-Other current liabilities	3			(7		)	13			10
Net cash provided from operating activities	124			196			104			50
Investing Activities:
Property additions	(97		)	(68		)	(70		)	(46		)
Cost of removal, net of salvage	(9		)	(4		)	(11		)	(2		)
Change in construction payables	(14		)	(7		)	12			(7		)
Other investing activities	(3		)	(5		)	(2		)	(2		)
Net cash used for investing activities	(123		)	(84		)	(71		)	(57		)
Financing Activities:
Increase (decrease) in notes payable, net	(190		)	46			16			(168		)
Proceeds —
Common stock issued to parent	175			—			—			175
Capital contributions from parent company	5			5			2			4
Senior notes	300			—
Redemptions —
Preference stock	(150		)	—
Senior notes	(85		)	(125		)
Payment of common stock dividends	(63		)	(60		)	(39		)	(31		)
Other financing activities	(4		)	(6		)	(1		)	3
Net cash used for financing activities	(12		)	(140		)	(22		)	(17		)
Net Change in Cash and Cash Equivalents	(11		)	(28		)
Cash and Cash Equivalents at Beginning of Period	56			74
Cash and Cash Equivalents at End of Period	$	45		$	46
Net Change in Cash, Cash Equivalents, and Restricted Cash							11			(24		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							28			56
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	39		$	32
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $- and $- capitalized for 2017 and 2016, respectively)	$	22		$	28
Income taxes, net	7			(3		)
Cash paid during the period for —
Interest (net of $- and $- capitalized for 2018 and 2017, respectively)							$	1		$	2
Noncash transactions — Accrued property additions at end of period	19			13			38			26

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Assets:
Cash and cash equivalents	$	45		$	56		$	39		$	28
Receivables —
Customer accounts receivable	77			72			72			76
Unbilled revenues	70			55			53			67
Under recovered regulatory clause revenues	26			17			10			27
Affiliated							6			14
Other accounts and notes receivable	11			6			5			7
Affiliated	8			17
Accumulated provision for uncollectible accounts	(1		)	(1		)	(1		)	(1		)
Fossil fuel stock	67			71			77			63
Materials and supplies	57			55			59			57
Other regulatory assets, current	55			44			53			56
Other current assets	17			30			12			21
Total current assets	432			422			385			415
Property, Plant, and Equipment:
In service	5,156			5,140			5,227			5,196
Less: Accumulated provision for depreciation	1,427			1,382			1,494			1,461
Plant in service, net of depreciation	3,729			3,758			3,733			3,735
Construction work in progress	59			51			123			91
Total property, plant, and equipment	3,788			3,809			3,856			3,826
Deferred Charges and Other Assets:
Deferred charges related to income taxes	57			58			30			31
Other regulatory assets, deferred	510			512			493			502
Other deferred charges and assets	22			21			26			23
Total deferred charges and other assets	589			591			549			556
Total Assets	$	4,809		$	4,822		$	4,790		$	4,797

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholder's Equity	At June 30, 2017			At December 31, 2016		At March 31, 2018			At December 31, 2017
	(in millions)					(in millions)
Current Liabilities:
Securities due within one year	$	27		$	87
Notes payable	78			268		$	61		$	45
Accounts payable —
Affiliated	52			59		45			52
Other	46			54		66			75
Customer deposits	35			35		35			35
Accrued taxes	27			20		22			10
Accrued interest	9			8		20			9
Accrued compensation	23			40		17			39
Deferred capacity expense, current	22			22		22			22
Asset retirement obligations, current						39			37
Other regulatory liabilities, current	—			16		72			—
Other current liabilities	43			40		26			27
Total current liabilities	362			649		425			351
Long-term Debt	1,265			987		1,285			1,285
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	966			948		536			537
Deferred credits related to income taxes						386			458
Employee benefit obligations	92			96		100			102
Deferred capacity expense	108			119		92			97
Asset retirement obligations, deferred	125			120		105			105
Other cost of removal obligations	218			249		215			221
Other regulatory liabilities, deferred	46			47		42			43
Other deferred credits and liabilities	74			71		68			67
Total deferred credits and other liabilities	1,629			1,650		1,544			1,630
Total Liabilities	3,256			3,286		3,254			3,266
Preference Stock	—			147
Common Stockholder's Equity:
Common stock, without par value —
Authorized — 20,000,000 shares
Outstanding — June 30, 2017: 7,392,717 shares
— December 31, 2016: 5,642,717 shares	678			503
Outstanding — 7,392,717 shares						678			678
Paid-in capital	596			589		597			594
Retained earnings	280			296		262			259
Accumulated other comprehensive income (loss)	(1		)	1
Accumulated other comprehensive loss						(1		)	—
Total common stockholder's equity	1,553			1,389		1,536			1,531
Total Liabilities and Stockholder's Equity	$	4,809		$	4,822	$	4,790		$	4,797

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

Gulf Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located in northwest Florida and to wholesale customers in the Southeast.

Many factors affect the opportunities, challenges, and risks of Gulf Power's business of providing electric service. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, stringent environmental standards, reliability, restoration following major storms, fuel, and capital expenditures. Gulf Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.

OnAs a continuation of a settlement agreement approved by the Florida PSC in April 4, 2017 (2017 Gulf Power Rate Case Settlement Agreement), on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement ~~(2017 Rate Case Settlement Agreement)~~ among Gulf Power and three intervenors ~~with respect~~addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's ~~request~~revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to ~~increase retail base rates. Under~~normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the ~~terms~~remainder of 2018. As a result of the ~~2017 Rate Case~~Gulf Power Tax Reform Settlement Agreement, ~~Gulf Power increased rates effective with~~ the ~~first billing cycle in July 2017 to provide~~Florida PSC also approved an ~~annual overall net customer impact of approximately $54.3 million. The net customer impact consists of a $62.0 million~~ increase in annual base revenues less an annual equivalent credit of approximately $7.7 million for 2017 for certain wholesale revenues to be provided through December 2019 through the purchased power capacity cost recovery clause. In addition, Gulf ~~Power continued its authorized retail ROE midpoint (10.25%) and range (9.25% to 11.25%), is deemed to have an~~Power's maximum equity ratio offrom 52.5% to 53.5% for all retail regulatory ~~purposes, and implemented new dismantlement accruals effective July 1, 2017.~~purposes.

See Note 3 to the financial statements of Gulf ~~Power's ownership of Plant Scherer Unit 3 (205 MWs), which was recorded~~Power under "Retail Regulatory Matters – Retail Base Rate Cases" in ~~the first quarter 2017. The remaining issues related to the inclusion of Gulf Power's investment in Plant Scherer Unit 3 in retail rates have been resolved as a result~~Item 8 of the 2017 Rate Case Settlement Agreement, including recoverability of certain costs associated with the ongoing ownership and operation of the unit through the environmental cost recovery clause rate approved by the Florida PSC in November 2016.Form 10-K for additional information.

Gulf Power continues to focus on several key performance indicators including, but not limited to, customer satisfaction, plant availability, system reliability, and net ~~income after dividends on preference stock.~~income.

RESULTS OF OPERATIONS

Net Income

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$1 2.9 $(10) (15.9)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$24		133.3

Gulf Power's net income after dividends on preference stock for the ~~second~~first quarter ~~2017~~2018 was ~~$35~~$42 million compared to ~~$34~~$18 million for the corresponding period in ~~2016. Gulf Power's net income after dividends on preference stock for year-to-date 2017 was $53 million compared to $63 million for the corresponding period in 2016.~~2017. The ~~decrease for year-to-date 2017~~increase was primarily due to athe first quarter 2017 write-down of $32.5 million ($20 million after tax) of Gulf Power's ownership of Plant Scherer Unit 3 ~~resulting from~~in accordance with the 2017 Gulf Power Rate Case Settlement Agreement, an increase in retail revenues, and ~~higher~~lower operations and maintenance expenses, partially offset by ~~lower depreciation and higher wholesale revenue. See Note (B) to the~~an increase in depreciation.

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Condensed Financial Statements~~See Note 3 to the financial statements of Gulf Power under ""Retail Regulatory Matters – ~~Gulf Power~~ – Retail Base Rate ~~Cases" herein~~Cases" in Item 8 of the Form 10-K for additional information regarding the 2017 Gulf Power Rate Case Settlement Agreement.

Retail Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(1) (0.3) $(6) (1.0)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$11		3.9

In the ~~second~~first quarter ~~2017,~~2018, retail revenues were ~~$318~~$290 million compared to ~~$319~~$279 million for the corresponding period in ~~2016. For year-to-date 2017, retail revenues were $596 million compared to $602 million for the corresponding period in 2016.~~2017.

Details of the changes in retail revenues were as follows:


	Second Quarter 2017					Year-to-Date 2017					First Quarter 2018
	(in millions)			(% change)		(in millions)			(% change)		(in millions)			(% change)
Retail – prior year	$	319				$	602				$	279
Estimated change resulting from –
Rates and pricing	5			1.6		7			1.2		5			1.8
Sales decline	(1		)	(0.3	)	(3		)	(0.5	)
Sales growth											1			0.4
Weather	—			—		(6		)	(1.0	)	9			3.1
Fuel and other cost recovery	(5		)	(1.6	)	(4		)	(0.7	)	(4		)	(1.4	)
Retail – current year	$	318		(0.3	)%	$	596		(1.0	)%	$	290		3.9	%

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under "Revenues" and Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information regarding Gulf Power's retail base rate case and cost recovery clauses, including Gulf Power's fuel cost recovery, purchased power capacity recovery, environmental cost recovery, and energy conservation cost recovery clauses.

Revenues associated with changes in rates and pricing increased in the ~~second~~first quarter ~~and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to an increase in retail base rates effective July 2017 in accordance with the 2017 Gulf Power Rate Case Settlement Agreement, partially offset by a reduction in revenues ~~as well as an increase in environmental cost recovery~~ effective ~~November 2016 resulting from~~January 1, 2018 due to the Gulf ~~Power's ownership of Plant Scherer Unit 3 being rededicated to retail service.~~Power Tax Reform Settlement Agreement.

Revenues attributable to changes in sales ~~decreased~~increased slightly in the ~~second~~first quarter ~~and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016.~~2017. For the first quarter 2018, weather-adjusted KWH sales to residential customers increased 2.3% due to customer growth. Weather-adjusted KWH sales to ~~residential and~~ commercial customers decreased ~~1.2% and 1.3%, respectively, for the second quarter 2017 and 1.3% and 1.0%, respectively, for year-to-date 2017~~0.2% due to lower ~~customer~~ usage ~~primarily~~ resulting from energy efficiency improvements in appliances and lighting, ~~partially~~substantially offset by customer growth. KWH sales to industrial customers ~~decreased 2.7% and 5.6%~~increased 3.9% for the ~~second~~first quarter ~~and year-to-date 2017, respectively,~~2018 primarily due to changes in customers' operations. ~~The year-to-date 2017 decrease also reflects increased customer co-generation.~~

Fuel and other cost recovery revenues decreased in the ~~second~~first quarter ~~and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016,~~2017, primarily due to lower ~~fuel, purchased power capacity, and energy conservation~~ recoverable costs ~~partially offset by higher environmental recoverable costs.~~under Gulf Power's fuel cost recovery clause. Fuel and other cost recovery provisions include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, ~~and~~ the difference between projected and actual costs and revenues related to energy conservation and environmental ~~compliance.~~ compliance, and a credit for certain wholesale revenues as a result of the 2017 Gulf Power Rate Case Settlement Agreement.

See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery ~~Clauses~~Clauses" and " – Retail ~~Fuel Cost Recovery"~~Base Rate Cases" in Item 8 of the Form 10-K for additional ~~information.~~information regarding cost recovery

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

clauses and the 2017 Gulf Power Rate Case Settlement Agreement, respectively. Also see FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail Base Rate Case" herein for additional information regarding the Gulf Power Tax Reform Settlement Agreement.

Wholesale Revenues – Non-Affiliates



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(4)		(23.5)

Wholesale revenues from sales to non-affiliates consist of long-term sales agreements to other utilities in Florida and Georgia and short-term opportunity sales. Capacity revenues from long-term sales agreements represent the greatest contribution to net income. The energy is generally sold at variable cost. Short-term opportunity sales are made at market-based rates that generally provide a margin above Gulf Power's variable cost of energy. Wholesale energy revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Gulf 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.

In the first quarter 2018, wholesale revenues from sales to non-affiliates were $13 million compared to $17 million for the corresponding period in 2017. The decrease was primarily due to a 44.7% decrease in KWH sales primarily resulting from lower opportunity sales due to planned outages at Gulf Power generating units.

Wholesale Revenues – Affiliates

Second Quarter 2017 vs. Second Quarter 2016

Year-to-Date 2017 vs. Year-to-Date 2016

First Quarter 2018 vs. First Quarter 2017

(change in millions)

(% change)

(change in millions)

(% change)

$~~(5)~~(9)

(33.3)

$11

30.6

(24.3)

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

In the ~~second~~first quarter ~~2017,~~2018, wholesale revenues from sales to affiliates were ~~$10~~$28 million compared to ~~$15~~$37 million for the corresponding period in ~~2016.~~2017. The decrease was primarily due to a ~~40.6%~~53.0% decrease in KWH sales primarily resulting from lower availability due to ~~decreased generation as~~planned outages at Gulf Power generating units. Partially offsetting this decrease was a ~~result of milder weather reducing Southern Company system loads.~~

For year-to-date 2017, wholesale revenues from sales to affiliates were $47 million compared to $36 million for the corresponding period in 2016. The increase was primarily due to a 17.2% increase in KWH sales as a result of supporting Southern Company system transmission reliability and a 10.0%63.6% increase in the price of energy sold due to ~~higher natural gas prices.~~dispatching higher-priced generating resources driven by the cold weather in January 2018.

Fuel and Purchased Power Expenses


	Second Quarter 2017 vs. Second Quarter 2016					Year-to-Date 2017 vs. Year-to-Date 2016					First Quarter 2018 vs. First Quarter 2017
	(change in millions)			(% change)		(change in millions)			(% change)		(change in millions)			(% change)
Fuel	$	(19	)	(17.8	)	$	(5	)	(2.5	)	$	(26	)	(24.1	)
Purchased power – non-affiliates	3			9.4		5			8.1
Purchased power – affiliates	5			125.0		6			120.0
Purchased power											12			35.3
Total fuel and purchased power expenses	$	(11	)			$	6				$	(14	)

In the ~~second~~first quarter ~~2017,~~2018, total fuel and purchased power expenses were ~~$132~~$128 million compared to ~~$143~~$142 million for the corresponding period in ~~2016.~~2017. The decrease was primarily the result of a $21 million net decrease related to the volume of KWHs generated and purchased due to milder weather in 2017 reducing demand, partially offset by an $11 million net increase due to the higher average cost of fuel associated with purchased power.

For year-to-date 2017, total fuel and purchased power expenses were $274 million compared to $268 million for the corresponding period in 2016. The increase was primarily the result of a $16 million net increase related to the higher average cost of fuel and purchased power resulting from higher natural gas prices, partially offset by a $10 million net decrease related to the volume of KWHs generated and purchased ~~due~~and a $4 million decrease related to ~~milder weather in 2017 reducing demand.~~the lower average cost of fuel and purchased power.

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Fuel and purchased power transactions do not have a significant impact on earnings since energy and capacity expenses are generally offset by energy and capacity revenues through Gulf Power's fuel and purchased power capacity cost recovery clauses and long-term wholesale contracts. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Retail Fuel Cost Recovery" and " – Purchased Power Capacity Recovery" in Item 8 of the Form 10-K for additional information.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
Total generation (in millions of KWHs)	1,898	2,064	4,220	3,880	1,775	2,322
Total purchased power (in millions of KWHs)	1,218	1,629	2,676	3,389	1,622	1,459
Sources of generation (percent) –
Coal	50	54	52	48	37	53
Gas	50	46	48	52	63	47
Cost of fuel, generated (in cents per net KWH) –
Coal	3.17	4.14	3.23	4.05	3.14	3.27
Gas	3.88	4.11	3.54	3.92	2.97	3.24
Average cost of fuel, generated (in cents per net KWH)	3.53	4.12	3.38	3.98	3.03	3.26
Average cost of purchased power (in cents per net KWH)^(*)	5.37	3.50	4.93	3.35	4.56	4.57


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

Fuel

In the ~~second~~first quarter ~~2017,~~2018, fuel expense was ~~$88~~$82 million compared to ~~$107~~$108 million for the corresponding period in ~~2016.~~2017. The decrease was primarily due to a ~~14.3% decrease in the average cost of fuel resulting from lower coal and natural gas prices and a 15.3%~~46.5% decrease in the volume of KWHs generated by Gulf Power's coal-fired generation resources due to ~~milder weather reducing demand.~~planned outages in the first quarter 2018.

~~For year-to-date 2017, fuel~~Purchased Power

In the first quarter 2018, purchased power expense was ~~$196~~$46 million compared to ~~$201~~$34 million for the corresponding period in 2016. The decrease was primarily due to a 15.1% decrease in the average cost of fuel resulting from lower coal and natural gas prices, partially offset by an 8.8% increase in the volume of KWHs generated by Gulf Power's coal-fired and gas-fired generation resources due to Southern Company system reliability requirements.

~~Purchased Power – Non-Affiliates~~

~~In the second quarter 2017, purchased power expense from non-affiliates was $35 million compared to $32 million for the corresponding period in 2016.~~2017. The increase was primarily due to ~~a 68.7%~~an increase ~~in the average cost per KWH purchased primarily resulting from higher natural gas prices, partially offset by a 37.9% decrease~~of 11.2% in the volume of KWHs purchased ~~due~~as a result of higher purchases from affiliates to ~~a planned outage of an external generation resource under a PPA.~~

For year-to-date 2017, purchased power expense from non-affiliates was $67 million compared to $62 million for the corresponding period in 2016. The increase was primarily due to a 50.0% increase in the average cost per KWH purchased primarily resulting fromserve higher ~~natural gas prices, partially offset by a 25.6% decrease in the volume of KWHs purchased due to a planned outage of an external generation resource under a PPA.~~territorial load.

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

~~Purchased Power – Affiliates~~

In the second quarter 2017, purchased power expense from affiliates was $9 million compared to $4 million for the corresponding period in 2016. The increase was primarily due to a 66.1% increase in the volume of KWHs purchased due to availability of power pool resources at lower cost compared to Gulf Power generation.

For year-to-date 2017, purchased power expense from affiliates was $11 million compared to $5 million for the corresponding period in 2016. The increase was primarily due to a 22.9% increase in the volume of KWHs

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purchased due to availability of power pool resources at lower cost compared to Gulf Power generation and a 67.1% increase in the average cost per KWH purchased primarily resulting from increased natural gas prices.

~~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~~ Affiliate purchases are made in accordance with the IIC or other contractual agreements, as approved by the FERC.

Other Operations and Maintenance Expenses

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$10 13.0 $16 10.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(10)		(11.6)

In the ~~second~~first quarter ~~2017,~~2018, other operations and maintenance expenses were ~~$87~~$76 million compared to ~~$77~~$86 million for the corresponding period in ~~2016. For year-to-date 2017, other operations~~2017. The decrease was primarily due to decreases of $3 million in environmental compliance expenses at generating facilities, $2 million in energy services expenses, and $2 million in routine and planned maintenance expenses at distribution facilities.

Expenses from energy services did not have a significant impact on earnings since they were ~~$171~~generally offset by associated revenues. Environmental compliance expenses did not have a significant impact on earnings since they were offset by environmental revenues through Gulf Power's environmental cost recovery clause. See Note 3 to the

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financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Environmental Cost Recovery" in Item 8 of the Form 10-K for additional information.

Depreciation and Amortization



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$29		161.1

In the first quarter 2018, depreciation and amortization was $47 million compared to ~~$155~~$18 million for the corresponding period in ~~2016.~~2017. The ~~increases were~~increase was primarily due to ~~higher expenses at generation facilities associated with routine and planned maintenance.~~

~~Depreciation and Amortization~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(7) (16.7) $(27) (33.8)

In$25.5 million in depreciation credits recorded in the ~~second~~first quarter 2017 depreciation and amortization was $35 million compared to $42 million for the corresponding period in 2016. For year-to-date 2017, depreciation and amortization was $53 million compared to $80 million for the corresponding period in 2016. The decreases were primarily due to $8 million and $28 million more of a reduction in depreciation, as authorized in a settlement agreement approved by the Florida PSC in ~~2013 (2013 Rate Case Settlement Agreement), in the second quarter and year-to-date 2017, respectively, compared to the corresponding periods in 2016.~~2013. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate ~~Case"~~Cases" in Item 8 of the Form 10-K ~~and~~for additional information.

Loss on Plant Scherer Unit 3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(33)		N/M

N/M - Not meaningful

In the first quarter 2017, Gulf Power recorded a $32.5 million write-down related to its ownership of Plant Scherer Unit 3 in accordance with the 2017 Gulf Power Rate Case Settlement Agreement. See Note ~~(B)~~3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for additional information.

Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(1)		(7.1)

In the first quarter 2018, income taxes were $13 million compared to $14 million for the corresponding period in 2017. The decrease was primarily due to the lower corporate income tax rate resulting from the Tax Reform Legislation substantially offset by the increase in pre-tax net income related to the first quarter 2017 write-down associated with Plant Scherer Unit 3. See Note (H) to the Condensed Financial Statements under "~~Regulatory Matters~~ – ~~Gulf Power~~ – ~~Retail Base Rate Cases~~""Effective Tax Rate" herein for additional information. Also see Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Cases" in Item 8 of the Form 10-K for more information regarding the 2017 Gulf Power Rate Case Settlement Agreement.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Gulf Power's future earnings potential. The level of Gulf Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power's business of providing electric service. These factors include Gulf Power's ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. Future earnings will be driven primarily by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies due to changes in the minimum allowable equipment efficiencies along with the continuation of changes in customer ~~behavior.~~behavior, both of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, energy conservation practiced by customers, the

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use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Gulf Power's service territory. Demand for electricity is primarily driven by ~~economic growth. The~~the pace of economic growth ~~and electricity demand~~that may be affected by changes in regional and global economic conditions, which may impact future earnings. Current proposals related to potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Gulf Power's financial statements. For additional information relating to these issues, see RISK FACTORS in Item

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1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.

Environmental Matters

~~Compliance~~Gulf Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Gulf Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs ~~related~~associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to ~~federal and state~~comply with environmental ~~statutes~~laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

New or revised environmental laws and regulations could affect many areas of Gulf Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in ~~retail~~ rates ~~or through long-term wholesale agreements~~ on a timely basis or through ~~market-based contracts.~~long-term wholesale agreements. The State of Florida has statutory provisions that allow a utility to petition the Florida PSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. Gulf Power's current long-term wholesale agreements contain provisions that permit charging the customer with costs incurred as a result of changes in environmental laws and regulations. The full impact of any such legislative or regulatory changes cannot be determined at this time. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, ~~higher~~increased costs that are recovered through regulated rates ~~or long-term wholesale agreements~~ could contribute to reduced demand for electricity, ~~as well as impact the cost competitiveness of wholesale capacity,~~ which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters," "Retail Regulatory Matters – Cost Recovery Clauses – Environmental Cost Recovery," and "Other Matters" of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under "Environmental Matters" in Item 8 of the Form 10-K for additional ~~information.~~information, including a discussion on the State of Florida's statutory provisions on environmental cost recovery.

Environmental ~~Statutes~~Laws and Regulations

~~Water Quality~~Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental ~~Statutes~~Laws and Regulations – ~~Water Quality"~~ Coal Combustion Residuals" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final ~~effluent guidelines~~ rule and the ~~final rule revising the regulatory definition of waters of the U.S. for all Clean Water Act (CWA) programs.~~

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

~~Global Climate Issues~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Environmental Matters~~ – ~~Global Climate Issues" of Gulf Power in Item 7 of the Form 10-K for additional information.~~

On March 28, 2017, the U.S. President signed an executive order directing agencies to review actions that potentially burden the development or use of domestically produced energy resources. The executive order specifically directs the EPA to review the Clean Power Planany legal challenges and ~~final greenhouse gas emission standards for new, modified, and reconstructed electric generating units and, if appropriate, take action to suspend, revise, or rescind those rules.~~

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

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~~FERC Matters~~Global Climate Issues

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – ~~"FERC Matters"~~ "Environmental Matters – Global Climate Issues" of Gulf Power in Item 7 of the Form 10-K for additional ~~information regarding the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.~~information.

~~On May 17,~~Through 2017, the ~~FERC accepted~~Southern Company system has achieved an estimated GHG emission reduction of 36% since 2007. In April 2018, Southern Company established an intermediate goal of a 50% reduction in carbon emissions from 2007 levels by 2030 and a long-term goal of low- to no-carbon operations by 2050. To achieve these goals, the ~~traditional electric operating companies' (including Gulf Power's)~~Southern Company system expects to continue growing its renewable energy portfolio, optimize technology advancements to modernize its transmission and distribution systems, increase the use of natural gas for generation, invest in energy efficiency, and continue research and development efforts focused on technologies to lower GHG emissions. The Southern ~~Power's compliance filing accepting~~Company system's ability to achieve these goals also will be dependent on many external factors, including supportive national energy policies, low natural gas prices, and the ~~terms~~development, deployment, and advancement of the FERC's February 2, 2017 order regarding an amendment by the traditional electric operating companies (including Gulf Power) and Southern Power to their market-based rate tariff. While the FERC's order references the traditional electric operating companies' (including Gulf Power's) and Southern Power's market power proceeding, it remains a separate, ongoing matter.relevant energy technologies. The ultimate outcome of this matter cannot be determined at this time.

Retail Regulatory Matters

Gulf Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Florida PSC. Gulf 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 energy costs, purchased power capacity costs, energy conservation and demand side management programs, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are recovered through base rates. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information. The recovery balance of each regulatory clause for Gulf Power is reported in Note (B) to the Condensed Financial Statements herein.

Retail Base Rate ~~Cases~~Case

~~The 2013~~As a continuation of the 2017 Gulf Power Rate Case Settlement Agreement, authorized Gulf Power to reduce depreciation and record a regulatory asset up to $62.5 million from January 2014 through June 2017. In any given month, such depreciation reduction could not exceed the amount necessary for the retail ROE, as reported to the Florida PSC monthly, to reach the midpoint of the authorized retail ROE range then in effect. For 2014 and 2015, Gulf Power recognized reductions in depreciation of $8.4 million and $20.1 million, respectively. No net reduction in depreciation was recorded in 2016. In the first six months of 2017, Gulf Power recognized the remaining allowable reductions in depreciation totaling $34.0 million.

~~On April 4, 2017,~~on March 26, 2018, the Florida PSC approved the ~~2017 Rate Case~~Gulf Power Tax Reform Settlement Agreement, a stipulation and settlement agreement among Gulf Power and three intervenors, ~~with respect~~addressing the retail revenue requirement effects of the Tax Reform Legislation.

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's ~~request~~revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to ~~increase retail base rates. Under~~normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the ~~terms~~remainder of 2018. As a result of the ~~2017 Rate Case~~Gulf Power Tax Reform Settlement Agreement, ~~Gulf Power increased rates effective with~~ the ~~first billing cycle in July 2017 to provide~~Florida PSC also approved an ~~annual overall net customer impact of approximately $54.3 million. The net customer impact consists of a $62.0 million~~ increase in annual base revenues less an annual equivalent credit of approximately $7.7 million for 2017 for certain wholesale revenues to be provided through December 2019 through the purchased power capacity cost recovery clause. In addition, Gulf ~~Power continued its authorized retail ROE midpoint (10.25%) and range (9.25% to 11.25%), is deemed to have an~~Power's maximum equity ratio offrom 52.5% to 53.5% for all retail regulatory ~~purposes, and implemented new dismantlement accruals effective July 1, 2017.~~purposes.

As part of the Gulf Power will also begin amortizing the regulatory asset associated with the investment balances remaining after the retirement of Plant Smith Units 1 and 2 over 15 years effective January 1, 2018 and will implement new depreciation rates effective January 1, 2018. The 2017 Rate CaseTax Reform Settlement Agreement, ~~also resulted~~a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in ~~a $32.5 million write-down of~~this regulatory liability will be refunded to retail customers in 2019 through Gulf Power's ownership of Plant Scherer Unit 3, which was recorded in the first quarter 2017. The remaining issues related to the inclusion of Gulf Power's investment in Plant Scherer Unit 3 in retail rates have been resolved as a result of the 2017 Rate Case Settlement Agreement, including recoverability of certain costs associated with the ongoing ownership and operation of the unit through the environmentalfuel cost recovery ~~clause rate approved by the Florida PSC in November 2016.~~

~~Cost Recovery Clauses~~rates. The ultimate outcome of this matter cannot be determined at this time.

See ~~MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Cost Recovery Clauses" of Gulf Power in Item 7 and~~ Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – ~~Cost Recovery Clauses"~~Retail Base Rate Cases" in Item 8 of the Form 10-K for additional ~~information regarding~~information.

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Gulf ~~Power's recovery~~Power in Item 7 of ~~retail costs through various regulatory clauses~~the Form 10-K and ~~accounting~~FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Gulf Power," and Note

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~~orders. Gulf Power has four regulatory clauses which are approved by the Florida PSC. See Note (B)~~(H) to the Condensed Financial Statements herein for ~~additional information.~~

~~As discussed previously,~~information regarding the ~~2017 Rate Case Settlement Agreement resolved the remaining issues~~Tax Reform Legislation and related to Gulf Power's inclusion of certain costs associated with the ongoing ownership and operation of Plant Scherer Unit 3 in the environmental cost recovery clause and no adjustment to the environmental cost recovery clause rate approved by the Florida PSC in November 2016 was made.regulatory actions.

Other Matters

Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. Gulf Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, 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.

Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstGulf Power~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Gulf Power's financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Gulf Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power's critical accounting policies and ~~estimates related to Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, and Contingent Obligations.~~estimates.

Recently Issued Accounting Standards

While Gulf Power expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of Gulf Power's revenue, including energy provided to customers, is from tariff offerings that provide electricity without a defined contractual term, as well as longer-term contractual commitments, including PPAs. Gulf Power expects that the revenue from contracts with these customers will not result in a significant shift in the timing of revenue recognition for such sales.

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See MANAGEMENT'S DISCUSSION AND ANALYSIS OF

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

– ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Gulf Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Gulf Power's ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Gulf Power's financial statements, if material. In addition, the power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Gulf Power expects CIAC to be out of the scope of ASC 606.

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Gulf Power intends to use the modified retrospective method of adoption effective January 1, 2018. Gulf Power has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized in Gulf Power's financial statements, Gulf Power will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.

~~On March 10, 2017, the FASB issued ASU No. 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Gulf Power is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Gulf Power's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Gulf Power's financial statements.recently adopted accounting standards.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Gulf Power in Item 7 of the Form 10-K for additional information. Gulf Power's financial condition remained stable at ~~June 30, 2017.~~March 31, 2018. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

Net cash provided from operating activities totaled ~~$124~~$104 million for the first ~~six~~three months of ~~2017~~2018 compared to ~~$196~~$50 million for the corresponding period in ~~2016.~~2017. The ~~$72~~$54 million ~~decrease in net cash~~increase was primarily due to increased fuel cost recovery and the timing of ~~fossil fuel stock purchases, a federal income tax refund received in 2016, as well as decreases in cash flows associated with lower cost recovery clause rates.~~accounts receivable collections. Net cash used for investing activities totaled ~~$123~~$71 million in the first ~~six~~three months of ~~2017~~2018 primarily due to property additions to utility plant. Net cash used for financing activities totaled $12 million for the first six months of 2017 primarily due to the payment of short-term debt, redemptions of preference stock and long-term debt, and common stock dividend payments, partially offset by proceeds from

~~105~~92

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~issuances~~activities totaled $22 million for the first three months of ~~long-term debt and~~2018 primarily due to the payment of a common ~~stock.~~stock dividend, partially offset by an increase in notes payable. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017 primarily reflect~~2018 include the ~~financing activities described above. Other significant changes include~~reclassification of $72 million to other regulatory liabilities, current from deferred credits related to income taxes as a ~~decrease in other cost~~result of ~~removal obligations, as authorized in~~ the ~~2013~~Gulf Power Tax Reform Settlement ~~Agreement, and a decrease in property, plant, and equipment primarily due to the write-down of Gulf Power's ownership of Plant Scherer Unit 3.~~Agreement. See ~~"Financing Activities" herein and Note (B) to the Condensed Financial Statements under "~~FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – ~~Gulf Power~~ – Retail Base Rate ~~Cases~~"Case" herein for additional ~~information.~~information regarding the Gulf Power Tax Reform Settlement Agreement.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power's capital requirements ~~for its construction program, including estimated capital expenditures to comply with existing environmental statutes~~ and ~~regulations,~~contractual obligations. There are no scheduled maturities of long-term debt ~~as well as related interest, leases, derivative obligations, purchase commitments, and trust funding requirements. Approximately $7 million will be required~~ through June 30, 2018 to fund maturities of long-term debt. In addition, at June 30, 2017, $20 million of Gulf Power's total fixed rate pollution control revenue bonds required to be remarketed over the next 12 months are classified as securities due within one year.March 31, 2019. See "Financing Activities" herein for additional information.

The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental ~~statutes~~laws and regulations; the outcome of any legal challenges to ~~the~~ environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing generating units, to meet regulatory requirements; changes in the expected environmental compliance programs; changes in FERC rules and regulations; Florida PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Gulf Power plans to obtain the funds required to meet its future capital needs from sources similar to those used in the past, which were primarily from operating cash flows, ~~short-term debt,~~ external security issuances, ~~term loans,~~borrowings from financial institutions, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Gulf Power in Item 7 of the Form 10-K for additional information.

At March 31, 2018, Gulf Power's current liabilities ~~frequently~~exceeded current assets by $40 million. Gulf Power's current liabilities may exceed current assets because of scheduled maturities of long-term debt and the ~~continued~~periodic use of short-term debt as a funding source, ~~to meet scheduled maturities of long-term debt,~~ as well as significant seasonal fluctuations in cash needs.

Gulf Power intends to utilize operating cash flows, external security issuances, and borrowings from financial institutions to fund its short-term capital needs. Gulf Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet short-term liquidity ~~needs, including its commercial paper program which is supported by bank credit facilities.~~

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~~GULF POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

needs.

At ~~June 30, 2017,~~March 31, 2018, Gulf Power had approximately ~~$45~~$39 million of cash and cash equivalents. Committed credit arrangements with banks at ~~June 30, 2017~~March 31, 2018 were as follows:


Expires	Expires											Executable Term Loans				Expires Within One Year				Expires									Executable Term Loans				Expires Within One Year
2017		2018		2019		2020		Total		Unused		One Year		Two Years		Term Out		No Term Out
2018																				2018	2019		2020		Total		Unused		One Year		Two Years		Term Out		No Term Out
(in millions)
$	30	$	195	$	25	$	30	$	280	$	280	$	45	$	—	$	—	$	40	20	$	25	$	235	$	280	$	280	$	45	$	—	$	20	$	—

See Note 6 to the financial statements of Gulf Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Most of these bank credit arrangements contain covenants that limit debt levels and contain cross-acceleration provisions to other indebtedness (including guarantee obligations) of Gulf Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Gulf Power defaulted on indebtedness, the payment of which was then accelerated. At ~~June 30, 2017,~~March 31, 2018, Gulf Power was in compliance with all such covenants. ~~None~~A portion ($40 million) of the bank credit arrangements contain material adverse change clauses at the time of borrowings.

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

Most of the unused credit arrangements with banks are allocated to provide liquidity support to Gulf Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of ~~June 30, 2017~~March 31, 2018 was approximately $82 million. In addition, at ~~June 30, 2017,~~March 31, 2018, Gulf Power had approximately ~~$140~~$75 million of fixed rate pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.

Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Gulf Power and the other traditional electric operating companies. Proceeds from such issuances for the benefit of Gulf Power are loaned directly to Gulf Power. The obligations of each traditional electric operating company under these arrangements are several and there is no cross-affiliate credit support. Short-term borrowings are included in notes payable inon the balance sheets.

Details of short-term borrowings were as follows:

Short-term Debt at
June 30, 2017

Short-term Debt During the Period^(*)

Amount
Outstanding

Weighted
Average
Interest
Rate

Average
Amount
Outstanding

Weighted
Average
Interest
Rate

Maximum
Amount
Outstanding
(in millions) (in millions) (in millions)
Commercial paper $ 78
1.5 % $ 20
1.4 % $ 78
Short-term bank debt —
— % 53
1.7 % 100
Total $ 78
1.5 % $ 73
1.6 %



	Short-term Debt at March 31, 2018				Short-term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)				(in millions)
Commercial paper	$	61	2.4	%	$	40	2.0	%	$	68


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017.~~March 31, 2018.

Gulf Power believes the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, short-term bank loans, and operating cash flows.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Credit Rating Risk

At ~~June 30, 2017,~~March 31, 2018, Gulf Power did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

The maximum potential collateral requirements under these contracts at ~~June 30, 2017~~March 31, 2018 were as follows:


Credit Ratings	Maximum Potential Collateral Requirements		Maximum Potential Collateral Requirements
	(in millions)		(in millions)
At BBB- and/or Baa3	$	167	$	147
Below BBB- and/or Baa3	$	570	$	479

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GULF POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Included in these amounts are certain agreements that could require collateral in the event that Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Gulf Power to access capital markets and would be likely to impact the cost at which it does so.

~~Market Price Risk~~

help mitigate these potential adverse impacts to Gulf Power's ~~market risk exposure relative to interest rate changes~~credit metrics by allowing a maximum equity ratio of 53.5% for ~~the second quarter and year-to-date 2017 has not changed materially compared~~all retail regulatory purposes. See Note 3 to the ~~December 31, 2016 reporting period.~~financial statements of Gulf ~~Power's exposure to market volatility~~Power under "Retail Regulatory Matters" in ~~commodity fuel prices~~Item 8 of the Form 10-K and ~~prices of electricity with respect to its wholesale generating capacity is limited because its long-term sales agreement shifts substantially all fuel cost responsibility~~Note (B) to the ~~purchaser.~~

~~In connection with the 2017 Rate Case Settlement Agreement,~~Condensed Financial Statements under "Regulatory Matters – Gulf Power recorded a $32.5 million write-down of Gulf Power's ownership of Plant Scherer Unit 3 in the first quarter 2017 to resolve the inclusion of Gulf Power's investment in Plant Scherer Unit 3 in retail rates and no adjustment to the environmental cost recovery clause rate approved by the Florida PSC in November 2016 was made. The 2017 Rate Case Settlement Agreement provides that 100% of Gulf Power's ownership of Plant Scherer Unit 3 will be included in retail rates. This resolved the market price risk concern around Gulf Power's uncontracted wholesale generating capacity related to Plant Scherer Unit 3. See FUTURE EARNINGS POTENTIAL – "~~Retail Regulatory Matters~~"Power" herein for additional information.

The Florida PSC extended the moratorium on Gulf Power's fuel-hedging program through January 1, 2021 in connection with the 2017 Rate Case Settlement Agreement. The moratorium does not have an impact on the recovery of existing hedges entered into under the previously-approved hedging program.

~~For additional discussion of Gulf Power's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Gulf Power in Item 7 of the Form 10-K.~~

Financing Activities

~~In January 2017,~~ Gulf Power issued 1,750,000 shares of common stock to Southern Company and realized proceeds of $175 million. The proceeds were used for general corporate purposes, including Gulf Power's continuous construction program.

Indid not issue or redeem any securities during the three months ended March 2017, Gulf Power extended the maturity of a $100 million short-term floating rate bank loan bearing interest based on one-month LIBOR from April 2017 to October 2017 and subsequently repaid the loan in May 2017.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

In May 2017, Gulf Power issued $300 million aggregate principal amount of Series 2017A 3.30% Senior Notes due May 30, 2027. The proceeds, together with other funds, were used to repay at maturity $85 million aggregate principal amount of Series 2007A 5.90% Senior Notes due June 15, 2017; to repay outstanding commercial paper borrowings; to repay a $100 million short-term floating rate bank loan, as discussed above; and to redeem 550,000 shares ($55 million aggregate liquidation amount) of 6.00% Series Preference Stock, 450,000 shares ($45 million aggregate liquidation amount) of Series 2007A 6.45% Preference Stock, and 500,000 shares ($50 million aggregate liquidation amount) of Series 2013A 5.60% Preference Stock.31, 2018.

In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF ~~INCOME~~OPERATIONS (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	222		$	206		$	422		$	389		$	194		$	200
Wholesale revenues, non-affiliates	62			60			124			120			63			62
Wholesale revenues, affiliates	15			7			20			16			34			5
Other revenues	4			4			9			8			11			5
Total operating revenues	303			277			575			533			302			272
Operating Expenses:
Fuel	102			81			180			157			98			78
Purchased power, non-affiliates	2			1			3			1
Purchased power, affiliates	4			4			11			9
Purchased power													9			8
Other operations and maintenance	70			68			144			136			75			76
Depreciation and amortization	41			45			81			84			41			40
Taxes other than income taxes	26			25			52			50			28			26
Estimated loss on Kemper IGCC	3,012			81			3,120			134			44			108
Total operating expenses	3,257			305			3,591			571			295			336
Operating Loss	(2,954		)	(28		)	(3,016		)	(38		)
Operating Income (Loss)													7			(64		)
Other Income and (Expense):
Allowance for equity funds used during construction	36			30			71			59			—			35
Interest expense, net of amounts capitalized	(17		)	(15		)	(37		)	(31		)	(19		)	(19		)
Other income (expense), net	1			(1		)	1			(3		)	1			1
Total other income and (expense)	20			14			35			25			(18		)	17
Loss Before Income Taxes	(2,934		)	(14		)	(2,981		)	(13		)	(11		)	(47		)
Income taxes (benefit)	(881		)	(17		)	(908		)	(27		)	(4		)	(27		)
Net Income (Loss)	(2,053		)	3			(2,073		)	14
Net Loss													(7		)	(20		)
Dividends on Preferred Stock	1			1			1			1			—			—
Net Income (Loss) After Dividends on Preferred Stock	$	(2,054	)	$	2		$	(2,074	)	$	13
Net Loss After Dividends on Preferred Stock													$	(7	)	$	(20	)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

For the Three Months Ended June 30, For the Six Months Ended June 30,
2017 2016 2017 2016
(in millions) (in millions)
Net Income (Loss) $ (2,053 ) $ 3
$ (2,073 ) $ 14
Other comprehensive income (loss)

Qualifying hedges:
Changes in fair value, net of tax of $-, $-, $-, and $-, respectively —
—
1
—
Total other comprehensive income (loss) —
—
1
—
Comprehensive Income (Loss) $ (2,053 ) $ 3
$ (2,072 ) $ 14



	For the Three Months Ended March 31,
	2018			2017
	(in millions)
Net Loss	$	(7	)	$	(20	)
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(1) and $-, respectively	(1		)	1
Total other comprehensive income (loss)	(1		)	1
Comprehensive Loss	$	(8	)	$	(19	)

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Net income (loss)	$	(2,073	)	$	14
Adjustments to reconcile net income (loss) to net cash provided from operating activities —
Net loss							$	(7	)	$	(20	)
Adjustments to reconcile net loss to net cash used for operating activities —
Depreciation and amortization, total	94			82			44			49
Deferred income taxes	(860		)	(16		)	155			(47		)
Allowance for equity funds used during construction	(71		)	(59		)	—			(35		)
Estimated loss on Kemper IGCC	3,120			134			37			108
Other, net	(11		)	(8		)	3			(3		)
Changes in certain current assets and liabilities —
-Receivables	(15		)	15			(129		)	5
-Fossil fuel stock	21			6
-Other current assets	(10		)	31			(12		)	13
-Accounts payable	(20		)	(12		)	(21		)	(35		)
-Accrued taxes	—			20			(110		)	(46		)
-Accrued compensation	(17		)	(12		)	(22		)	(22		)
-Over recovered regulatory clause revenues	(30		)	4			9			(12		)
-Customer liability associated with Kemper refunds	—			(69		)
-Other current liabilities	7			7			(9		)	5
Net cash provided from operating activities	135			137
Net cash used for operating activities							(62		)	(40		)
Investing Activities:
Property additions	(337		)	(403		)	(33		)	(186		)
Construction payables	(19		)	(11		)
Government grant proceeds	—			137
Payments pursuant to LTSAs							(9		)	1
Other investing activities	(5		)	(19		)	(10		)	(5		)
Net cash used for investing activities	(361		)	(296		)	(52		)	(190		)
Financing Activities:
Decrease in notes payable, net	(10		)	—
Increase (decrease) in notes payable, net							(4		)	9
Proceeds —
Capital contributions from parent company	1,001			226
Long-term debt to parent company	40			200
Other long-term debt	—			900
Senior notes							600			—
Short-term borrowings	4			—			300			4
Redemptions —
Short-term borrowings	—			(475		)
Long-term debt to parent company	(591		)	(225		)
Other long-term debt	(300		)	(425		)
Redemptions — Other long-term debt							(900		)	—
Other financing activities	(2		)	(3		)	(5		)	(1		)
Net cash provided from financing activities	142			198
Net Change in Cash and Cash Equivalents	(84		)	39
Cash and Cash Equivalents at Beginning of Period	224			98
Cash and Cash Equivalents at End of Period	$	140		$	137
Net cash provided from (used for) financing activities							(9		)	12
Net Change in Cash, Cash Equivalents, and Restricted Cash							(123		)	(218		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							248			224
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	125		$	6
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (paid $53 and $49, net of $27 and $23 capitalized for 2017 and 2016, respectively)	$	26		$	26
Cash paid during the period for —
Interest (paid $21 and $25, net of $- and $12 capitalized for 2018 and 2017, respectively)							$	21		$	13
Income taxes, net	(93		)	(122		)	19			—
Noncash transactions — Accrued property additions at end of period	59			94			30			78

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

MISSISSIPPI POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017		At December 31, 2016		At March 31, 2018		At December 31, 2017
	(in millions)				(in millions)
Current Assets:
Cash and cash equivalents	$	140	$	224	$	125	$	248
Receivables —
Customer accounts receivable	33		29		26		36
Unbilled revenues	42		42		35		41
Income taxes receivable, current	544		544		144		4
Affiliated					25		16
Other accounts and notes receivable	25		14		9		12
Affiliated	20		15
Fossil fuel stock	20		100		21		17
Materials and supplies	44		76
Materials and supplies, current					51		44
Other regulatory assets, current	114		115		123		125
Other current assets	2		8		2		9
Total current assets	984		1,167		561		552
Property, Plant, and Equipment:
In service	4,826		4,865		4,780		4,773
Less: Accumulated provision for depreciation	1,283		1,289		1,344		1,325
Plant in service, net of depreciation	3,543		3,576		3,436		3,448
Construction work in progress	56		2,545		93		84
Total property, plant, and equipment	3,599		6,121		3,529		3,532
Other Property and Investments	22		12		30		30
Deferred Charges and Other Assets:
Deferred charges related to income taxes	61		361		35		35
Other regulatory assets, deferred	441		518		449		437
Accumulated deferred income taxes	404		—		98		247
Other deferred charges and assets	20		56		10		33
Total deferred charges and other assets	926		935		592		752
Total Assets	$	5,531	$	8,235	$	4,712	$	4,866

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

MISSISSIPPI POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholder's Equity	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Liabilities:
Securities due within one year —
Parent	$	—		$	551
Other	1,028			78
Securities due within one year							$	214		$	989
Notes payable	17			23			300			4
Accounts payable —
Affiliated	54			62			47			59
Other	109			135			78			96
Customer deposits	16			16
Accrued taxes	97			99
Unrecognized tax benefits	385			383
Accrued interest	52			46
Accrued taxes —
Accrued income taxes							—			40
Other accrued taxes							31			101
Accrued compensation	25			42			18			39
Accrued plant closure costs							61			35
Asset retirement obligations, current	21			32			36			37
Over recovered regulatory clause liabilities	21			51
Other current liabilities	89			20			67			63
Total current liabilities	1,914			1,538			852			1,463
Long-term Debt	1,169			2,424			1,567			1,097
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	—			756
Deferred credits related to income taxes							391			372
Employee benefit obligations	111			115			115			116
Asset retirement obligations, deferred	149			146			134			137
Other cost of removal obligations	173			170			177			178
Other regulatory liabilities, deferred	80			84			78			79
Other deferred credits and liabilities	29			26			14			33
Total deferred credits and other liabilities	542			1,297			909			915
Total Liabilities	3,625			5,259			3,328			3,475
Redeemable Preferred Stock	33			33			33			33
Common Stockholder's Equity:
Common stock, without par value —
Authorized — 1,130,000 shares
Outstanding — 1,121,000 shares	38			38			38			38
Paid-in capital	4,527			3,525			4,531			4,529
Accumulated deficit	(2,689		)	(616		)	(3,213		)	(3,205		)
Accumulated other comprehensive loss	(3		)	(4		)	(5		)	(4		)
Total common stockholder's equity	1,873			2,943			1,351			1,358
Total Liabilities and Stockholder's Equity	$	5,531		$	8,235		$	4,712		$	4,866

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

Mississippi Power operates as a vertically integrated utility providing electric service to retail customers within its traditional service territory located within the State of Mississippi and to wholesale customers in the Southeast.

Many factors affect the opportunities, challenges, and risks of Mississippi Power's business of providing electric service. These factors include Mississippi Power's ability to maintain and grow energy sales and to operate in a constructive regulatory environment that provides timely recovery of prudently-incurred costs. These costs include those related to ~~the Kemper County energy facility, projected long-term demand growth,~~ reliability, fuel, and stringent environmental standards, as well as ongoing capital and operations and maintenance expenditures ~~required for maintenance~~ and restoration following major storms. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Mississippi Power for the foreseeable future.

~~The Kemper IGCC was approved by~~During the first quarter 2018, Mississippi ~~PSC in~~Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the ~~2010 CPCN proceedings, subject to a construction cost cap of $2.88 billion, net of $245 million of grants awarded to~~abandonment and related closure activities for the ~~project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite~~ mine and ~~equipment, the cost of the CO~~₂ pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). The combined cycle and associated common facilities portion of the Kemper IGCC were placed in service in August 2014.

In December 2015, the Mississippi PSC issued an order (In-Service Asset Rate Order), based on a stipulation (2015 Stipulation) between Mississippi Power and the Mississippi Public Utilities Staff (MPUS), authorizing rates that provide for the recovery of approximately $126 million annually related to the combined cycle and associated common facilities portion of Kemper IGCCgasifier-related assets previously placed in service. As required by the In-Service Asset Rate Order, on June 5, 2017, Mississippi Power made a rate filing requesting to adjust the amortization schedules of the regulatory assets reviewed and determined prudent in a manner that would not change customer rates or annual revenues. On June 28, 2017, the Mississippi PSC suspended this filing. On July 6, 2017, the Mississippi PSC issued an order requiring Mississippi Power to establish a regulatory liability account to maintain current rates related to the Kemper IGCC following the July 2017 completion of the amortization period for certain regulatory assets approved in the In-Service Asset Rate Order that would allow for subsequent refund if the Mississippi PSC deems the rates unjust and unreasonable.

~~On June 21, 2017, the Mississippi PSC stated its intent to issue an order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which~~at the Kemper County energy ~~facility would be operated as a~~

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~~natural gas plant, rather than an IGCC plant, and address all issues associated with the Kemper IGCC (Kemper Settlement Order). The Kemper Settlement Order established a new docket~~facility. Additional closure costs for the purposes of pursuing a global settlement of costs of the Kemper IGCC (Kemper IGCC Settlement Docket). The Mississippi PSC requested any such proposed settlement agreement reflect: (i) at a minimum, no rate increase to Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifiermine and related assets; and (iii) modification or amendment of the CPCN for the Kemper IGCC to allow only for ownership and operation of a natural gas facility. The Kemper Settlement Order provides that any related settlement agreement be filed within 45 days from the effective date of the Kemper Settlement Order. If a settlement agreement is filed, a hearing will be set 45 days from the date of the settlement's filing, and the appropriate scheduling order will be established.

Although the ability to achieve a negotiated settlement is uncertain, Mississippi Power intends to pursue any available settlement alternatives. In addition, the Kemper Settlement Order provides that, in the event a settlement agreement is not reached, the Mississippi PSC reserves its right to take any appropriate steps,gasifier-related assets, including ~~issuing an order to show cause as to why the CPCN for the Kemper IGCC should not be revoked.~~

At the time of project suspension, the total cost estimate for the Kemper IGCC was approximately $7.38 billion, including approximately $5.95 billion of costs subject to the construction cost cap, and was net of the $137 million in additional grants from the DOE received on April 8, 2016 (Additional DOE Grants). Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate subject to the construction cost cap totaling $196 million ($121 million after tax) in the second quarter through May 31, 2017 and a total of $305 million ($188 million after tax) for year-to-date through May 31, 2017. In the aggregate, Mississippi Power incurred charges of $3.07 billion ($1.89 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through May 31, 2017. The May 31, 2017 cost estimate included approximately $175 million of estimated costs to be incurred beyond the then-estimated in-service date of June 30, 2017 that were expected to be subject to the $2.88 billion cost cap.

While the ultimate disposition of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increase for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 of $2.8 billion ($2.0 billion after tax), which includes estimated costs associated with the gasification portions of the plant and lignite mine. In the event the gasification portions of the project are ultimately canceled, additional pre-tax costsash disposal, currently estimated ~~at approximately $100~~to cost up to $50 million ~~to $200 million~~pre-tax (excluding salvage), are expected to be ~~incurred.~~

~~Total pre-tax charges~~incurred during the remainder of 2018 and 2019. In addition, period costs, including, but not limited to, ~~income~~costs for compliance and safety, ARO accretion, and property taxes for the mine and gasifier-related assets, are estimated ~~probable losses on the Kemper IGCC were $3.0 billion ($2.1 billion after tax)~~at $4 million for the ~~second quarter 2017~~remainder of 2018, $4 million in 2019, and $3.1 billion ($2.2 billion after tax) for the six months ended June 30, 2017. In the aggregate, since the Kemper IGCC project started, Mississippi Power has incurred charges of $6.0 billion ($3.9 billion after tax) through June 30, 2017.

~~As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion~~$1 million annually beginning in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that was

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions.2020. The ultimate outcome ~~will~~of this matter cannot be determined ~~by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.~~at this time.

For additional information on the Kemper ~~IGCC, including information on the project economic viability analysis, pending lawsuits, and an ongoing SEC investigation,~~County energy facility, see Note 3 to the financial statements of Mississippi Power under ~~"Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "~~Integrated Coal Gasification Combined Cycle" and "Other Matters"~~"Kemper County Energy Facility" and Note (B) to the Condensed Financial Statements under "~~Integrated Coal Gasification Combined Cycle" herein.~~

In June 2017, Southern Company made equity contributions totaling $1.0 billion to Mississippi Power. Mississippi Power used a portion of the proceeds to (i) prepay $300 million of the outstanding principal amount under its $1.2 billion unsecured term loan; (ii) repay $591 million of the outstanding principal amount of promissory notes to Southern Company; and (iii) repay $10 million of the outstanding principal amount of bank loans.

Mississippi Power's financial statement presentation contemplates continuation of Mississippi Power as a going concern as a result of Southern Company's anticipated ongoing financial support of Mississippi Power. For additional information, see Notes 1 and 6 to the financial statements of Mississippi Power under "Recently Issued Accounting Standards" and "Going Concern," respectively, in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Going Concern""Kemper County Energy Facility" herein.

~~In addition to the rate recovery of the Kemper County energy facility,~~ Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power's long-term financial success is dependent upon how well it satisfies its customers' needs, Mississippi Power's retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power's allowed ROE. Mississippi Power also focuses on broader measures of customer satisfaction, plant availability, system reliability, and net income after dividends on preferred stock.

~~RESULTS OF OPERATIONS~~

~~Net Income (Loss)~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(2,056) N/M $(2,087) N/M

~~N/M - Not meaningful~~

~~In the second quarter and year-to-date 2017,~~On February 7, 2018, Mississippi ~~Power's net loss after dividends on preferred stock was $2.05 billion and $2.07 billion, respectively, compared to net income of $2 million and $13 million, respectively, for the corresponding periods~~Power revised its annual projected PEP filing, requesting an increase in 2016. In the second quarter and year-to-date 2017, the decrease in net income was related to higher pre-tax charges associated with the Kemper IGCC of $3.0 billion ($2.1 billion after tax) and $3.1 billion ($2.2 billion after tax), respectively, compared to pre-tax charges of $81 million ($50 million after tax) and $134 million ($83 million after tax), respectively, for the corresponding periods in 2016. The changes in net income were partially offset by a decrease in depreciation and amortization and increases inannual retail revenues ~~AFUDC equity,~~of $26 million. On February 14, 2018, Mississippi Power submitted its 2018 ECO Plan filing, requesting an increase in annual retail revenue of $17 million. These filings include the effects of the Tax Reform Legislation. The Mississippi PSC is expected to rule on these requests in mid-2018. The ultimate outcome of these matters cannot be determined at this time.

On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and ~~income tax benefits.~~

~~See Note 3~~instructed its legal staff and the Mississippi Public Utilities Staff (MPUS) to ~~the financial statements~~prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power ~~under "Integrated Coal Gasification Combined Cycle"~~expects that the review will include its cost recovery framework and an analysis of potential participation in ~~Item 8~~a regional transmission organization. The ultimate outcome of ~~the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle~~"this matter cannot be determined at this time.

See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" herein for additional information.

In March 2018, Mississippi Power issued $300 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018, Mississippi Power also entered into a $300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from these financings to repay the entire $900 million principal amount of its unsecured term loan.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Retail Revenues~~RESULTS OF OPERATIONS

Net Income (Loss)

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$16 7.8 $33 8.5



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$13		65.0

InMississippi Power's net loss after dividends on preferred stock for the ~~second~~first quarter ~~2017, retail revenues were $222~~2018 was $7 million compared to ~~$206~~$20 million for the corresponding period in ~~2016. For year-to-date 2017,~~2017. The change was related to lower pre-tax charges associated with the Kemper County energy facility, partially offset by the cessation of AFUDC equity related to the Kemper County energy facility in the second quarter 2017.

See Note 3 to the financial statements of Mississippi Power under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.

Retail Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(6)		(3.0)

In the first quarter 2018, retail revenues were ~~$422~~$194 million compared to ~~$389~~$200 million for the corresponding period in ~~2016.~~2017.

Details of the changes in retail revenues were as follows:


	Second Quarter 2017					Year-to-Date 2017					First Quarter 2018
	(in millions)			(% change)		(in millions)			(% change)		(in millions)			(% change)
Retail – prior year	$	206				$	389				$	200
Estimated change resulting from –
Rates and pricing	8			3.9		19			4.9		(5		)	(2.5	)
Sales growth (decline)	(2		)	(0.9	)	3			0.8
Sales decline											(1		)	(0.5	)
Weather	(2		)	(1.0	)	(7		)	(1.8	)	5			2.5
Fuel and other cost recovery	12			5.8		18			4.6		(5		)	(2.5	)
Retail – current year	$	222		7.8	%	$	422		8.5	%	$	194		(3.0	)%

Revenues associated with changes in rates and pricing ~~increased~~decreased in the ~~second~~first quarter ~~and year-to-date 2017~~2018 when compared to the corresponding ~~periods~~period in ~~2016~~2017 primarily due to an ECO Plan rate ~~increase implemented in the third quarter 2016, partially offset by an ECO Plan rate~~ decrease of $5 million implemented in the second quarter 2017. See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters – Environmental Compliance Overview Plan" in Item 8 of the Form 10-K for additional information.

Revenues attributable to changes in sales decreased for the ~~second~~first quarter ~~2017~~2018 compared to the corresponding period in 2017. Weather-adjusted residential KWH sales increased 0.3% in 2018 primarily due to customer growth. Weather-adjusted commercial KWH sales decreased 0.3% primarily due to decreased customer usage related to energy efficiency, largely offset by customer growth. Industrial KWH sales increased 1.2% primarily due to increased usage by several large industrial customers.

Fuel and other cost recovery revenues decreased in the first quarter 2018 when compared to the corresponding period in 2016. Weather-adjusted KWH sales to residential customers decreased 2.7% due to lower customer usage. Weather-adjusted KWH sales to commercial customers decreased 0.8% due to lower customer usage, offset by customer growth. KWH sales to industrial customers decreased 1.3% primarily due to an unplanned outage by a large customer in 2017 ~~and a decrease in the number of mid-size customers.~~

Revenues attributable to changes in sales increased for year-to-date 2017 when compared to the corresponding period in 2016. Weather-adjusted KWH sales to residential and commercial customers decreased 0.7% and 0.5%, respectively, due to lower customer usage. KWH sales to industrial customers decreased 0.4% primarily due to an unplanned outage by a larger customer in 2017 and a decrease in the number of mid-size customers.

~~Fuel and other cost recovery revenues increased in the second quarter and year-to-date 2017 when compared to the corresponding periods in 2016,~~ primarily as a result of ~~higher~~lower recoverable fuel costs. ~~See "Fuel and Purchased Power Expenses" herein for additional information.~~ Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel portion of wholesale revenues from energy sold to customers outside Mississippi Power's service territory. Electric rates include provisions to adjust billings for fluctuations in fuel costs,

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including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income.

Wholesale Revenues – Non-Affiliates

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$2 3.3 $4 3.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$1		1.6

Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for

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energy within the Southern Company system's electric service territory, and the availability of the Southern ~~Company system's~~Company's system generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power provides service under long-term contracts with rural electric cooperative associations and municipalities located in southeastern Mississippi under cost-based electric tariffs which are subject to regulation by the FERC. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "FERC Matters" of Mississippi Power in Item 7 of the Form 10-K and – FUTURE EARNINGS POTENTIAL – "FERC Matters" herein for additional information.

In the ~~second~~first quarter ~~and year-to-date 2017,~~2018, wholesale revenues from sales to non-affiliates were ~~$62~~$63 million ~~and $124 million, respectively,~~ compared to ~~$60 million and $120~~$62 million for the corresponding ~~periods~~period in ~~2016.~~2017. The ~~increases were~~increase was due to ~~increases~~a $5 million increase in ~~energy~~ revenues due to weather impacts, partially offset by a decrease of $4 million ~~and $5 million in the second quarter and year-to-date 2017, respectively, primarily resulting from higher fuel prices, partially offset by decreases in base and capacity revenues~~related to a refund of ~~$2 million and $1 million, respectively, primarily due to milder weather resulting in lower sales.~~transmission revenues.

Wholesale Revenues – Affiliates

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$8 N/M $4 25.0



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$29		N/M

N/M - Not meaningful

In the ~~second~~first quarter ~~2017,~~2018, wholesale revenues from sales to affiliates were ~~$15~~$34 million compared to $7$5 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to a $6$16 million increase associated with higher natural gas prices and a $13 million increase in KWH sales ~~and a $2 million increase primarily~~ due to ~~higher natural gas prices.~~dispatch of Mississippi Power's lower cost generation resources to serve the Southern Company system's territorial load. The KWH sales increase is partially related to Mississippi Power's generation outages which decreased the amount of KWH available to dispatch in 2017.

~~For year-to-date 2017, wholesale~~Other Revenues



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$6		N/M

N/M - Not meaningful

In the first quarter 2018, other revenues ~~from sales to affiliates~~ were ~~$20~~$11 million compared to ~~$16~~$5 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to ~~higher natural gas prices.~~

~~Fuel and Purchased Power Expenses~~

Second Quarter 2017
vs.
Second Quarter 2016 Year-to-Date 2017
vs.
Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
Fuel $ 21
25.9 $ 23
14.6
Purchased power – non-affiliates 1
100.0 2
200.0
Purchased power – affiliates —
— 2
22.2
Total fuel and purchased power expenses $ 22
$ 27

In the second quarter 2017, total fuel and purchased power expenses were $108 million compared to $86 million for the corresponding period in 2016. The increase was due to a $17 million increase in natural gas prices and a $5 million increase in ~~the volume of KWHs generated and purchased.~~

For year-to-date 2017, total fuel and purchased power expenses were $194 million compared to $167 million for the corresponding period in 2016. The increase was due to a $34 million increase in natural gas prices, partially offset by a $7 million decrease in the volume of KWHs generated and purchased.transmission revenues.

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Fuel and Purchased Power Expenses



	First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)
Fuel	$	20	25.6
Purchased power	1		12.5
Total fuel and purchased power expenses	$	21

In the first quarter 2018, total fuel and purchased power expenses were $107 million compared to $86 million for the corresponding period in 2017. The increase was primarily due to a $20 million increase in the volume of KWHs generated and a $1 million increase in the cost of purchased power.

Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power's fuel cost recovery clause.

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


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
Total generation (in millions of KWHs)	3,927	3,728	7,088	7,315	4,003	3,161
Total purchased power (in millions of KWHs)^(*)	121	188	362	449	194	242
Sources of generation (percent) –
Coal	7	5	8	8	4	9
Gas	93	95	92	92	96	91
Cost of fuel, generated (in cents per net KWH) –
Coal	3.61	5.49	3.46	4.16	3.62	3.33
Gas	2.73	2.17	2.69	2.16	2.60	2.65
Average cost of fuel, generated (in cents per net KWH)	2.79	2.33	2.76	2.32	2.65	2.71
Average cost of purchased power (in cents per net KWH)^(*)	4.74	2.55	3.80	2.33	4.74	3.33


(*)	Includes energy produced during the test period for the Kemper IGCC, which is accounted for in accordance with FERC guidance.

Fuel

In the ~~second~~first quarter ~~2017,~~2018, total fuel expense was ~~$102~~$98 million compared to ~~$81~~$78 million for the corresponding period in ~~2016.~~2017. The increase was due to a ~~20% increase in the average cost of fuel per KWH generated, primarily due to a 26% higher cost of natural gas, and a 6%~~29% increase in the volume of KWHs ~~generated.~~generated primarily as a result of higher sales.

~~For year-to-date 2017,~~Purchased Power

In the first quarter 2018, total ~~fuel~~purchased power expense was ~~$180~~$9 million compared to ~~$157~~$8 million for the corresponding period in ~~2016.~~2017. The increase was primarily due to a ~~19%~~$3 million, or 42.7%, increase in the average cost ~~of fuel~~ per KWH ~~generated primarily due to a 25% higher cost of natural gas,~~purchased, partially offset by a 3%$2 million, or 19.6%, decrease in the volume of KWHs ~~generated.~~

~~Purchased Power~~purchased as compared to 2017.

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. ~~Energy~~These purchases ~~from affiliates~~ are made in accordance with the IIC or other contractual agreements, as approved by the FERC.

~~Other Operations and Maintenance Expenses~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$2 2.9 $8 5.9

For year-to-date 2017, other operations and maintenance expenses were $144 million compared to $136 million for the corresponding period in 2016. The increase was primarily associated with the Kemper IGCC in-service assets.

~~See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle~~ – ~~Rate Recovery of Kemper IGCC Costs~~ – ~~2015 Rate Case" herein for additional information.~~

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~~Depreciation and Amortization~~Taxes Other Than Income Taxes

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(4) (8.9) $(3) (3.6)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$2		7.7

In the ~~second~~first quarter ~~2017, depreciation and amortization was $41~~2018, taxes other than income taxes were $28 million compared to ~~$45~~$26 million for the corresponding period in ~~2016. For year-to-date 2017, depreciation~~2017. The increase was primarily due to higher ad valorem taxes.

The retail portion of ad valorem taxes is recoverable under Mississippi Power's ad valorem tax cost recovery clause and, amortization was $81 million compared to $84 million for the corresponding period in 2016. The decreases were primarily related to changes in amortization and deferrals associated with regulatory assets.

~~See Note 1 to the financial statements of Mississippi Power under "Depreciation, Depletion, and Amortization" in Item 8 of the Form 10-K.~~therefore, does not affect net income.

Estimated Loss on Kemper IGCC

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$2,931 N/M $2,986 N/M



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(64)		(59.3)

~~N/M - Not meaningful~~

~~Prior to the project suspension on June 28, 2017, estimated probable~~Estimated losses on the Kemper IGCC ~~totaled $196~~of $44 million ~~and $305 million~~were recorded in the ~~second~~first quarter 2018 resulting from the abandonment and ~~year-to-date 2017, respectively,~~related closure activities for the mine and gasifier-related assets as compared to ~~$81~~$108 million ~~and $134 million~~for the corresponding period in 2017 related to revisions to the ~~second quarter and year-to-date 2016, respectively. These losses reflected revisions of~~ estimated ~~costs expected to be incurred on the~~ construction ~~of the Kemper IGCC~~costs prior to ~~project suspension in excess of~~ the ~~$2.88 billion cost cap established by the Mississippi PSC, net of the Initial DOE Grants and excluding the Cost Cap Exceptions.~~

While the ultimate disposition of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increase for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 ~~of $2.8 billion, which includes estimated costs associated with the gasification portions of the plant and lignite mine.~~project suspension.

See Note 3 to the financial statements of Mississippi Power under ~~"Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form 10-K ~~and FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle~~" and Note (B) to the Condensed Financial Statements under "~~Integrated Coal Gasification Combined Cycle~~""Kemper County Energy Facility" herein for additional information.

Allowance for Equity Funds Used During Construction

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$6 20.0 $12 20.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(35)		(100.0)

In the ~~second~~first quarter ~~2017,~~2018, AFUDC equity was ~~$36 million~~immaterial compared to ~~$30~~$35 million for the corresponding period in ~~2016. For year-to-date 2017, AFUDC equity was $71 million compared to $59 million for the corresponding period in 2016.~~2017. The ~~increases~~decrease resulted from ~~a higher AFUDC rate and an increase in~~suspension of the Kemper IGCC ~~CWIP subject to AFUDC prior to project suspension.~~construction in June 2017.

See Note 3 to the financial statements of Mississippi Power under ~~"FERC Matters" and "Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form 10-K and ~~FUTURE EARNINGS POTENTIAL – "Integrated~~Note (B) to the Condensed Financial Statements under "Kemper County Energy Facility" herein for additional information.

Interest Expense, Net of Amounts Capitalized

In the first quarter 2018, interest expense, net of amounts capitalized was flat compared to the corresponding period in 2017 reflecting a $12 million reduction in AFUDC debt due to the Kemper IGCC project suspension in June 2017, largely offset by a $9 million decrease in interest expense as a result of a decrease in average outstanding debt and the reversal of tax reserves in 2017 and a $3 million decrease due to the completion of Kemper IGCC carrying cost amortization in 2017.

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~~Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "FERC Matters" and "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC.~~

~~Interest Expense, Net of Amounts Capitalized~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$2 13.3 $6 19.4

~~In the second quarter 2017, interest expense, net of amounts capitalized was $17 million compared to $15 million~~, for the corresponding period in 2016. For year-to-date 2017, interest expense, net of amounts capitalized was $37 million compared to $31 million for the corresponding period in 2016. The increases were primarily associated with the Kemper IGCC in-service assets.

~~See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.~~

Income Taxes (Benefit)

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(864) N/M $(881) N/M

~~N/M - Not meaningful~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$23		85.2

In the ~~second~~first quarter ~~2017,~~2018, income tax benefit was ~~$881 million compared to $17 million for the corresponding period in 2016. For year-to-date 2017, income tax benefit was $908~~$4 million compared to $27 million for the corresponding period in ~~2016.~~2017. The ~~changes were~~decrease was primarily due to ~~the~~lower estimated ~~probable~~ losses on the Kemper IGCC, net of the related non-deductible AFUDC equity ~~portion~~in 2018 due to the Kemper IGCC project suspension. The decrease also reflects increases resulting from higher pre-tax earnings, partially offset by the reversal of tax reserves in 2017 and the ~~related state valuation allowances.~~impact of the Tax Reform Legislation.

See Note ~~(G)~~(H) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Mississippi Power's future earnings potential. The level of Mississippi Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power's business of providing electric service. These factors include Mississippi Power's ability to recover its prudently-incurred costs ~~including those related to the remainder of the Kemper County energy facility not included in current rates,~~ in a timely manner during a time of increasing costs and ~~its~~limited projected demand growth over the next several years. Another factor is Mississippi Power's ability to prevail against legal challenges associated with the Kemper County energy facility. Future earnings will be driven primarily by customer growth. Earnings will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies and increasing volumes of electronic commerce ~~transactions.~~transactions, both of which could contribute to a net reduction in customer usage. Earnings are subject to a variety of other factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Mississippi Power's service territory. Demand for electricity is primarily driven by ~~economic growth. The~~the pace of economic growth ~~and electricity demand~~that may be affected by changes in regional and global economic conditions, which may impact future earnings.

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~~transition rules and cannot be determined at this time, but could have a material impact on Mississippi Power's financial statements.~~

For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form ~~10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.~~10-K.

Environmental Matters

~~Compliance~~Mississippi Power's operations are regulated by state and federal environmental agencies through a variety of laws and regulations governing air, water, land, and protection of other natural resources. Mississippi Power maintains comprehensive environmental compliance and greenhouse gas (GHG) strategies to assess upcoming requirements and compliance costs ~~related~~associated with these environmental laws and regulations. The costs, including capital expenditures and operations and maintenance costs, required to ~~federal and state~~comply with environmental ~~statutes~~laws and regulations and to achieve stated goals may impact future unit retirement and replacement decisions, results of operations, cash flows, and financial condition. Related costs may result from the installation of additional environmental controls, closure and monitoring of CCR facilities, unit retirements, and adding or changing fuel sources for certain existing units, as well as related upgrades to the transmission system. A major portion of these costs are expected to be recovered through existing ratemaking provisions. The ultimate impact of environmental laws and regulations and the GHG goals discussed below will depend on various factors, such as state adoption and implementation of requirements, the availability and cost of any deployed control technology, and the outcome of pending and/or future legal challenges.

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New or revised environmental laws and regulations could affect many areas of Mississippi Power's operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through long-term wholesale agreements. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, ~~higher~~increased costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for electricity. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

Environmental ~~Statutes~~Laws and Regulations

~~Water Quality~~Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental ~~Statutes~~Laws and Regulations – ~~Water Quality"~~ Coal Combustion Residuals" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the Disposal of Coal Combustion Residuals from Electric Utilities rule (CCR Rule).

Consistent with the EPA's announced plans to reconsider certain portions of the CCR Rule, on March 15, 2018, the EPA published the first of two proposed coal ash rules it plans to finalize by no later than December 2019. The impact of any changes to the CCR Rule will depend on the content of the final ~~effluent guidelines~~ rule and the ~~final rule revising the regulatory definition of waters of the U.S. for all Clean Water Act (CWA) programs.~~

~~The ultimate~~ outcome of ~~these matters~~any legal challenges and cannot be determined at this time.

Global Climate Issues

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Mississippi Power in Item 7 of the Form 10-K for additional information.

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

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FERC Matters

~~Municipal and Rural Associations Tariff~~

See Note 3 to the financial statements of Mississippi Power under "FERC Matters" in Item 8 of the Form 10-K for additional information regarding a settlement agreement entered into by Mississippi Power regarding the establishment of a regulatory asset for Kemper IGCC-related costs. See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "~~Integrated Coal Gasification Combined Cycle" herein for information regarding the Kemper IGCC.~~

In March 2016, Mississippi Power reached a settlement agreement with its wholesale customers, which was subsequently approved by the FERC, for an increase in wholesale base revenues under the MRA cost-based electric tariff, primarily as a result of placing scrubbers for Plant Daniel Units 1 and 2 in service in 2015. The settlement agreement became effective for services rendered beginning May 1, 2016, resulting in an estimated annual revenue increase of $7 million under the MRA cost-based electric tariff. Additionally, under the settlement agreement, the tariff customers agreed to similar regulatory treatment for MRA tariff ratemaking as the treatment approved for retail ratemaking under the In-Service Asset Rate Order. This regulatory treatment primarily includes (i) recovery of the Kemper IGCC assets currently operational and providing service to customers and other related costs, (ii) amortization of the Kemper IGCC-related regulatory assets included in rates under the settlement agreement over the 36 months ending April 30, 2019, (iii) Kemper IGCC-related expenses included in rates under the settlement agreement no longer being deferred and charged to expense, and (iv) removing all of the Kemper IGCC CWIP from rate base with a corresponding increase in accrual of AFUDC. The additional resulting AFUDC totaled approximately $22 million through the suspension of Kemper IGCC start-up activities.

~~See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.~~

~~Fuel Cost Recovery~~

Mississippi Power has a wholesale MRA and a Market Based (MB) fuel cost recovery factor. At June 30, 2017, the amount of over-recovered wholesale MRA fuel costs included in the balance sheets was $7 million compared to $13 million at December 31, 2016. Over-recovered wholesale MB fuel costs included in the balance sheets were immaterial at June 30, 2017 and December 31, 2016.

See Note 3 to the financial statements of Mississippi Power under "FERC Matters – ~~Fuel Cost Recovery"~~Cooperative Energy Power Supply Agreement" in Item 8 of the Form 10-K for additional ~~information.~~

~~Market-Based Rate Authority~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"FERC Matters~~ – ~~Market-Based Rate Authority" of Mississippi Power in Item 7 of the Form 10-K for additional~~ information regarding ~~the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.~~Cooperative Energy's network integration transmission service agreement (NITSA) with SCS.

On ~~May 17, 2017,~~March 23, 2018, the FERC accepted the ~~traditional electric operating companies' (including Mississippi Power's)~~amendment to the NITSA between Cooperative Energy and Southern Power's compliance filing accepting the terms of the FERC's February 2, 2017 order regarding an amendment by the traditional electric operating companies (including Mississippi Power) and Southern Power to their market-based rate tariff. While the FERC's order references the traditional electric operating companies' (including Mississippi Power's) and Southern Power's market power proceeding, it remains a separate, ongoing matter.SCS, effective April 1, 2018.

Retail Regulatory Matters

Mississippi Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's rates are a combination of base rates under PEP and several separate cost recovery

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clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased power, energy efficiency programs, ad valorem taxes, property damage, and the costs of compliance with

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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.

On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and instructed its legal staff and the MPUS to prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power expects that the review will include its cost recovery framework and an analysis of potential participation in a regional transmission organization. The ultimate outcome of this matter cannot be determined at this time.

See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters" and ~~"Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Mississippi Power" ~~and "Integrated Coal Gasification Combined Cycle~~" herein for additional information.

~~Renewables~~

Performance Evaluation Plan

On March ~~15, 2017,~~22, 2018, Mississippi Power submitted its annual PEP lookback filing for ~~2016,~~2017, which reflected no surcharge or refund.

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

Environmental Compliance Overview Plan

On February 14, 2018, Mississippi Power submitted its ECO Plan filing for 2018, including the ~~need~~effects of the Tax Reform Legislation, which requested the maximum 2% annual increase in revenues, or approximately $17 million, primarily related to the carryforward from the prior year. Approximately $13 million of related revenue requirements in excess of the 2% maximum, along with related carrying costs, remains deferred for ~~a $5 million surcharge~~inclusion in the 2019 filing. The Mississippi PSC is expected to ~~be recovered from customers. The filing has been suspended for review by the Mississippi PSC.~~rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

~~Energy Efficiency~~

On July 6, 2017, the Mississippi PSC issued an order approving Mississippi Power's Energy Efficiency Cost Rider compliance filing, which increased annual retail revenues by approximately $2 million effective with the first billing cycle for August 2017.

~~Environmental Compliance Overview Plan~~

On May 4, 2017, the Mississippi PSC approved Mississippi Power's ECO Plan filing for 2017, which requested the maximum 2% annual increase in revenues, approximately $18 million, primarily related to the Plant Daniel Units 1 and 2 scrubbers placed in service in 2015. The rates became effective with the first billing cycle for June 2017. Approximately $26 million of related revenue requirements in excess of the 2% maximum was deferred for inclusion in the 2018 filing.

Fuel Cost Recovery

At ~~June 30, 2017,~~March 31, 2018, the amount of over-recovered retail fuel costs included in other regulatory liabilities, current on the condensed balance sheet was ~~$14~~approximately $3 million compared to ~~$37~~an approximately $6 million under-recovered balance in other accounts and notes receivable at December 31, ~~2016.~~2017.

Ad Valorem Tax Adjustment

On ~~July 6, 2017, the~~March 23, 2018, Mississippi ~~PSC approved Mississippi Power's~~Power submitted its annual ad valorem tax adjustment factor filing for ~~2017,~~2018, which included an annual rate increase of ~~0.85%~~0.8%, or $8$7 million in annual retail revenues, primarily due to increased assessments. The ultimate outcome of this matter cannot be determined at this time.

~~Integrated Coal Gasification Combined Cycle~~Kemper County Energy Facility

~~See~~For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Mississippi Power under ~~"Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form ~~10-K for information regarding Mississippi Power's construction of~~10-K.

As the ~~Kemper IGCC.~~

~~Kemper IGCC Overview~~

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and situated adjacent to the Kemper IGCC. The mine, operated by North American Coal Corporation, started commercial operation in 2013. In connection with the Kemper IGCC, Mississippi Power constructed approximately 61 miles of CO₂ ~~pipeline infrastructure for the transport of captured CO~~₂ ~~for use in enhanced oil recovery.~~

~~Kemper IGCC Schedule and Cost Estimate~~

In 2012, the Mississippi PSC issued the 2012 MPSC CPCN Order, a detailed order confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC. The certificated cost estimate of the Kemper IGCC included in the 2012 MPSC CPCN Order was $2.4 billion, net of $245 million of Initial DOE Grants and excluding the cost of the lignite mine and equipment, the cost of the CO₂ pipeline facilities, and AFUDC related to the Kemper IGCC. The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, with recovery of prudently-incurred costs subject to approval by the Mississippi PSC. The Kemper IGCC was originally projected to be placed in service in May 2014. Mississippi Power placed the combined cycle and the associated common facilities portion of the Kemper IGCC in service in August 2014. The remainder of the plant includes the gasifiers and the gas clean-up facilities. The initial production of syngas began on July 14, 2016 for gasifier "B" and on September 13, 2016 for gasifier "A." Mississippi Power achieved integrated operation of both gasifiers on January 29, 2017, including the production of electricity from syngas in both combustion turbines. During testing, the plant produced and captured CO₂, and produced sulfuric acid and ammonia, each of acceptable quality under the related off-take agreements. However, Mississippi Power experienced numerous challenges during the extended start-up process to achieve integrated operation of the gasifiers on a sustained basis. Most recently, in May 2017, after achieving these milestones, Mississippi Power determined that a critical system component, the syngas coolers, would need replacement sooner than originally planned, which would require significant lead time and significant cost. In addition, the long-term natural gas price forecast has decreased significantly and the estimated cost of operating and maintaining the facility during the first five full years of operations increased significantly since certification.

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Mississippi Power's Kemper IGCC 2010 project estimate, cost estimate at the time of project suspension (which includes the impacts of the Mississippi Supreme Court's (Court) decision discussed herein under "~~Rate Recovery of Kemper IGCC Costs~~ – ~~2013 MPSC Rate Order"), and actual costs incurred as of June 30, 2017, all of which include 100% of the costs for the Kemper IGCC, are as follows:~~

Cost Category
2010 Project Estimate^(a)

Cost Estimate
at
Suspension^(b)

June 30, 2017
Actual Costs
(in billions)
Plant Subject to Cost Cap^(c)(e)
$ 2.40
$ 5.95
$ 5.68
Lignite Mine and Equipment 0.21
0.23
0.23
CO₂ Pipeline Facilities
0.14
0.11
0.11
AFUDC^(d)
0.17
0.85
0.85
Combined Cycle and Related Assets Placed in
Service – Incremental^(e)
—
0.05
0.05
General Exceptions 0.05
0.10
0.08
Deferred Costs^(e)
—
0.23
0.23
Additional DOE Grants —
(0.14 ) (0.14 )
Total Kemper IGCC $ 2.97
$ 7.38
$ 7.09


~~(a)~~	~~Represents the certificated cost estimate adjusted to include the certificated estimate for the CO~~₂ ~~pipeline facilities approved in 2011 by the Mississippi PSC, as well as the lignite mine and equipment, AFUDC, and general exceptions.~~


~~(b)~~	~~Represents actual costs through June 30, 2017 and projected costs at the time of project suspension, including estimated post-in-service costs which were expected to be subject to the cost cap.~~

~~(c)~~

The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. The Cost Estimate at Suspension and the Actual Costs include non-incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014 that are subject to the $2.88 billion cost cap and exclude post-in-service costs for the lignite mine. See "~~Rate Recovery of Kemper IGCC Costs~~ – ~~2013 MPSC Rate Order" herein for additional information.~~

~~(d)~~

Mississippi Power's 2010 Project Estimate included recovery of financing costs during construction rather than the accrual of AFUDC. This approach was not approved by the Mississippi PSC as described in "~~Rate Recovery of Kemper IGCC Costs~~ – ~~2013 MPSC Rate Order." The Cost Estimate at Suspension also reflects the impact of a settlement agreement with the wholesale customers for cost-based rates under FERC's jurisdiction. See "FERC Matters" herein for additional information.~~

~~(e)~~

Non-capital Kemper IGCC-related costs incurred during construction were initially deferred as regulatory assets. Some of these costs are included in current rates and are being recognized through income; however, such costs remained in the Cost Estimate at Suspension and are reflected in the Actual Costs at June 30, 2017. The equity return associated with assets placed in service and other non-CWIP accounts deferred for regulatory purposes, as well as the wholesale portion of debt carrying costs, whether deferred or recognized through income, was not included in the Cost Estimate at Suspension or in the Actual Costs at June 30, 2017. At June 30, 2017, such deferred amounts totaled $33 million and $1 million, respectively.

Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate of $196 million ($121 million after tax) in the second quarter through May 31, 2017 and a total of $305 million ($188 million after tax) for year-to-date through May 31, 2017. In the aggregate, Mississippi Power incurred charges of $3.07 billion ($1.89 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through May 31, 2017. The May 31, 2017 cost estimate included approximately $175 million of estimated costs to be incurred beyond the then-estimated in-service date of June 30, 2017 that were expected to be subject to the $2.88 billion cost cap.

While the ultimate disposition of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increasemining permit holder for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 of $2.8 billion ($2.0 billion after tax), which includes estimated costs associated with the gasification portions of the plant and lignite mine. In the event the gasification portions of the project are

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~~ultimately canceled, additional pre-tax costs currently estimated at approximately $100 million to $200 million are expected to be incurred.~~

In the aggregate, Mississippi Power recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC totaling $3.0 billion for the second quarter 2017 and $3.1 billion for the six months ended June 30, 2017.

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC, of which $1.2 billion is included in plant in service, $14 million in materials and supplies, $22 million in other regulatory assets, current, and $95 million in other regulatory assets, deferred.

~~Rate Recovery of Kemper IGCC Costs~~

Given the variety of potential scenarios and the uncertainty of the outcome of future regulatory proceedings with the Mississippi PSC (and any subsequent related legal challenges), the ultimate outcome of the rate recovery matters discussed herein, including the resolution of legal challenges, cannot now be determined but could result in further material charges that could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity.

~~Kemper IGCC Settlement Docket~~

On June 21, 2017, the Mississippi PSC stated its intent to issue an order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant, rather than an IGCC plant, and address all issues associated with the Kemper IGCC. The Kemper Settlement Order established the Kemper IGCC Settlement Docket. The Mississippi PSC requested any such proposed settlement agreement reflect: (i) at a minimum, no rate increase to Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifier and related assets; and (iii) modification or amendment of the CPCN for the Kemper IGCC to allow only for ownership and operation of a natural gas facility. The Kemper Settlement Order provides that any related settlement agreement be filed within 45 days from the effective date of the Kemper Settlement Order. If a settlement agreement is filed, a hearing will be set 45 days from the date of the settlement's filing, and the appropriate scheduling order will be established.

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As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that was previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.

~~Prudence~~

On August 17, 2016, the Mississippi PSC issued an order establishing a discovery docket to manage all filings related to the prudence of the Kemper IGCC. On October 3, 2016, Mississippi Power made a required compliance filing, which included a review and explanation of differences between the Kemper IGCC project estimate set forth in the 2010 CPCN proceedings and the most recent Kemper IGCC project estimate, as well as comparisons of current cost estimates and current expected plant operational parameters to the estimates presented in the 2010 CPCN proceedings for the first five years after the Kemper IGCC is placed in service. Compared to amounts presented in the 2010 CPCN proceedings, operations and maintenance expenses have increased an average of $105 million annually and maintenance capital has increased an average of $44 million annually for the first full five years of operations for the Kemper IGCC. Additionally, while the current estimated operational availability estimates reflect ultimate results similar to those presented in the 2010 CPCN proceedings, the ramp up period for the current estimates reflects a lower starting point and a slower escalation rate. On November 17, 2016, Mississippi Power submitted a supplemental filing to the October 3, 2016 compliance filing to present revised non-fuel operations and maintenance expense projections for the first year after the Kemper IGCC is placed in service. This supplemental filing included approximately $68 million in additional estimated operations and maintenance costs expected to be required to support the operations of the Kemper IGCC during that period.

Mississippi Power responded to numerous requests for information from interested parties in the discovery docket, which is now complete. Mississippi Power expects the Mississippi PSC to utilize this information in connection with the ultimate resolution of Kemper IGCC cost recovery.

~~Economic Viability Analysis~~

In the fourth quarter 2016, as a part of its Integrated Resource Plan process, the Southern Company system completed its regular annual updated fuel forecast, the 2017 Annual Fuel Forecast. This updated fuel forecast reflected significantly lower long-term estimated costs for natural gas than were previously projected. As a result of the updated long-term natural gas forecast, as well as the revised operating expense projections reflected in the discovery docket filings discussed above, on February 21, 2017, Mississippi Power filed an updated project economic viability analysis of the Kemper IGCC as required under the 2012 MPSC CPCN Order confirming authorization of the Kemper IGCC. The project economic viability analysis measures the life cycle economics of the Kemper IGCC compared to feasible alternatives, natural gas combined cycle generating units, under a variety of scenarios and considering fuel, operating and capital costs, and operating characteristics, as well as federal and state taxes and incentives. The reduction in the projected long-term natural gas prices in the 2017 Annual Fuel Forecast and, to a lesser extent, the increase in the estimated Kemper IGCC operating costs, negatively impact the updated project economic viability analysis.

~~Mississippi Power expects the Mississippi PSC to address this matter in connection with the Kemper IGCC Settlement Docket.~~

~~2015 Rate Case~~

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transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs. The interim rates were designed to collect approximately $159 million annually and became effective in September 2015, subject to refund and certain other conditions.

On December 3, 2015, the Mississippi PSC issued the In-Service Asset Rate Order adopting in full the 2015 Stipulation entered into between Mississippi Power and the MPUS regarding the In-Service Asset Proposal. The In-Service Asset Rate Order provided for retail rate recovery of an annual revenue requirement of approximately $126 million, based on Mississippi Power's actual average capital structure, with a maximum common equity percentage of 49.733%, a 9.225% return on common equity, and actual embedded interest costs. The In-Service Asset Rate Order also included a prudence finding of all costs in the stipulated revenue requirement calculation for the in-service assets. The stipulated revenue requirement excluded the costs of the Kemper IGCC related to the 15% undivided interest that was previously projected to be purchased by SMEPA but reserved Mississippi Power's right to seek recovery in a future proceeding. See "~~Termination of Proposed Sale of Undivided Interest~~" herein for additional information. With implementation of the new rates on December 17, 2015, the interim rates were terminated and, in March 2016, Mississippi Power completed customer refunds of approximately $11 million for the difference between the interim rates collected and the permanent rates.

In 2011, the Mississippi PSC authorized Mississippi Power to defer all non-capital Kemper IGCC-related costs to a regulatory asset through the in-service date. In connection with the implementation of the In-Service Asset Order and wholesale rates, Mississippi Power began expensing certain ongoing project costs and certain retail debt carrying costs that previously were deferred and began amortizing certain regulatory assets associated with assets placed in service and consulting and legal fees. The amortization periods for these regulatory assets vary from two years to 10 years as set forth in the In-Service Asset Rate Order and the settlement agreement with wholesale customers. As of June 30, 2017, the balance associated with these regulatory assets was $117 million, of which $22 million is included in current assets. See "FERC Matters" herein for additional information related to the 2016 settlement agreement with wholesale customers.

The In-Service Asset Rate Order requires Mississippi Power to submit an annual true-up calculation of its actual cost of capital, compared to the stipulated total cost of capital, with the first occurring as of May 31, 2016. At June 30, 2017, Mississippi Power's related regulatory liability included in its balance sheet totaled approximately $10 million.

As required by the In-Service Asset Rate Order, on June 5, 2017, Mississippi Power made a rate filing requesting to adjust the amortization schedules of the regulatory assets reviewed and determined prudent in the In-Service Asset Order in a manner that would not change customer rates or annual revenues. On June 28, 2017, the Mississippi PSC suspended this filing. On July 6, 2017, the Mississippi PSC issued an order requiring Mississippi Power to establish a regulatory liability account to maintain current rates related to the Kemper IGCC following the July 2017 completion of the amortization period for certain regulatory assets approved in the In-Service Asset Rate Order that would allow for subsequent refund if the Mississippi PSC deems the rates unjust and unreasonable.

~~2013 MPSC Rate Order~~

In January 2013, Mississippi Power entered into a settlement agreement with the Mississippi PSC that was intended to establish the process for resolving matters regarding cost recovery related to the Kemper IGCC (2013 Settlement Agreement). Under the 2013 Settlement Agreement, Mississippi Power agreed to limit the portion of prudently-incurred Kemper IGCC costs to be included in retail rate base to the $2.4 billion certificated cost estimate, plus the Cost Cap Exceptions, but excluding AFUDC, and any other costs permitted or determined to be excluded from the $2.88 billion cost cap by the Mississippi PSC. In March 2013, the Mississippi PSC issued a rate order approving retail rate increases of 15% effective March 19, 2013 and 3% effective January 1, 2014, which collectively were designed to collect $156 million annually beginning in 2014 (2013 MPSC Rate Order) to be used to mitigate customer rate impacts after the Kemper IGCC was placed in service, based on a mirror CWIP methodology (Mirror CWIP rate).

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On February 12, 2015, the Court reversed the 2013 MPSC Rate Order and, on July 7, 2015, the Mississippi PSC ordered that the Mirror CWIP rate be terminated effective July 20, 2015 and required the fourth quarter 2015 refund of the $342 million previously collected, along with associated carrying costs of $29 million.

Because the 2013 MPSC Rate Order did not provide for the inclusion of CWIP in rate base as permitted by the Baseload Act, Mississippi Power continued to record AFUDC on the Kemper IGCC. Between the original May 2014 estimated in-service date and the June 2017 project suspension date, Mississippi Power recorded $493 million of AFUDC on the Kemper IGCC subject to the $2.88 billion cost cap and Cost Cap Exception amounts, of which $459 million related to the gasification portions of the Kemper IGCC.

~~Mississippi Power expects the Mississippi PSC to address this matter in connection with the Kemper IGCC Settlement Docket.~~

~~Lignite Mine and CO~~₂ ~~Pipeline Facilities~~

~~In conjunction with the Kemper IGCC, Mississippi Power owns the lignite mine and equipment and mineral reserves located around the Kemper IGCC site. The mine started commercial operation in June 2013.~~

~~In 2010, Mississippi Power executed a 40-year management fee contract with~~ Liberty Fuels Company, LLC (Liberty Fuels), a wholly-owned subsidiary of The North American Coal Corporation, which developed, constructed, and is responsible for the mining operations through the end of the mine reclamation. As the mining permit holder, Liberty Fuels has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. ~~In addition to~~Mine reclamation began in the ~~obligation to fund the reclamation activities, Mississippi Power provides working capital support to Liberty Fuels through cash advances for capital purchases, payroll, and other operating expenses.~~first quarter 2018. See Note 1 to the financial statements of Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.

~~In addition, Mississippi Power constructed the CO~~₂ ~~pipeline for the planned transport of captured CO~~₂ for use in enhanced oil recovery. Mississippi Power entered into agreements with Denbury Onshore (Denbury) and Treetop Midstream Services, LLC (Treetop), pursuant to which Denbury would purchase 70% of the CO₂ ~~captured from the Kemper IGCC and Treetop would purchase 30% of the CO~~₂ captured from the Kemper IGCC. On June 3, 2016, Mississippi Power cancelled its contract with Treetop and amended its contract with Denbury to reflect, among other things, Denbury's agreement to purchase 100% of the CO₂ captured from the Kemper IGCC and an initial contract term of 16 years. Denbury has the right to terminate the contract at any time because Mississippi Power did not place the Kemper IGCC in service by July 1, 2017.

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

~~Termination of Proposed Sale of Undivided Interest~~

In 2010 and as amended in 2012, Mississippi Power and SMEPA entered into an agreement whereby SMEPA agreed to purchase a 15% undivided interest in the Kemper IGCC (15% Undivided Interest). On May 20, 2015, SMEPA notified Mississippi Power of its termination of the agreement. Mississippi Power previously received a total of $275 million of deposits from SMEPA that were required to be returned to SMEPA with interest. On June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million to SMEPA. Subsequently, Mississippi Power issued a promissory note in the aggregate principal amount of approximately $301 million to Southern Company, which was repaid in June 2017.

~~Litigation~~

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~~represented,~~During the first quarter 2018, Mississippi Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the abandonment and ~~failed to fully disclose important facts concerning~~related closure activities for the ~~cost~~mine and ~~schedule of~~gasifier-related assets at the Kemper ~~IGCC~~County energy facility. Additional closure costs for the mine and ~~that these alleged breaches have unjustly enriched Mississippi Power~~gasifier-related assets, including ash disposal, currently estimated to cost up to $50 million pre-tax (excluding salvage), are expected to be incurred during the remainder of 2018 and ~~Southern Company. The plaintiffs seek unspecified actual damages~~2019. In addition, period costs, including, but not limited to, costs for compliance and ~~punitive damages; ask~~safety, ARO accretion, and property taxes for the ~~Circuit Court to appoint a receiver to oversee, operate, manage,~~mine and ~~otherwise control all affairs relating to~~gasifier-related assets, are estimated at $4 million for the Kemper IGCC; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper IGCC in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper IGCC costs from being charged to customers through electric rates. On June 23, 2017, the Circuit Court ruled in favorremainder of ~~motions by Southern Company and Mississippi Power and dismissed the case. On July 7, 2017, the plaintiffs filed notice to appeal to the Court.~~

~~On June 9, 2016, Treetop, Greenleaf CO~~₂ Solutions, LLC (Greenleaf), Tenrgys, LLC, Tellus Energy, LLC, WCOA, LLC, and Tellus Operating Group filed a complaint against Mississippi Power, Southern Company, and SCS in the state court in Gwinnett County, Georgia. The complaint relates to the cancelled CO₂contract with Treetop and alleges fraudulent misrepresentation, fraudulent concealment, civil conspiracy, and breach of contract on the part of Mississippi Power, Southern Company, and SCS and seeks compensatory damages of $100 million, as well as unspecified punitive damages. Southern Company, Mississippi Power, and SCS have moved to compel arbitration pursuant to the terms of the CO₂ contract, which the court granted on May 4, 2017. On June 28, 2017, Treetop, Greenleaf, Tenrgys, LLC, Tellus Energy, LLC, WCOA, LLC, and Tellus Operating Group filed a claim for arbitration requesting $5002018, $4 million in ~~damages.~~

~~Mississippi Power believes these legal challenges have no merit; however, an adverse outcome~~2019, and $1 million annually beginning in these proceedings could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity. Mississippi Power will vigorously defend itself in these matters, and the2020. The ultimate outcome of ~~these matters~~this matter cannot be determined at this time.

~~Baseload Act~~

~~In 2008, the Baseload Act was signed by the Governor of Mississippi.~~ The ~~Baseload Act authorizes, but does not require, the Mississippi PSC to adopt a cost recovery mechanism that includes in retail base rates, prior to~~combined cycle and ~~during construction, all or a portion~~associated common facilities portions of the prudently-incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. Prior to the passage of the Baseload Act, such costs would traditionally be recovered only after the plant was placed in service. The Baseload Act also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the Baseload Act authorizes the Mississippi PSC to make a public interest determinationKemper County energy facility were dedicated as ~~to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant.~~Plant Ratcliffe on April 27, 2018.

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Mississippi Power in Item 7 of the Form 10-K and ~~Note (G) to the Condensed Financial Statements under~~ FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk,"~~Section 174 Research and Experimental Deduction" herein for additional information on bonus depreciation, investment tax credits, and the Section 174 research and experimental deduction.~~

~~Bonus Depreciation~~

Approximately $370 million of positive cash flows is expected to result from bonus depreciation for the 2017 tax year, but may not all be realized in 2017 due to net operating loss projections for the 2017 tax year, and is dependent upon placing the remainder of the Kemper IGCC in service by December 31, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount previously estimated as bonus depreciation would be claimed as a deduction under IRC Section 165. As of June 30, 2017, $82 million has been received through quarterly income tax refunds for bonus depreciation related to the Kemper IGCC, which may be subject to repayment. See Note (B) to the Condensed Financial Statements under ~~"Integrated Coal Gasification Combined~~

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~~Cycle" herein~~"Regulatory Matters – Mississippi Power," and Note ~~(G)~~(H) to the Condensed Financial Statements herein for ~~additional information. The ultimate outcome of this matter cannot be determined at this time.~~information regarding the Tax Reform Legislation and related regulatory actions.

~~Section 174 Research and Experimental Deduction~~

Southern Company, on behalf of Mississippi Power, has reflected deductions for research and experimental (R&E) expenditures related to the Kemper IGCC in its federal income tax calculations since 2013 and filed amended federal income tax returns for 2008 through 2013 to also include such deductions. In December 2016, Southern Company and the IRS reached a proposed settlement, subject to approval of the U.S. Congress Joint Committee on Taxation, resolving a methodology for these deductions. Due to the uncertainty related to this tax position, Mississippi Power had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million as of June 30, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount not allowed under IRC Section 174 would be claimed as a deduction under IRC Section 165, and would result in a reversal of the related unrecognized tax benefits, excluding interest. See Notes (B) and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" and "Section 174 Research and Experimental Deduction," respectively, herein for additional information. This matter is expected to be resolved in the next 12 months; however, the ultimate outcome of this matter cannot be determined at this time.

Other Matters

Mississippi Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. Mississippi Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, 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.

Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstMississippi Power~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Mississippi Power's financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

Litigation

In 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean, which was amended and refiled to include, among other things, Southern Company as a defendant. The ~~SEC is conducting~~individual plaintiff alleges that Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedule of the Kemper County energy facility and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a ~~formal investigation~~receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper County energy facility; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper County energy facility in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper County energy facility costs from being charged to customers through electric rates. In June 2017, the Circuit Court ruled in favor of motions by Southern Company and Mississippi Power ~~concerning~~and dismissed the ~~estimated costs and expected in-service date~~

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case. In July 2017, the ~~Kemper IGCC. Southern Company and~~plaintiffs filed notice of an appeal. Mississippi Power ~~believe~~believes this legal challenge has no merit; however, an adverse outcome in this proceeding could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity. Mississippi Power intends to vigorously defend itself in this matter and the investigation is focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC. See ACCOUNTING POLICIES – "~~Application of Critical Accounting Policies and Estimates" herein for additional information on the Kemper IGCC. The~~ ultimate outcome of this matter cannot be determined at this ~~time; however, it is not expected to have a material impact on the financial statements of Mississippi Power.~~time.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Mississippi Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power's critical accounting policies and estimates.

Kemper County Energy Facility Closure Costs

Recently Issued Accounting Standards

See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Mississippi Power's recently adopted accounting standards.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Mississippi Power in Item 7 of the Form 10-K for additional information.

Mississippi Power's cash requirements primarily consist of funding ongoing operations, capital expenditures, and debt maturities. Capital expenditures and other investing activities include investments to maintain existing generation facilities, to comply with environmental regulations including adding environmental modifications to certain existing generating units, to expand and improve transmission and distribution facilities, and for restoration following major storms.

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~~Mississippi Power in Item 7 of the Form 10-K for~~entered into a complete discussion of Mississippi Power's critical accounting policies and estimates related to Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, AFUDC, Unbilled Revenues, and Contingent Obligations.

~~Kemper IGCC Rate Recovery~~

~~For periods prior to the second quarter 2017, significant accounting estimates included Kemper IGCC estimated construction costs, project completion date, and~~$300 million short-term floating rate recovery. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery" of Mississippi Power in Item 7 of the Form 10-K for additional information. Mississippi Power recorded total pre-tax charges to income related to the Kemper IGCC of $428 million ($264 million after tax) in 2016, $365 million ($226 million after tax) in 2015, $868 million ($536 million after tax) in 2014, and $1.2 billion ($729 million after tax) in prior years.

~~As a result of the Mississippi PSC's June 21, 2017 stated intent to issue an order (which occurred~~bank loan bearing interest based on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant rather than an IGCC plant, as well as Mississippi Power's June 28, 2017 suspension of the operation and start-up of the gasifier portion of the Kemper IGCC, the estimated construction costs and project completion date are no longer considered significant accounting estimates. Significant accounting estimates for the June 30, 2017 financial statements presented herein include the overall assessment of rate recovery for the Kemper County energy facility and the estimated costs for the potential cancellation of the Kemper IGCC.

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets,one-month LIBOR, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that$125 million was ~~previously contracted~~repaid subsequent to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.

Given the significant judgment involved in estimating the costs to cancel the gasifier portion of the Kemper IGCC, the ultimate rate recovery for the Kemper IGCC, including the $0.5 billion of combined cycle-related costs not yet in rates, and the impact on Mississippi Power's results of operations, Mississippi Power considers these items to be critical accounting estimates. See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.

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~~Recently Issued Accounting Standards~~

While Mississippi Power expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of Mississippi Power's revenue, including energy provided to customers, is from tariff offerings that provide electricity without a defined contractual term, as well as longer-term contractual commitments, including PPAs. Mississippi Power expects that the revenue from contracts with these customers will not result in a significant shift in the timing of revenue recognition for such sales.

Mississippi Power's ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements, such as alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Mississippi Power's financial statements, if material. In addition, the power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Mississippi Power expects CIAC to be out of the scope of ASC 606.

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Mississippi Power intends to use the modified retrospective method of adoption effective January 1,March 31, 2018. Mississippi Power ~~has also elected~~used the proceeds from these financings to ~~utilize practical expedients which allow it to apply~~repay the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing orentire $900 million principal amount of ~~revenues recognized in Mississippi Power's financial statements, Mississippi Power will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.~~its unsecured term loan.

~~On March 10, 2017, the FASB issued ASU No. 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Mississippi Power is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Mississippi Power's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Mississippi Power's financial statements.

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~~FINANCIAL CONDITION AND LIQUIDITY~~

~~Overview~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Mississippi Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle" herein for additional information. Earnings for the six months ended June 30, 2017 were negatively affected by revisions to the cost estimate for the Kemper IGCC.~~

Mississippi Power's capital expenditures and debt maturities are expected to materially exceed operating cash flows through 2022. Projected capital expenditures in that period include investments to maintain existing generation facilities, to add environmental modifications to existing generating units, and to expand and improve transmission and distribution facilities.

In the second quarter 2017, Mississippi Power borrowed an additional $40 million under a promissory note issued to Southern Company. In June 2017, Southern Company made equity contributions totaling $1.0 billion to Mississippi Power. Mississippi Power used a portion of the proceeds to prepay $901 million of outstanding debt.

As of June 30, 2017, Mississippi Power's current liabilities exceeded current assets by approximately $930 million primarily due to $935 million in long-term debt that matures within the next 12 months and $107 million of short-term debt. Mississippi Power intends to utilize operating cash flows, lines of credit, and bank term loans, as market conditions permit, as well as, under certain circumstances, commercial paper and/or equity contributions and/or loans from Southern Company to fund Mississippi Power's short-term capital needs.

Net cash ~~provided from~~used for operating activities totaled ~~$135~~$62 million for the first ~~six~~three months of ~~2017, a decrease~~2018, an increase of $2$22 million as compared to the corresponding period in ~~2016.~~2017. The ~~decrease~~increase in cash ~~provided from~~used for operating activities is primarily due to ~~lower~~the timing of collections of receivables and payments of taxes other than income taxes, partially offset by a decrease in income taxes related to the Kemper ~~IGCC, the timing of payments for ad valorem taxes and materials and supplies,~~County energy facility and the ~~timing of payments received from affiliates and customers, partially offset by the completion of Mirror CWIP refunds in 2016. See Notes (B) and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle~~ – ~~Rate Recovery of Kemper IGCC Costs" and "Unrecognized~~ Tax ~~Benefits~~ – ~~Section 174 Research and Experimental Deduction" herein for additional information.~~Reform Legislation. Net cash used for investing activities totaled ~~$361~~$52 million for the first ~~six~~three months of ~~2017~~2018 primarily due to gross property additions related to ~~the Kemper IGCC.~~steam production, distribution, and transmission. Net cash ~~provided from~~used for financing activities totaled ~~$142~~$9 million for the first ~~six~~three months of ~~2017~~2018 primarily due to ~~capital contributions from Southern Company, offset by~~ redemptions of long-term ~~debt.~~debt, offset by the issuance of senior notes and short-term borrowings. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017~~2018 include ~~an increase~~increases of $470 million in ~~paid-in capital of $1.0 billion due to capital contributions from Southern Company, a portion of which was used to repay $300 million of securities due within one year, $591 million of~~ long-term debt ~~and $10 million of short-term debt. Long-term debt decreased~~ primarily due to the ~~reclassification~~issuance of ~~$1.2 billion~~senior notes and $296 million in ~~unsecured term loans~~notes payable primarily due to ~~securities due within one year.~~the issuance of a short-term bank loan. Other significant changes include ~~decreases~~an increase of ~~$2.5 billion~~$140 million in ~~construction work in progress, $1.1 billion in total common stockholder's equity, $352~~income taxes receivable and a decrease of $149 million in accumulated deferred income taxes, ~~and $300~~primarily due to tax refunds expected in 2018, as well as a decrease of $775 million in deferred charges related to income taxes. All of these changes primarily result from the Kemper IGCC estimated loss. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle" and Note (B)securities due within one year due to the ~~Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.~~repayment of a $900 million unsecured term loan.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power's capital requirements ~~for its construction program, including estimated capital expenditures for new generating resources~~ and ~~to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, leases, purchase commitments, derivative~~

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~~obligations, preferred stock dividends, trust funding requirements, and unrecognized tax benefits.~~contractual obligations. Approximately ~~$935~~$125 million will be required through ~~June 30, 2018~~March 31, 2019 to fund maturities of long-term debt and ~~$17~~$300 million will be required to fund maturities of short-term debt. In addition, Mississippi Power has $40 million of tax-exempt variable rate demand obligations that are supported by short-term credit facilities and $50 million of ~~fixed~~index rate ~~pollution control~~ revenue bonds that are required to be remarketed over the next 12 months. See "Sources of Capital" ~~and FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle"~~ herein for additional information.

The construction program of Mississippi Power is currently estimated to be $561 million for 2017, $192 million for 2018, $182 million for 2019, $235 million for 2020, $199 million for 2021, and $245 million for 2022. These estimated expenditures do not include potential compliance costs that may arise from the EPA's final rules and guidelines or future state plans that would limit CO₂ ~~emissions from existing, new, modified, or reconstructed fossil-fuel-fired electric generating units.~~

The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental ~~statutes~~laws and regulations; the outcome of any legal challenges to ~~the~~ environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating units, to meet regulatory requirements; changes in FERC rules and regulations; Mississippi PSC approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Mississippi Power plans to obtain the funds required for construction and other purposes from operating cash flows, lines of credit, bank term loans, external security issuances, ~~term loans, and/or short-term debt, as well as, under certain circumstances,~~commercial paper (to the extent it is eligible to participate), monetization of income tax deductions associated with the abandonment of the gasifier portion of the Kemper County energy facility, and equity contributions ~~and/or loans~~ from Southern Company. The amount, type, and timing of future financings will depend upon regulatory approval, prevailing market conditions, and other ~~factors, which includes resolution of the Kemper County energy facility cost recovery.~~factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" ~~and – FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs" of Mississippi Power~~ in Item 7 of the Form 10-K for additional information.

On February 28, 2017, the maturity dates for $551 million in promissory notes to Southern Company were extended to July 31, 2018. In the second quarter 2017, Mississippi Power borrowed an additional $40 million under a promissory note issued to Southern Company. In June 2017, Southern Company made equity contributions totaling $1.0 billion to Mississippi Power. Mississippi Power used a portion of the proceeds to (i) prepay $300 million of the outstanding principal amount under its $1.2 billion unsecured term loan; (ii) repay all of the $591 million outstanding principal amount of promissory notes to Southern Company; and (iii) repay $10 million of the outstanding principal amount of bank loans.

As of ~~June 30, 2017,~~March 31, 2018, Mississippi Power's current liabilities exceeded current assets by approximately ~~$930~~$291 million ~~primarily due to $935 million in long-term debt that matures within the next 12 months and $107~~as a result of $425 million of ~~short-term debt.~~debt maturities. Mississippi Power intends to ~~utilize operating cash flows, lines of credit,~~continue to monitor its access to short-term and ~~bank term loans, as market conditions permit,~~long-term capital markets as well as ~~under certain circumstances, commercial paper and/or equity contributions and/or loans from Southern Company~~its bank credit arrangements to ~~fund Mississippi Power's short-term~~meet future capital needs. Specifically, Mississippi Power has been informed by Southern Company that in the event sufficient funds are not available from external sources, Southern Company intends to provide Mississippi Power with loans and/or equity contributions sufficient to fund the remaining indebtedness scheduled to mature and other cash needs over the next 12 months. Therefore, Mississippi Power's financial statement presentation contemplates continuation of Mississippi Power as a going concern as a result of Southern Company's anticipated ongoing financial support of Mississippi Power. For additional information, see Notes 1 and 6 to the financial statements of Mississippi Power under "Recently Issuedliquidity needs.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Accounting Standards" and "Going Concern," respectively, in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Going Concern" herein.~~

At ~~June 30, 2017,~~March 31, 2018, Mississippi Power had approximately ~~$140~~$125 million of cash and cash equivalents. Committed credit arrangements with banks at ~~June 30, 2017~~March 31, 2018 were as follows:


Expires	Expires					Executable Term Loans				Expires Within One Year				Expires					Executable Term Loans				Expires Within One Year
2017		Total		Unused		One Year		Two Years		Term Out		No Term Out
2018														2018	Total		Unused		One Year		Two Years		Term Out		No Term Out
(in millions)
$	113	$	113	$	100	$	—	$	13	$	13	$	100	100	$	100	$	100	$	—	$	—	$	—	$	100

See Note 6 to the financial statements of Mississippi Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

~~Most~~All of these bank credit arrangements, as well as Mississippi Power's term loan agreement, contain covenants that limit debt levels and ~~typically~~ contain cross acceleration to other indebtedness (including guarantee obligations) of Mississippi Power. Such cross-acceleration provisions to other indebtedness would trigger an event of default if Mississippi Power defaulted on indebtedness, the payment of which was then accelerated. At ~~June 30, 2017,~~March 31, 2018, Mississippi Power was in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowing.

Subject to applicable market conditions, Mississippi Power expects to seek to renew or replace its credit arrangements as needed, prior to expiration. In connection therewith, Mississippi Power may extend the maturity dates and/or increase or decrease the lending commitments thereunder.

A portion of the $100 million unused credit arrangements with banks is allocated to provide liquidity support to Mississippi Power's ~~pollution control~~ revenue bonds. The amount of variable rate ~~pollution control~~ revenue bonds outstanding requiring liquidity support as of ~~June 30, 2017~~March 31, 2018 was approximately $40 million. In addition, at ~~June 30, 2017,~~March 31, 2018, Mississippi Power had approximately $50 million of ~~fixed~~index rate ~~pollution control~~revenue bonds outstanding that were required to be remarketed within the next 12 months.

Short-term borrowings are included in notes payable in the balance sheets. Details of short-term borrowings were as follows:



	Short-term Debt at March 31, 2018			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)
Short-term bank debt	$	300	3.6%	$	10	3.6%	$	300


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017.~~March 31, 2018.

Credit Rating Risk

At ~~June 30, 2017,~~March 31, 2018, Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

In October 2017, Mississippi Power executed agreements with its largest retail customer, Chevron, to continue providing retail service to the Chevron refinery in Pascagoula, Mississippi through 2038. The agreements grant Chevron a security interest in the co-generation assets, with a net book value of approximately $92 million, located at the refinery that is exercisable upon the occurrence of (i) certain bankruptcy events or (ii) other events of default

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

coupled with specific reductions in steam output at the facility and a downgrade of Mississippi Power's credit rating to below investment grade by two of the three rating agencies.

There are certain contracts that have required or could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2 or below. These contracts are for physical electricity purchases and

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~~MISSISSIPPI POWER COMPANY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

sales, fuel transportation and storage, energy price risk management, and transmission. At ~~June 30, 2017,~~March 31, 2018, the ~~maximum potential collateral requirements under these contracts at a rating of BBB and/or Baa2 or BBB- and/or Baa3 was not material. The~~ maximum potential collateral requirements at a rating below BBB- and/or Baa3 equaled approximately ~~$243~~$198 million.

Included in these amounts are certain agreements that could require collateral in the event that Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Mississippi Power to access capital markets, ~~and would be likely to impact~~or at a minimum the cost at which it does so.

On February 26, 2018, Moody's revised its rating outlook for Mississippi Power from stable to positive.

On March ~~1, 2017, Moody's downgraded~~14, 2018, S&P upgraded the senior unsecured long-term debt rating of Mississippi Power to ~~Ba1~~A- from ~~Baa3.~~BBB+ with a negative outlook.

~~On March 24, 2017, S&P revised its consolidated~~While it is unclear how the credit rating ~~outlook for~~agencies, the FERC, and the Mississippi PSC may respond to 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~~including Mississippi ~~Power) from stable~~Power, may be negatively impacted. To help mitigate the resulting impacts, Mississippi Power has proposed to ~~negative.~~

~~On March 30, 2017, Fitch placed~~increase its equity ratio to 55%. See Note 3 to the ~~ratings~~financial statements of Mississippi Power ~~on rating watch negative.~~

~~On June 22, 2017, Moody's placed~~under "Retail Regulatory Matters" in Item 8 of the ~~ratings of~~Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Mississippi ~~Power on review~~Power" herein for ~~downgrade.~~additional information.

Financing Activities

In March ~~2017,~~2018, Mississippi Power issued $300 million aggregate principal amount of Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on three-month LIBOR and $300 million aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, 2028. In March 2018, Mississippi Power also entered into a $9$300 million short-term floating rate bank ~~note~~loan bearing interest ~~at 5% per annum,~~based on one-month LIBOR, of which $125 million was repaid ~~in April 2017.~~

~~In February 2017, Mississippi Power amended $551 million in promissory notes~~subsequent to ~~Southern Company extending the maturity dates of the notes from December 1, 2017 to July~~March 31, 2018. ~~In the second quarter 2017, Mississippi Power borrowed an additional $40 million under a promissory note issued to Southern Company.~~

~~In June 2017, Southern Company made equity contributions totaling $1.0 billion to Mississippi Power.~~ Mississippi Power used ~~a portion of~~ the proceeds from these financings to ~~(i) prepay $300~~repay the entire $900 million ~~of the outstanding principal amount under its $1.2 billion unsecured term loan, which matures on March 30, 2018; (ii) repay all of the $591 million outstanding~~ principal amount of ~~promissory notes~~its unsecured term loan.

In addition to ~~Southern Company;~~any financings that may be necessary to meet capital requirements and ~~(iii) repay a $10 million short-term bank loan.~~contractual obligations, Mississippi Power plans, when economically feasible, to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

SOUTHERN POWER COMPANY

AND SUBSIDIARY COMPANIES

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Operating Revenues:
Wholesale revenues, non-affiliates	$	436		$	264		$	783		$	480		$	424		$	347
Wholesale revenues, affiliates	90			107			190			204			83			100
Other revenues	3			2			6			4			2			3
Total operating revenues	529			373			979			688			509			450
Operating Expenses:
Fuel	139			96			271			187			169			132
Purchased power, non-affiliates	29			21			54			35
Purchased power, affiliates	11			2			16			8
Purchased power													61			30
Other operations and maintenance	97			86			190			162			93			92
Depreciation and amortization	129			81			247			154			114			119
Taxes other than income taxes	12			6			24			13			12			12
Total operating expenses	417			292			802			559			449			385
Operating Income	112			81			177			129			60			65
Other Income and (Expense):
Interest expense, net of amounts capitalized	(48		)	(22		)	(97		)	(43		)	(47		)	(50		)
Other income (expense), net	2			1			(2		)	1			3			(1		)
Total other income and (expense)	(46		)	(21		)	(99		)	(42		)	(44		)	(51		)
Earnings Before Income Taxes	66			60			78			87			16			14
Income taxes (benefit)	(38		)	(41		)	(90		)	(65		)	(99		)	(52		)
Net Income	104			101			168			152			115			66
Less: Net income attributable to noncontrolling interests	22			12			17			13
Net loss attributable to noncontrolling interests													(6		)	(4		)
Net Income Attributable to Southern Power	$	82		$	89		$	151		$	139		$	121		$	70

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)						(in millions)						(in millions)
Net Income	$	104		$	101		$	168		$	152		$	115		$	66
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $24, $(15), $20, and $(15), respectively	40			(24		)	32			(24		)
Reclassification adjustment for amounts included in net income, net of tax of $(27), $8, $(30), and $8, respectively	(45		)	13			(48		)	14
Changes in fair value, net of tax of $16 and $(4), respectively													48			(8		)
Reclassification adjustment for amounts included in net income, net of tax of $(8) and $(3), respectively													(24		)	(4		)
Total other comprehensive income (loss)	(5		)	(11		)	(16		)	(10		)	24			(12		)
Comprehensive Income	99			90			152			142			139			54
Less: Comprehensive income attributable to noncontrolling interests	22			12			17			13
Comprehensive loss attributable to noncontrolling interests													(6		)	(4		)
Comprehensive Income Attributable to Southern Power	$	77		$	78		$	135		$	129		$	145		$	58

The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)						(in millions)
Operating Activities:
Net income	$	168		$	152		$	115		$	66
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	264			159			122			127
Deferred income taxes	91			(71		)	(50		)	36
Amortization of investment tax credits	(28		)	(15		)	(14		)	(14		)
Deferred revenues	(34		)	(31		)	(14		)	(27		)
Income taxes receivable, non-current	(58		)	—
Other, net	(1		)	9			15			5
Changes in certain current assets and liabilities —
-Receivables	(58		)	(76		)	48			(7		)
-Prepaid income taxes	33			(147		)	(32		)	(21		)
-Other current assets	20			5			5			(6		)
-Accounts payable	(45		)	4			(43		)	(38		)
-Accrued taxes	4			62			9			(40		)
-Other current liabilities	(8		)	—			(12		)	15
Net cash provided from operating activities	348			51			149			96
Investing Activities:
Business acquisitions	(1,020		)	(502		)	(46		)	(1,004		)
Property additions	(145		)	(1,281		)	(121		)	(69		)
Change in construction payables	(167		)	(137		)	25			(125		)
Payments pursuant to LTSAs	(68		)	(43		)	(18		)	(31		)
Investment in restricted cash	(16		)	(646		)
Distribution of restricted cash	27			649
Other investing activities	(2		)	(25		)	7			(2		)
Net cash used for investing activities	(1,391		)	(1,985		)	(153		)	(1,231		)
Financing Activities:
Increase in notes payable, net	189			695			29			171
Proceeds —
Senior notes	—			1,241
Capital contributions from parent company	—			300
Distributions to noncontrolling interests	(40		)	(11		)	(13		)	(18		)
Capital contributions from noncontrolling interests	73			179			8			71
Purchase of membership interests from noncontrolling interests	—			(129		)
Payment of common stock dividends	(158		)	(136		)	(78		)	(79		)
Other financing activities	(21		)	(13		)	—			(12		)
Net cash provided from financing activities	43			2,126
Net Change in Cash and Cash Equivalents	(1,000		)	192
Cash and Cash Equivalents at Beginning of Period	1,099			830
Cash and Cash Equivalents at End of Period	$	99		$	1,022
Net cash provided from (used for) financing activities							(54		)	133
Net Change in Cash, Cash Equivalents, and Restricted Cash							(58		)	(1,002		)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							140			1,112
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	82		$	110
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $4 and $21 capitalized for 2017 and 2016, respectively)	$	113		$	42
Interest (net of $5 and $2 capitalized for 2018 and 2017, respectively)							$	29		$	28
Income taxes, net	(117		)	115			(39		)	(1		)
Noncash transactions — Accrued property additions at end of period	19			108			57			53

The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017		At December 31, 2016		At March 31, 2018		At December 31, 2017
	(in millions)				(in millions)
Current Assets:
Cash and cash equivalents	$	99	$	1,099	$	82	$	129
Receivables —
Customer accounts receivable	158		102		126		117
Other accounts receivable	37		34
Affiliated	65		57		28		50
Fossil fuel stock	15		15
Other					69		98
Materials and supplies	349		337		218		278
Prepaid income taxes	41		74		82		50
Other current assets	26		39		35		36
Total current assets	790		1,757		640		758
Property, Plant, and Equipment:
In service	13,731		12,728		13,803		13,755
Less: Accumulated provision for depreciation	1,689		1,484		1,989		1,910
Plant in service, net of depreciation	12,042		11,244		11,814		11,845
Construction work in progress	344		398		634		511
Total property, plant, and equipment	12,386		11,642		12,448		12,356
Other Property and Investments:
Intangible assets, net of amortization of $35 and $22 at June 30, 2017 and December 31, 2016, respectively	423		436
Intangible assets, net of amortization of $54 and $47 at March 31, 2018 and December 31, 2017, respectively					404		411
Total other property and investments	423		436		404		411
Deferred Charges and Other Assets:
Prepaid LTSAs	61		101		103		118
Accumulated deferred income taxes	536		594		911		925
Income taxes receivable, non-current	69		11		76		72
Other deferred charges and assets — affiliated	28		13
Other deferred charges and assets — non-affiliated	410		615
Other deferred charges and assets					600		566
Total deferred charges and other assets	1,104		1,334		1,690		1,681
Total Assets	$	14,703	$	15,169	$	15,182	$	15,206

The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholders' Equity	At June 30, 2017		At December 31, 2016		At March 31, 2018		At December 31, 2017
	(in millions)				(in millions)
Current Liabilities:
Securities due within one year	$	909	$	560	$	770	$	770
Notes payable	398		209		134		105
Accounts payable —
Affiliated	68		88		56		102
Other	93		278		130		103
Accrued taxes —
Accrued income taxes	35		148
Other accrued taxes	21		7
Accrued interest	25		36
Acquisitions payable	—		461
Contingent consideration	11		46
Other current liabilities	67		70		145		152
Total current liabilities	1,627		1,903		1,235		1,232
Long-term Debt	4,816		5,068		5,108		5,071
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	174		152		142		199
Accumulated deferred ITCs	1,914		1,839		1,872		1,884
Asset retirement obligations	69		64
Other deferred credits and liabilities	238		304		267		322
Total deferred credits and other liabilities	2,395		2,359		2,281		2,405
Total Liabilities	8,838		9,330		8,624		8,708
Redeemable Noncontrolling Interests	51		164
Common Stockholder's Equity:
Common stock, par value $.01 per share —
Common stock, par value $0.01 per share —
Authorized — 1,000,000 shares
Outstanding — 1,000 shares	—		—		—		—
Paid-in capital	3,671		3,671		3,663		3,662
Retained earnings	717		724		1,519		1,478
Accumulated other comprehensive income	19		35
Accumulated other comprehensive income (loss)					27		(2		)
Total common stockholder's equity	4,407		4,430		5,209		5,138
Noncontrolling interests	1,407		1,245		1,349		1,360
Total stockholders' equity	5,814		5,675		6,558		6,498
Total Liabilities and Stockholders' Equity	$	14,703	$	15,169	$	15,182	$	15,206

The accompanying notes as they relate to Southern Power are an integral part of these condensed consolidated financial statements.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SECOND~~FIRST QUARTER ~~2017~~2018 vs. ~~SECOND~~FIRST QUARTER ~~2016~~

~~AND~~

~~YEAR-TO-DATE~~ 2017 ~~vs. YEAR-TO-DATE 2016~~

OVERVIEW

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

During the ~~six~~three months ended June 30, 2017, Southern Power acquired or completed the construction of, and placed in service, approximately 498 MWs of solar and wind facilities. In addition, Southern Power continued developing its portfolio of wind projects as well as the construction to expand the Mankato natural gas facility by 345 MWs of capacity. Subsequent to June 30, 2017,March 31, 2018, Southern Power acquired and ~~commenced~~completed construction of the 20-MW Gaskell West 1 solar project and continued construction of the Cactus Flats ~~a 148-MW~~ wind facility and the expansion of the 345-MW Mankato natural gas facility. See FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" herein for additional information.

Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantially all of Southern Power's solar facilities, including certain subsidiaries owned in partnership with various third parties. If successful, the sale is expected to close in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

At ~~June 30, 2017,~~March 31, 2018, Southern Power had an average investment coverage ratio of ~~91%~~92% through ~~2021~~2022 and 90% through ~~2026,~~2027, with an average remaining contract duration of approximately 1615 years. These ratios include the PPAs and capacity associated with facilities currently under construction and acquisitions discussed herein. See FUTURE EARNINGS POTENTIAL – "Power Sales Agreements" herein for additional information.

See FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for information regarding Southern Power's revised capital expenditure forecasts for 2018 through 2022.

Southern Power continues to focus on several key performance indicators, including, but not limited to, peak season equivalent forced outage rate, contract availability, and net income.

RESULTS OF OPERATIONS

Net Income Attributable to Southern Power

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$(7) (7.9) $12 8.6



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$51		72.9

Net income attributable to Southern Power for the ~~second~~first quarter ~~2017~~2018 was ~~$82~~$121 million compared to ~~$89~~$70 million for the corresponding period in 2016. The decrease was primarily due to increased interest expense from debt issuances to fund acquisitions and construction and an increase in net income attributable to noncontrolling interests, significantly offset by additional operating income related to new generating facilities.

~~Net income attributable to Southern Power for year-to-date 2017 was $151 million compared to $139 million for the corresponding period in 2016.~~2017. The increase was primarily due to ~~additional operating income from new generating facilities, as well as increased federal~~net state income tax benefits arising from wind PTCs, partially offset by increased interest expense from debt issuances to fund acquisitions and construction. For additional information on new generating facilities placed in service during 2016 and 2017, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "~~Acquisitions" and "Construction Projects~~"a reorganization of Southern ~~Power in Item 7 of the Form 10-K~~Power's legal entities that own and ~~FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" herein.~~operate its solar facilities.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Revenues

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$156 41.8 $291 42.3



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$59		13.1

Total operating revenues include PPA capacity revenues, which are derived primarily from long-term contracts involving natural gas and biomass generating facilities, and PPA energy revenues ~~which include sales~~ from Southern Power's ~~natural gas, biomass, solar, and wind~~generation facilities. To the extent Southern Power has capacity not contracted under a PPA, it may sell power into the wholesale market and, to the extent the generation assets are part of the IIC, as approved by the FERC, it may sell power into the power pool.

Natural Gas and Biomass Capacity and Energy Revenue

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

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

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


	Second Quarter 2017		Second Quarter 2016		Year-to-Date 2017		Year-to-Date 2016		First Quarter 2018		First Quarter 2017
	(in millions)								(in millions)
PPA capacity revenues	$	149	$	133	$	298	$	258	$	138	$	148
PPA energy revenues	270		168		466		285		254		198
Total PPA revenues	419		301		764		543		392		346
Non-PPA revenues	107		70		209		141		115		101
Other revenues	3		2		6		4		2		3
Total operating revenues	$	529	$	373	$	979	$	688	$	509	$	450

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In the ~~second~~first quarter ~~2017,~~2018, total operating revenues were ~~$529~~$509 million, reflecting a ~~$156~~$59 million, or ~~42%~~13%, increase from the corresponding period in ~~2016.~~2017. The increase in operating revenues was primarily due to the following:

PPA capacity revenues ~~increased $16~~decreased $10 million, or ~~12%~~7%, primarily due to ~~new PPAs related to~~the contractual expiration of an affiliate natural gas ~~facilities and additional customer load requirements.~~PPA.

PPA energy revenues increased ~~$102~~$56 million, or ~~61%~~28%, primarily due to $33 million in increased fuel costs that are contractually recovered through existing PPAs as well as an ~~$85~~$18 million increase ~~in sales from new solar and wind facilities and a $20 million increase in sales~~arising from new natural gas PPAs ~~and additional customer load requirements.~~from existing facilities.

Non-PPA revenues increased ~~$37~~$14 million, or ~~53%~~14%, primarily due to ~~a $23 million~~an increase in the volume of KWHs sold ~~primarily~~ from uncovered natural gas capacity through short-term ~~opportunity sales, as well as a $14 million increase in the price of energy primarily due to increased natural gas prices.~~

For year-to-date 2017, total operating revenues were $979 million, reflecting a $291 million, or 42%, increase from the corresponding period in 2016. The increase in operating revenues was primarily due to the following:

~~PPA capacity revenues increased $40 million, or 16%, primarily due to new PPAs related to natural gas facilities and additional customer load requirements.~~

PPA energy revenues increased $181 million, or 64%, primarily due to a $137 million increase in sales from new solar and wind facilities and a $37 million increase in sales from new natural gas PPAs and additional customer load requirements.

Non-PPA revenues increased $68 million, or 48%, due to a $48 million increase in the volume of KWHs sold primarily from uncovered natural gas capacity through short-term opportunity sales, as well as a $20 million increase in the price of energy primarily due to increased natural gas prices.sales.

Fuel and Purchased Power Expenses

Fuel costs constitute one of the ~~single~~ largest ~~expense~~expenses for Southern Power. In addition, Southern Power purchases a portion of its electricity needs from the wholesale ~~market.~~market including the power pool. Details of Southern Power's generation and purchased power were as follows:


	Second Quarter 2017	Second Quarter 2016	Year-to-Date 2017	Year-to-Date 2016	First Quarter 2018	First Quarter 2017
	(in billions of KWHs)				(in billions of KWHs)
Generation	10.9	9.1	20.6	16.7	9.8	9.7
Purchased power	1.2	0.9	2.2	1.5	0.9	0.9
Total generation and purchased power	12.1	10.0	22.8	18.2	10.7	10.6

Total generation and purchased power, excluding solar, wind, and tolling agreements	5.6	5.7	10.5	11.0	6.7	4.9

Southern Power's PPAs for natural gas and biomass 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 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

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Southern Power, an affiliate company, or external parties. Such purchased power costs are generally recovered through PPA revenues.

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


	Second Quarter 2017 vs. Second Quarter 2016			Year-to-Date 2017 vs. Year-to-Date 2016			First Quarter 2018 vs. First Quarter 2017
	(change in millions)		(% change)	(change in millions)		(% change)	(change in millions)		(% change)
Fuel	$	43	44.8	$	84	44.9	$	37	28.0
Purchased power	17		73.9	27		62.8	31		N/M
Total fuel and purchased power expenses	$	60		$	111		$	68

N/M - Not meaningful

In the ~~second~~first quarter ~~2017,~~2018, total fuel and purchased power expenses increased ~~$60~~$68 million, or ~~50.4%~~42%, compared to the corresponding period in ~~2016.~~2017. Fuel expense increased ~~$43~~$37 million primarily due to a ~~$51~~$60 million increase ~~in the average cost of natural gas per KWH generated, partially offset by an $8 million decrease~~ in the volume of KWHs generated, excluding solar, wind, and tolling agreements. Purchased power expense increased $17 million primarily due to a $10 million increase in the volume of KWHs purchased and a $6 million increase associated with the average cost of purchased power.

For year-to-date 2017, total fuel and purchased power expenses increased $111 million, or 48.3%, compared to the corresponding period in 2016. Fuel expense increased $84 million primarily due to a $105 million increase in the average cost of natural gas per KWH generated,agreements, partially offset by a ~~$22~~$23 million decrease in the volume of KWHs generated, excluding solar, wind, and tolling agreements. Purchased power expense increased $27 million due to a $19 million increase in the volume of KWHs purchased and an $8 million increase associated with the average cost of purchased power.

~~Other Operations and Maintenance Expenses~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$11 12.8 $28 17.3

In the second quarter 2017, other operations and maintenance expenses were $97 million compared to $86 million for the corresponding period in 2016. The increase was primarily due to a $19 million increase associated with new solar, wind, and gas facilities and a $5 million increase associated with employee compensation and expenses in support of Southern Power's overall growth strategy, partially offset by a $9 million decrease in scheduled outage maintenance expenses and a $5 million decrease in non-outage operations and maintenance expenses.

For year-to-date 2017, other operations and maintenance expenses were $190 million compared to $162 million for the corresponding period in 2016. The increase was primarily due to a $35 million increase associated with new solar, wind, and gas facilities and a $10 million increase associated with employee compensation and expenses in support of Southern Power's overall growth strategy, partially offset by a $16 million decrease in scheduled outage maintenance expenses and a $4 million decrease in non-outage operations and maintenance expenses.

~~Depreciation and Amortization~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$48 59.3 $93 60.4

In the second quarter 2017, depreciation and amortization was $129 million compared to $81 million for the corresponding period in 2016. For year-to-date 2017, depreciation and amortization was $247 million compared to

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~~$154~~decrease in the average cost of natural gas per KWH generated. Purchased power expense increased $31 million ~~for the corresponding period in 2016. The increases were primarily due to new solar, wind, and gas facilities placed in service.~~

~~Interest Expense, net of Amounts Capitalized~~

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$26 118.2 $54 125.6

~~In the second quarter 2017, interest expense, net of amounts capitalized was $48 million compared to $22 million for the corresponding period in 2016. The increase was~~ primarily due to an increase in the average cost of $16 million in interest expense related to additional debt issued in 2016, primarily to fund Southern Power's growth strategy and continuous construction program, as well as a $9 million decrease in capitalized interest associated with completing construction of and placing in service solar facilities.

For year-to-date 2017, interest expense, net of amounts capitalized was $97 million compared to $43 million for the corresponding period in 2016. The increase was primarily due to an increase of $36 million in interest expense related to additional debt issued in 2016, primarily to fund Southern Power's growth strategy and continuous construction program, as well as a $17 million decrease in capitalized interest associated with completing construction of and placing in service solar facilities.purchased power.

Other Income (Expense), Net

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$1 100.0 $(3) (300.0)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$4		N/M

N/M - Not meaningful

In the ~~second~~first quarter ~~2017,~~2018, other income ~~(expense), net~~ was $2$3 million compared to other expense of $1 million for the corresponding period in ~~2016. For year-to-date 2017, other income (expense), net was $(2)~~2017. The change includes a $19 million ~~compared to $1 million for the corresponding period~~increase in ~~2016. The changes include increases of $99 million and $116 million from~~ currency losses arising from translation of €1.1 billion euro-denominated fixed-rate notes into U.S. dollars, ~~for the second quarter and year-to-date 2017, respectively,~~ fully offset by an equal ~~change in gains on~~amount from the foreign currency hedges ~~that were~~ reclassified from accumulated OCI into earnings. See Note ~~(H)~~(I) to the Condensed Financial Statements herein for additional information.

Income Taxes (Benefit)

Second Quarter 2017 vs. Second Quarter 2016 Year-to-Date 2017 vs. Year-to-Date 2016
(change in millions) (% change) (change in millions) (% change)
$3 7.3 $(25) (38.5)



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(47)		(90.4)

In the ~~second~~first quarter ~~2017,~~2018, income tax benefit was ~~$38~~$99 million compared to ~~$41~~$52 million for the corresponding period in ~~2016. The decrease was primarily due to a $29 million decrease in ITC benefits, partially offset by a $27 million increase in wind PTC benefits.~~

~~For year-to-date 2017, income tax benefit was $90 million compared to $65 million for the corresponding period in 2016.~~2017. The increase was primarily due to income tax benefits arising from a ~~$57 million increase~~reorganization of Southern Power's legal entities that own and operate substantially all of its solar facilities related to certain changes in ~~wind PTC benefits, a $4 million increase resulting from~~ state apportionment ~~rate changes, and a $4 million increase related to lower pre-tax earnings, partially offset by a $41 million decrease in ITC benefits.~~rates.

See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Legal Entity Reorganization" and Note ~~(G)~~(H) to the Condensed Financial Statements herein for additional ~~information on income taxes and Note 1 to the financial statements of Southern Power under "Income and Other Taxes" in Item 8 of the Form 10-K for additional information on ITCs.~~information.

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FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Power's future earnings potential. The level of Southern Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Power's competitive wholesale business. These factors include: Southern Power's ability to achieve sales growth while containing costs; regulatory matters; creditworthiness of customers; total generating capacity available in Southern Power's market areas; the successful remarketing of capacity as current contracts expire; Southern Power's ability to execute its growth strategy, including successful additional investments in renewable and other energy projects, and to develop and construct generating facilities. ~~Current proposals related~~

Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantially all of the solar facilities, including certain subsidiaries owned in partnership with various third parties. If successful, the sale is expected to ~~potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction.~~close in mid-2018. The ultimate ~~impact~~outcome of any tax reform proposals, including any potential changes to the availability or realizability of ITCs and PTCs, is dependent on the final form of any legislation enacted and the related transition rules, andthis matter cannot be determined at this ~~time, but could have a material impact on Southern Power's consolidated financial statements.~~time.

Demand for electricity is primarily driven by ~~economic growth. The~~the pace of economic growth ~~and electricity demand~~that may be affected by changes in regional and global economic conditions, as well as renewable portfolio standards, which may impact future earnings.

Other factors that could influence future earnings include weather, ~~demand,~~transmission constraints, cost of generation from ~~facilities~~units within the power pool, and operational limitations. For additional information relating to these factors, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.

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Power Sales Agreements

See BUSINESS – "The Southern Company System – Southern Power" in Item 1 of the Form 10-K for additional information regarding Southern Power's PPAs. Generally, under the solar and wind generation PPAs, the purchasing party retains the right to keep or resell the renewable energy credits.

At ~~June 30, 2017,~~March 31, 2018, Southern Power's average investment coverage ratio for its generating assets, based on the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction) as the investment amount, was ~~91%~~92% through ~~2021~~2022 and 90% through ~~2026,~~2027, with an average remaining contract duration of approximately 1615 years.

Environmental Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emissions of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, water quality, or other environmental and health concerns could also significantly affect Southern Power. While Southern Power's PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such legislative or regulatory changes cannot be determined at this time.

~~Environmental Statutes and Regulations~~

~~Water Quality~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Environmental Matters~~ – ~~Environmental Statutes and Regulations~~ – ~~Water Quality" of Southern Power in Item 7 of the Form 10-K for additional information regarding the final effluent guidelines rule.~~

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

~~Global Climate Issues~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – ~~"Environmental Matters~~ – ~~Global Climate Issues" of Southern Power in Item 7 of the Form 10-K for additional information.~~

~~On June 1, 2017, the U.S. President announced that the United States will withdraw from the non-binding Paris Agreement and begin renegotiation of its terms.~~

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

~~FERC Matters~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – "FERC Matters" of Southern Power in Item 7 of the Form 10-K for additional information regarding the traditional electric operating companies' and Southern Power's market power proceeding and amendment to their market-rate tariff.

Acquisitions

During the ~~six~~three months ended ~~June 30, 2017, in accordance with Southern Power's overall growth strategy, Southern Renewable Partnerships, LLC (SRP),~~March 31, 2018, one of Southern Power's wholly-owned subsidiaries acquired and completed construction of the ~~Bethel wind~~Gaskell West 1 solar facility. Acquisition-related costs were expensed as incurred and were not material. See Note ~~(I)~~(J) to the Condensed Financial Statements under "Southern Power" herein and MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Power in Item 7 of the Form 10-K for additional information.

Project Facility Resource
Approximate Nameplate Capacity (MW)
Location Percentage Ownership Actual COD PPA Counterparties PPA Contract Period
Bethel Wind 276 Castro County, TX 100 % January 2017 Google Energy, LLC 12 years



Project Facility	Resource	Approximate Nameplate Capacity (MW)	Location	Percentage Ownership		Actual COD	PPA Counterparties	PPA Contract Period
Gaskell West 1	Solar	20	Kern County, CA	100% of Class B	(*)	March 2018	Southern California Edison	20 years


(*)	Southern Power owns 100% of the class B membership interests under a tax equity partnership agreement.

The aggregate amounts of revenue and net income, excluding impacts from PTCs, recognized by Southern Power related to the Bethel facility included in the condensed consolidated statements of income for year-to-date 2017 were immaterial. The BethelGaskell West 1 facility did not have operating revenues or activities prior to completion of construction and the assets being placed in ~~service; therefore, supplemental pro forma information for the comparable 2016 period is not meaningful and has been omitted.~~

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~~2033. The facility is expected to be placed in~~ service ~~in mid-2018. The ultimate outcome of this matter cannot be determined at this time.~~during March 2018.

Construction Projects

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" of Southern Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information.

Construction Projects Completed and in Progress

During the ~~six~~three months ended ~~June 30, 2017, in accordance with its overall growth strategy,~~March 31, 2018, Southern Power ~~completed construction of and placed in service, or~~ continued construction of the projects set forth in the ~~following table. Through June 30, 2017, total costs of construction incurred for these projects were $421 million, of which $49 million remained in CWIP for the Mankato facility acquired in 2016.~~table below. Total aggregate construction costs, excluding the acquisition costs, are expected to be ~~$170~~between $370 million ~~to $190~~and $415 million for the Mankato ~~facility.~~and Cactus Flats facilities. At March 31, 2018, construction costs included in CWIP related to these projects totaled $273 million. The ultimate outcome of ~~this matter~~these matters cannot be determined at this time.

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Project Facility	Resource	Approximate Nameplate Capacity (MW)	Location	Actual/Expected COD	PPA Counterparties	PPA Contract Period
Projects ~~Completed During the Six Months Ended June 30, 2017~~
~~East Pecos~~	~~Solar~~	~~120~~	~~Pecos County, TX~~	~~March 2017~~	~~Austin Energy~~	~~15 years~~
~~Lamesa~~	~~Solar~~	~~102~~	~~Dawson County, TX~~	~~April 2017~~	~~City of Garland, Texas~~	~~15 years~~

~~Project~~ Under Construction as of ~~June 30, 2017~~March 31, 2018
Cactus Flats^(*)	Wind	148	Concho County, TX	Third quarter 2018	General Motors, LLC and General Mills Operations, LLC	12 years and 15 years
Mankato	Natural Gas	345	Mankato, MN	Second quarter 2019	Northern States Power Company	20 years


(*)	In July 2017, Southern Power purchased 100% of the Cactus Flats facility and commenced construction. Upon placing the facility in service, Southern Power expects to close on a tax equity partnership agreement, subject to various customary conditions at closing, and will then own 100% of the class B membership interests.

Development Projects

~~In December 2016,~~During 2017, as part of ~~Southern Power's~~its renewable development strategy, ~~SRP~~Southern Power purchased wind turbine equipment from Siemens Gamesa Renewable Energy Inc. and Vestas-American Wind Technology, Inc. to be used for various development and construction projects. Any wind projects reaching commercial operation by 2021 are expected to qualify for 80% PTCs.

During 2016, Southern Power entered into a joint development agreement with Renewable Energy Systems Americas, Inc. to develop and construct ~~approximately 3,000 MWs of~~ wind projects. ~~Also~~In addition, in ~~December~~ 2016, Southern Power ~~signed agreements and made payments to purchase~~purchased wind turbine equipment from Siemens Wind Power, Inc. and Vestas-American Wind Technology, Inc. to be used for construction of the facilities. ~~All of the~~Any wind ~~turbine equipment was delivered~~projects reaching commercial operation by ~~April 2017, which allows the projects~~2020 are expected to qualify for 100% ~~PTCs for 10 years following their expected commercial operation dates between 2018 and 2020.~~ PTCs.

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

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk" and Note ~~(G)~~(H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation.

Legal Entity Reorganization

In March 2018, Southern Power substantially completed a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of the solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $50 million, which were recorded in the first quarter 2018. In April 2018, Southern Power completed the final stage of the reorganization resulting in additional ~~information.~~net state tax benefits of approximately $4 million. Southern Power is pursuing the sale of a 33% equity interest in the newly-formed holding company owning these solar facilities. If successful, the sale is expected to close in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. Southern Power's business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as standards for air, ~~quality~~water, land, and ~~water standards,~~protection of other natural resources, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been

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~~U.S. This litigation has included claims for damages alleged to have been~~ caused by CO₂ and other emissions and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.

Theultimateoutcomeofsuchpendingorpotentiallitigation~~againstSouthern Power~~ or regulatory matters cannotbepredictedatthistime;however,forcurrentproceedingsnotspecificallyreportedinNote(B)totheCondensedFinancialStatementsherein,management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Power's financial statements.

During 2015, Southern Power indirectly acquired a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, LLC and was subsequently placed in service in November 2016. Prior to placing the facility in service, certain solar panels were damaged during installation. While the facility currently is generating energy consistent with operational expectations and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace these solar panels. In connection therewith, Southern Power is withholding payments of approximately $26 million from the construction contractor, who has placed a lien on the Roserock facility for the same amount. ~~The amounts withheld are included in other accounts payable and other current liabilities on Southern Power's consolidated balance sheets. On~~In May ~~18,~~ 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas, against ~~X.L.~~XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from a hail storm and certain installation practices by the construction contractor, McCarthy Building Companies, Inc. (McCarthy). OnAlso in May ~~19,~~ 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breach of warranty for the damages sustained at the Roserock facility, which has since been moved to the U.S. District Court for the Western District of Texas. OnAdditionally in May ~~22,~~ 2017, McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL, and North American Elite in the U.S. District Court for the Western District of Texas alleging, among other things, breach of contract, and requesting foreclosure of mechanic's liens against Roserock. OnIn July ~~18,~~ 2017, the U.S. District Court for the Western District of Texas consolidated the two pending lawsuits. In December 2017, the U.S. District Court for the Western District of Texas dismissed McCarthy's claims against Canadian Solar (USA), Inc. and dismissed cross-claims that XL and North American Elite had sought to bring against Roserock. Southern Power intends to vigorously pursue and defend these matters, the ultimate outcome of which cannot be determined at this time.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Power prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power's critical accounting policies and ~~estimates related to Revenue Recognition, Impairment of Long-Lived Assets and Intangibles, Acquisition Accounting, and ITCs.~~estimates.

Recently Issued Accounting Standards

~~In 2014, the FASB issued ASC 606,~~ ~~Revenue from Contracts with Customers~~ (ASC 606), replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principleSee MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Power in Item 7 of the ~~standard is~~Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to ~~recognize revenue to depict~~ the ~~transfer of goods or services to customers at the amount expected to be collected. The new standard also requires enhanced disclosures~~Condensed Financial Statements herein for information regarding ~~the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers.~~

~~While Southern Power expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. However, given~~ Southern Power's ~~core activities of selling~~recently adopted accounting standards.

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generation capacity and energy to high credit rated customers, Southern Power currently does not expect the new standard to have a significant impact to net income. Southern Power's ongoing evaluation of revenue streams and related contracts includes the evaluation of identified revenue streams tied to longer-term contractual arrangements, such as certain capacity and energy payments under PPAs that are expected to be excluded from the scope of ASC 606 and included in the scope of the current leasing guidance (ASC 840).

The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Southern Power intends to use the modified retrospective method of adoption effective January 1, 2018. Southern Power has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized in Southern Power's financial statements, Southern Power will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Power in Item 7 of the Form 10-K for additional information. Southern Power's financial condition remained stable at ~~June 30, 2017.~~March 31, 2018. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements as needed to meet future capital and liquidity needs. See "Sources of Capital" herein for additional information on lines of credit.

Southern Power also utilizes third-party tax equity partnerships as one of the financing sources to fund its renewable growth strategy where the tax partner takes significantly all of the federal tax benefits. These tax equity partnerships are consolidated in Southern Power's financial statements using a hypothetical liquidation at book value (HLBV) methodology to allocate partnership gains and losses to Southern Power. Southern Power has secured third-party tax equity funding for the Gaskell West 1 project. See Note (A) to the Condensed Financial Statements under "Hypothetical Liquidation at Book Value" herein for additional information on the HLBV methodology.

In addition, Southern Power is pursuing the sale of a 33% equity interest in a newly-formed holding company owning substantially all of Southern Power's solar facilities, including certain subsidiaries owned in partnership with various third parties. If successful, the sale is expected to close in mid-2018. Proceeds from the sale may be used for debt redemptions, common stock dividends, working capital, and general corporate purposes as well as to support Southern Power's continuing growth strategy.

Net cash provided from operating activities totaled ~~$348~~$149 million for the first ~~six~~three months of ~~2017~~2018 compared to ~~$51~~$96 million for the first ~~six~~three months of ~~2016.~~2017. The increase in net cash provided from operating activities was primarily due to income tax refunds received and an increase in energy ~~sales arising from new solar and wind facilities and a decrease in income taxes paid, partially offset by an increase in interest paid.~~revenues. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Bonus Depreciation" of Southern Power in Item 7 of the Form 10-K for additional information. Net cash used for investing activities totaled ~~$1.4 billion~~$153 million for the first ~~six~~three months of ~~2017~~2018 primarily due to ~~payments for renewable acquisitions and~~ the construction of generating ~~facilities. See FUTURE EARNINGS POTENTIAL~~ – "~~Acquisitions~~"facilities and "~~Construction Projects" herein~~payments for ~~additional information.~~renewable acquisitions. Net cash ~~provided from~~used for financing activities totaled ~~$43~~$54 million for the first ~~six~~three months of ~~2017~~2018 primarily due to ~~notes payable~~a common stock dividend payment and ~~contributions from~~distributions to noncontrolling interests, partially offset by ~~dividends to Southern Company and distributions to noncontrolling interests.~~a net increase in notes payable. Cash flows from financing activities may vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first ~~six~~three months of ~~2017~~2018 include a ~~$1.0 billion~~$123 million increase in CWIP primarily due to the construction of the Cactus Flats wind facility and the Mankato natural gas expansion project, a $57 million decrease in ~~cash and cash equivalents~~accumulated deferred income taxes primarily due to a legal entity reorganization, and a ~~$798~~$48 million increase in property, plant, and equipment in-service primarily related to ~~acquisitions, as well as a $54 million decrease in CWIP primarily due to East Pecos and Lamesa being placed in service, partially offset by equipment purchased for wind construction projects.~~ the Gaskell West 1 project.

See FUTURE EARNINGS POTENTIAL – "Acquisitions," ~~and~~ "Construction Projects," and "Income Tax Matters – Legal Entity Reorganization" herein for additional information.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Power in Item 7 of the Form 10-K for a description of Southern Power's capital requirements ~~for its construction program, scheduled~~and contractual obligations. Approximately $770 million will be required to repay maturities of long-term debt ~~as well as~~through March 31, 2019.

Southern Power's construction program includes estimates for potential plant acquisitions and placeholder growth, new construction and development, capital improvements, and work to be performed under LTSAs and is subject to periodic review and revision. Post-tax reform, planned expenditures for plant acquisitions and placeholder growth are now expected to average approximately $0.5 billion per year for 2018 through 2022 and may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. Southern Power's capital expenditures for committed construction, capital improvements, and work to be performed under LTSAs remain unchanged and total approximately $0.9 billion for the ~~related interest, derivative obligations, leases, unrecognized tax benefits, and other purchase~~five years ending 2022. Actual construction costs may vary

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~commitments. Approximately $909 million will be required to repay maturities of long-term debt through June 30, 2018.~~

Southern Power's construction program includes estimates for potential plant acquisitions, new construction and development, capital improvements, and work to be performed under LTSAs and is subject to periodic review and revision. Planned expenditures for plant acquisitions may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. Actual capital costs may vary from these estimates because of numerous factors such as: changes in business conditions; changes in the expected environmental compliance program; changes in environmental ~~statutes~~laws and regulations; the outcome of any legal challenges to ~~the~~ environmental rules; changes in FERC rules and regulations; changes in load projections; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. See ~~Note (I) to the Condensed Financial Statements~~FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" herein for additional information.

Sources of Capital

Southern Power plans to obtain the funds required for acquisitions, construction, development, debt maturities, and other purposes from operating cash flows, ~~short-term debt,~~external securities issuances, ~~term loans,~~borrowings from financial institutions, tax equity partnership contributions, and equity contributions from Southern Company. Southern Power also plans to utilize funds resulting from any potential sale of a 33% equity interest in substantially all of its solar asset portfolio, if completed. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Power in Item 7 of the Form 10-K for additional information.

As of ~~June 30, 2017,~~March 31, 2018, Southern Power's current liabilities exceeded current assets by ~~$837~~$595 million due to long-term debt maturing in the next 12 months, the use of short-term debt as a funding source, and ~~construction payables, as well as~~ fluctuations in cash needs, due to both seasonality and the stage of acquisitions and construction projects. ~~In 2017, Southern Power expects to utilize the debt capital markets, bank term loans, and commercial paper markets as the source of funds for the majority of its debt maturities.~~

~~As of June 30, 2017, Southern Power had cash and cash equivalents of approximately $99 million.~~

Southern Power believes the need for working capital can be adequately met by utilizing the commercial paper program, the Facility (as defined below), bank term loans, the debt capital markets, and operating cash flows.

As of March 31, 2018, Southern Power had cash and cash equivalents of approximately $82 million.

Southern Power's commercial paper program is used to finance acquisition and construction costs related to electric generating facilities, for general corporate purposes, and to finance maturing debt. Commercial paper is included in notes payable on the condensed consolidated balance ~~sheet at June 30, 2017.~~sheets.

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

Short-term Debt at
June 30, 2017

Short-term Debt During the Period ^(*)
Amount Outstanding Weighted Average Interest Rate Average Amount Outstanding Weighted Average Interest Rate
Maximum
Amount
Outstanding
(in millions) (in millions) (in millions)
Commercial paper $ 398
1.5 % $ 328
1.3 % $ 419



	Short-term Debt at March 31, 2018				Short-term Debt During the Period ^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)				(in millions)
Commercial paper	$	134	2.4	%	$	83	2.0	%	$	145


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended ~~June 30, 2017.~~March 31, 2018.

At ~~June 30, 2017,~~March 31, 2018, Southern Power had a committed credit facility (Facility) of $750 million, of which ~~$75~~$22 million has been used for letters of credit and ~~$675~~$728 million remains unused. ~~In May 2017, Southern Power amended the~~The Facility ~~which, among other things, extended the maturity date from 2020 to 2022 and increased Southern Power's borrowing ability under this Facility to $750 million from $600 million.~~expires in 2022. Proceeds from the Facility may be used for working capital and general corporate purposes as well as liquidity support for Southern Power's commercial paper program. Subject to applicable market conditions, Southern Power expects to renew or replace the Facility, as

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

needed, prior to expiration. In connection therewith, Southern Power may extend the maturity date and/or increase or decrease the lending commitment thereunder. See Note 6 to the financial statements of Southern Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

The Facility, as well as Southern Power's term loan ~~agreement,~~agreements, contains a covenant that limits 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 purposes of this definition, debt excludes any project debt incurred by certain subsidiaries of Southern Power to the extent such debt is non-recourse to Southern Power, and

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

capitalization excludes the capital stock or other equity attributable to such subsidiary. Southern Power is currently in compliance with all covenants in the Facility.

~~In December 2016,~~ Southern Power ~~entered into an agreement for~~also has a $120 million continuing letter of credit facility expiring in 2019 for standby letters of ~~credit expiring in 2019.~~credit. At ~~June 30, 2017, the total amount available under this letter~~March 31, 2018, $99 million has been used for letters of credit, ~~facility was $62 million.~~primarily as credit support for PPA requirements, and $21 million remains unused.

In addition, at March 31, 2018, Southern Power had $103 million of cash collateral posted related to PPA requirements.

Southern Power's subsidiaries do not borrow under the commercial paper program and are not parties to, and do not borrow under, the Facility or the continuing letter of credit facility.

Credit Rating Risk

Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2, or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, energy price risk management, ~~transmission,~~ and ~~foreign currency risk management.~~transmission.

The maximum potential collateral requirements under these contracts at ~~June 30, 2017~~March 31, 2018 were as follows:


Credit Ratings	Maximum Potential Collateral Requirements		Maximum Potential Collateral Requirements
	(in millions)		(in millions)
At BBB and/or Baa2	$	38	$	37
At BBB- and/or Baa3	$	392	$	372
At BB+ and/or Ba1^(*)	$	1,127	$	959


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

Included in these amounts are certain agreements that could require collateral in the event that Alabama Power or Georgia Power has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Power to access capital markets and would be likely to impact the cost at which it does so.

In addition, Southern Power has a PPA that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power's credit. The PPA requires credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses resulting from a credit downgrade.

~~On March 24, 2017, S&P revised its consolidated~~While it is unclear how the credit rating ~~outlook for~~agencies may respond to 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~~including Southern ~~Power) from stable~~Power, may be negatively impacted. Absent actions by Southern Power to ~~negative.~~mitigate the resulting impacts, which, among other alternatives, could include adjusting Southern Power's capital structure, Southern Power's credit ratings could be negatively affected.

Financing Activities

Southern Power did not issue or redeem any securities during the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. However, Southern Power received $5 million of third-party tax equity during the three months ended March 31, 2018 related to the Gaskell West 1 solar facility.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

SOUTHERN COMPANY GAS

AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Successor			Predecessor			Successor			Predecessor
	For the Three Months Ended June 30,			For the Three Months Ended June 30,			For the Six Months Ended June 30,			For the Six Months Ended June 30,			For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(in millions)			(in millions)			(in millions)			(in millions)			(in millions)
Operating Revenues:
Natural gas revenues (includes revenue taxes of $19, $17, $67, and $57 for the periods presented, respectively)	$	684		$	539		$	2,214		$	1,841
Natural gas revenues (includes revenue taxes of $51 and $48, respectively)													$	1,631		$	1,521
Alternative revenue programs													(24		)	9
Other revenues	32			32			62			64			32			30
Total operating revenues	716			571			2,276			1,905			1,639			1,560
Operating Expenses:
Cost of natural gas	232			184			951			755			720			719
Cost of other sales	6			7			13			14			7			7
Other operations and maintenance	213			213			467			454			276			255
Depreciation and amortization	125			104			244			206			129			120
Taxes other than income taxes	44			37			114			99			77			70
Merger-related expenses	—			53			—			56
Goodwill impairment													42			—
Total operating expenses	620			598			1,789			1,584			1,251			1,171
Operating Income (Loss)	96			(27		)	487			321
Operating Income													388			389
Other Income and (Expense):
Earnings from equity method investments	29			1			68			2			42			39
Interest expense, net of amounts capitalized	(48		)	(48		)	(94		)	(96		)	(59		)	(46		)
Other income (expense), net	3			2			7			5			12			7
Total other income and (expense)	(16		)	(45		)	(19		)	(89		)	(5		)	—
Earnings (Loss) Before Income Taxes	80			(72		)	468			232
Income taxes (benefit)	31			(24		)	180			87
Net Income (Loss)	49			(48		)	288			145
Less: Net income attributable to noncontrolling interest	—			3			—			14
Net Income (Loss) Attributable to Southern Company Gas	$	49		$	(51	)	$	288		$	131
Earnings Before Income Taxes													383			389
Income taxes													104			150
Net Income													$	279		$	239

~~The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.~~

~~SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES~~

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Successor Predecessor Successor Predecessor
For the Three Months Ended June 30, For the Three Months Ended June 30, For the Six Months Ended June 30, For the Six Months Ended June 30,
2017 2016 2017 2016
(in millions) (in millions) (in millions) (in millions)
Net Income (Loss) $ 49
$ (48 ) $ 288
$ 145
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of
$(1), $(7), $(2), and $(23), respectively (1 ) (12 ) (2 ) (41 )
Reclassification adjustment for amounts included in
net income, net of tax of $-, $-, $-, and $-,
respectively —
2
—
1
Pension and other postretirement benefit plans:
Reclassification adjustment for amounts included in
net income, net of tax of $-, $2, $-, and $4,
respectively —
2
(1 ) 5
Total other comprehensive income (loss) (1 ) (8 ) (3 ) (35 )
Comprehensive Income (Loss) 48
(56 ) 285
110
Less: Comprehensive income attributable to
noncontrolling interest —
3
—
14
Comprehensive Income (Loss) Attributable to
Southern Company Gas $ 48
$ (59 ) $ 285
$ 96



	For the Three Months Ended March 31,
	2018			2017
	(in millions)
Net Income	$	279		$	239
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $- and $(1), respectively	1			(1		)
Reclassification adjustment for amounts included in net income, net of tax of $1 and $-, respectively	2			—
Pension and other postretirement benefit plans:
Reclassification adjustment for amounts included in net income, net of tax of $- and $(1), respectively	(1		)	(1		)
Total other comprehensive income (loss)	2			(2		)
Comprehensive Income	$	281		$	237

The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Successor			Predecessor
	For the Six Months Ended June 30,			For the Six Months Ended June 30,			For the Three Months Ended March 31,
	2017			2016			2018			2017
	(in millions)			(in millions)			(in millions)
Operating Activities:
Net income	$	288		$	145		$	279		$	239
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total	244			206			129			120
Deferred income taxes	144			8			47			46
Stock based compensation expense	19			20
Hedge settlements	—			(26		)
Mark-to-market adjustments	(49		)	162			(59		)	(82		)
Goodwill impairment							42			—
Other, net	(53		)	(77		)	(2		)	26
Changes in certain current assets and liabilities —
-Receivables	420			181			175			115
-Natural gas for sale, net of temporary LIFO liquidation	223			273			413			411
-Prepaid income taxes	24			151			21			24
-Other current assets	(12		)	37			14			19
-Accounts payable	(102		)	43			(119		)	(216		)
-Accrued taxes	(8		)	41			28			19
-Accrued compensation	(12		)	(21		)	(38		)	(14		)
-Other current liabilities	25			(30		)	48			49
Net cash provided from operating activities	1,151			1,113			978			756
Investing Activities:
Property additions	(684		)	(509		)	(268		)	(301		)
Cost of removal, net of salvage	(25		)	(32		)	(14		)	(11		)
Change in construction payables, net	23			(7		)	(46		)	(12		)
Investment in unconsolidated subsidiaries	(111		)	(14		)	(29		)	(81		)
Other investing activities	16			3			(4		)	2
Net cash used for investing activities	(781		)	(559		)	(361		)	(403		)
Financing Activities:
Decrease in notes payable, net	(631		)	(896		)	(483		)	(234		)
Proceeds —
First mortgage bonds	—			250
Capital contributions from parent company	57			—
Senior notes	450			350
Redemptions and repurchases — First mortgage bonds	—			(125		)
Distributions to noncontrolling interest	—			(19		)
Payment of common stock dividends	(221		)	(128		)	(118		)	(111		)
Other financing activities	(6		)	10			6			1
Net cash used for financing activities	(351		)	(558		)	(595		)	(344		)
Net Change in Cash and Cash Equivalents	19			(4		)
Cash and Cash Equivalents at Beginning of Period	19			19
Cash and Cash Equivalents at End of Period	$	38		$	15
Net Change in Cash, Cash Equivalents, and Restricted Cash							22			9
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period							78			24
Cash, Cash Equivalents, and Restricted Cash at End of Period							$	100		$	33
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $7 and $3 capitalized for 2017 and 2016, respectively)	$	105		$	119
Income taxes, net	20			(100		)
Cash paid during the period for —
Interest (net of $1 and $3 capitalized for 2018 and 2017, respectively)							$	52		$	41
Noncash transactions — Accrued property additions at end of period	84			41			89			53

The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Assets	At June 30, 2017			At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)						(in millions)
Current Assets:
Cash and cash equivalents	$	38		$	19		$	94		$	73
Receivables —
Energy marketing receivables	482			623			448			607
Customer accounts receivable	270			364			509			400
Unbilled revenues	69			239			210			285
Other accounts and notes receivable	63			76			51			103
Accumulated provision for uncollectible accounts	(35		)	(27		)	(36		)	(28		)
Materials and supplies	24			26
Natural gas for sale	477			631			235			595
Prepaid expenses	69			80			66			53
Assets from risk management activities, net of collateral	114			128			145			135
Other regulatory assets, current	72			81			75			94
Other current assets	20			10			51			78
Total current assets	1,663			2,250			1,848			2,395
Property, Plant, and Equipment:
In service	14,850			14,508			16,056			15,833
Less: Accumulated depreciation	4,550			4,439			4,670			4,596
Plant in service, net of depreciation	10,300			10,069			11,386			11,237
Construction work in progress	779			496			511			491
Total property, plant, and equipment	11,079			10,565			11,897			11,728
Other Property and Investments:
Goodwill	5,967			5,967			5,925			5,967
Equity investments in unconsolidated subsidiaries	1,610			1,541			1,504			1,477
Other intangible assets, net of amortization of $80 and $34 at June 30, 2017 and December 31, 2016, respectively	320			366
Other intangible assets, net of amortization of $136 and $120 at March 31, 2018 and December 31, 2017, respectively							264			280
Miscellaneous property and investments	21			21			20			21
Total other property and investments	7,918			7,895			7,713			7,745
Deferred Charges and Other Assets:
Other regulatory assets, deferred	963			973			878			901
Other deferred charges and assets	186			170			232			218
Total deferred charges and other assets	1,149			1,143			1,110			1,119
Total Assets	$	21,809		$	21,853		$	22,568		$	22,987

The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


Liabilities and Stockholder's Equity	At June 30, 2017		At December 31, 2016			At March 31, 2018			At December 31, 2017
	(in millions)					(in millions)
Current Liabilities:
Securities due within one year	$	22	$	22		$	177		$	157
Notes payable	626		1,257			1,035			1,518
Energy marketing trade payables	534		597			437			546
Accounts payable	327		348			392			446
Customer deposits	134		153			112			128
Accrued taxes —
Accrued income taxes	23		26			77			40
Other accrued taxes	63		68			76			78
Accrued interest	50		48			65			51
Accrued compensation	45		58			55			74
Liabilities from risk management activities, net of collateral	20		62			18			69
Other regulatory liabilities, current	146		102			179			135
Accrued environmental remediation, current	63		69
Temporary LIFO liquidation	69		—			54			—
Other current liabilities	113		108			143			159
Total current liabilities	2,235		2,918			2,820			3,401
Long-term Debt	5,677		5,259			5,859			5,891
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	2,091		1,975			1,104			1,089
Deferred credits related to income taxes						1,083			1,063
Employee benefit obligations	432		441			413			415
Other cost of removal obligations	1,638		1,616			1,650			1,646
Accrued environmental remediation, deferred	353		357			333			342
Other regulatory liabilities, deferred	50		51
Other deferred credits and liabilities	91		127			107			118
Total deferred credits and other liabilities	4,655		4,567			4,690			4,673
Total Liabilities	12,567		12,744			13,369			13,965
Common Stockholder's Equity:
Common stock, par value $0.01 per share —
Authorized — 100 million shares
Outstanding — 100 shares	—		—			—			—
Paid in capital	9,164		9,095			9,228			9,214
Retained earnings (accumulated deficit)	55		(12		)
Accumulated deficit						(55		)	(212		)
Accumulated other comprehensive income	23		26			26			20
Total common stockholder's equity	9,242		9,109			9,199			9,022
Total Liabilities and Stockholder's Equity	$	21,809	$	21,853		$	22,568		$	22,987

The accompanying notes as they relate to Southern Company Gas are an integral part of these condensed consolidated financial statements.

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FIRST QUARTER 2018 vs. FIRST QUARTER 2017

OVERVIEW

Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas through utilities in seven states – Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland. Southern Company Gas and its subsidiaries are also involved in several other complementary businesses.

Southern Company Gas has four reportable segments – gas distribution operations, gas marketing services, wholesale gas services, and gas midstream operations – and one non-reportable segment – all other. For additional information on these segments, see Note ~~(K)~~(L) to the Condensed Financial Statements herein and "BUSINESS – The Southern Company System – Southern Company Gas" in Item 1 of the Form 10-K.

Many factors affect the opportunities, challenges, and risks of Southern Company Gas' business. These factors include the ability to maintain safety, to maintain constructive regulatory environments, to maintain and grow natural gas sales and number of customers, and to effectively manage and secure timely recovery of costs. ~~Southern Company Gas has~~These costs include those related to projected long-term demand growth, environmental standards, reliability, natural gas, and capital expenditures, including updating and expanding the natural gas distribution systems. 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 Southern Company Gas for the foreseeable future.

~~Merger and Acquisition Activities~~

~~On July 1, 2016,~~In October 2017, a Southern Company Gas ~~completed~~subsidiary, Pivotal Utility Holdings, entered into agreements for the ~~Merger, which was accounted for by Southern Company using the acquisition method~~sale of ~~accounting whereby~~ the assets ~~acquired~~of two of its natural gas distribution utilities, Elizabethtown Gas and ~~liabilities assumed were recognized at fair~~Elkton Gas, to South Jersey Industries, Inc. for a total cash purchase price of $1.7 billion. As of March 31, 2018, the net book value as of the ~~acquisition date. Pushdown accounting~~assets to be disposed of in the sale was ~~applied to create~~approximately $1.5 billion, which includes approximately $0.5 billion of goodwill. The goodwill is not deductible for tax purposes and, as a ~~new cost basis for~~result, a deferred tax liability has not yet been provided. Through the completion of the asset sales, Southern Company Gas ~~assets, liabilities, and equity as~~intends to invest approximately $0.1 billion in capital additions required for ordinary business operations of ~~the acquisition date. Accordingly, the successor financial statements reflect a new basis~~these assets. The completion 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 (I)each asset sale is subject to the ~~Condensed Financial Statements herein for additional information relating~~satisfaction or waiver of certain conditions, including, among other customary closing conditions, the receipt of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the ~~Merger.~~

~~In September 2016,~~sale of Elkton Gas, the Maryland PSC. Southern Company Gas ~~paid approximately $1.4 billion~~and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The asset sales are expected to ~~acquire a 50% equity interest in SNG.~~ be completed by the end of the third quarter 2018.

On ~~March 31, 2017,~~April 11, 2018, Southern Company Gas ~~made an additional $50~~and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions for a purchase price of approximately $365 million, ~~contribution~~including estimated working capital. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. The remaining goodwill of $242 million is not deductible for tax purposes and, as a result, a deferred tax liability has not been provided. The completion of this transaction is subject to ~~maintain its 50% equity interest in SNG. Southern Company Gas recorded equity investment income~~the satisfaction or waiver of ~~$24 million~~certain conditions, including, among other customary closing conditions, approval from the Florida Office of Insurance Regulation and ~~$58 million from this investment in~~the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed by the end of the second quarter ~~and year-to-date 2017, respectively. See Note (J) to the Condensed Financial Statements herein and Notes 4 and 11 to the financial statements~~2018.

The ultimate outcome of ~~Southern Company Gas under "Equity Method Investments – SNG" and "Investment in SNG," respectively, in Item 8 of the Form 10-K for additional information.~~these matters cannot be determined at this time.

In October 2016, Southern Company Gas completed its purchase of Piedmont's 15% interest in SouthStar, which eliminated the noncontrolling interest associated with SouthStar. See Note 4 to the financial statements of Southern Company Gas under "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.

Operating Metrics

Southern Company Gas continues to focus on several operating metrics, including Heating Degree Days, customer count, and volumes of natural gas sold. For additional information on these indicators, see MANAGEMENT'S

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DISCUSSION AND ANALYSIS – ~~RESULTS OF OPERATIONS~~OVERVIEW – "Operating Metrics" of Southern Company Gas in Item 7 of the Form 10-K.

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. With the exception of Southern Company Gas' utilities in Illinois and Florida, Southern Company Gas has various regulatory mechanisms, such as weather normalization ~~mechanisms,~~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 utility customers in Illinois and the 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 ~~at gas distribution operations and gas marketing services~~ to reduce negative earnings impact in the event of warmer-than-normal weather, while retaining ~~all of the~~

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~earnings upside in the event of colder-than-normal weather for gas distribution operations in Illinois and~~ most of the earnings upside for ~~gas marketing services.~~these businesses.

The number of customers atserved by gas distribution operations and ~~energy customers at~~ 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, Illinois, and ~~Illinois.~~Ohio.

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

See RESULTS OF OPERATIONS herein for additional information on these operating metrics.

Seasonality of Results

~~During~~Heating Season is the ~~months of~~period from November through March when 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 ~~during a~~throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Operating results for the interim periods presented are not necessarily indicative of annual results and can vary significantly from quarter to quarter.

RESULTS OF OPERATIONS

Net Income

Net income attributable to Southern Company Gas for the successor second quarter 2017 and net loss attributable to Southern Company Gas for the predecessor second quarter 2016 were $49 million and $51 million, respectively. Net income attributable to Southern Company Gas for the successor year-to-date 2017 and the predecessor year-to-date 2016 was $288 million and $131 million, respectively.

~~As a result of purchasing the remaining interest in SouthStar in October 2016, all net income was attributable to Southern Company Gas in the successor period.~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$40		16.7

Net income for the ~~successor second~~first quarter ~~2017~~2018 was ~~negatively impacted by $5~~$279 million compared to $239 million for the corresponding period in 2017. The increase was primarily due to ~~the pushdown of acquisition accounting related to the Merger and included $10 million in after-tax earnings~~additional revenues from ~~the SNG investment, net of related interest expense. Also reflected in net income was an increase of $12 million, after tax, from additional~~ infrastructure investments recovered through replacement programs ~~at gas distribution operations, net of increased~~less the associated increase in depreciation, and a base rate increase at Atlanta Gas Light effective March 1, 2017. The successor second quarter 2017 also included $11 million in after-tax losses from commercial activity and $8 million in after-tax mark-to-market gains at wholesale gas services.

~~Net loss attributable to Southern Company Gas for the predecessor second quarter 2016 included $39 million in after-tax Merger-related expenses,~~ as well as ~~$5 million in after-tax losses from~~base rate increases, higher commercial activity at wholesale gas services, and ~~$50 million~~a decrease in ~~net after-tax mark-to-market losses~~income tax expense, partially offset by a goodwill impairment charge at ~~wholesale gas services and gas marketing services due to changes in natural gas price volatility in the period.~~

Net income attributable to Southern Company Gas for the successor year-to-date 2017 was negatively impacted by $2 million due to the pushdown of acquisition accounting related to the Merger and included $25 million in after-tax earnings from the SNG investment, net of related interest expense. The successor year-to-date 2017 included an increase of $19 million, after tax, from additional infrastructure replacement programs at gas distribution operations, net of increased depreciation and a base rate increase at Atlanta Gas Light effective March 1, 2017. The successor year-to-date 2017 also included $41 million in after-tax gains from commercial activity at wholesale gas services, $27 million in net after-tax mark-to-market gains at wholesale gas services and gas marketing services and revenues deferred as regulatory liabilities for expected adjustments to customer billings as a ~~reduction~~result of ~~$9 million, after tax, resulting from warmer-than-normal weather, net~~the regulatory treatment of ~~hedging.~~

Net income attributable to Southern Company Gas for the predecessor year-to-date 2016 included $41 million in after-tax Merger-related expenses and $21 million in after-tax mark-to-market gains from commercial activity atTax Reform Legislation impacts.

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wholesale gas services. Also reflected in net income was $38 million in net after-tax mark-to-market losses at wholesale gas services and gas marketing services and a decrease of $5 million, after tax, resulting from warmer-than-normal weather, net of hedging.

Natural Gas Revenues

~~Natural~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$77		5.0

In the first quarter 2018, natural gas revenues were $1.6 billion compared to $1.5 billion for the ~~successor second quarter 2017 and~~corresponding period in 2017.

Details of the predecessor second quarter 2016 were $684 million and $539 million, respectively. Natural gas revenues for the successor year-to-date 2017 and the predecessor year-to-date 2016 were $2.2 billion and $1.8 billion, respectively.

~~Natural gas revenues for the successor second quarter 2017 included recovery of $232 million in cost of natural gas and $12 million in net losses from wholesale gas services. Also included~~changes in natural gas revenues were ~~$26 million~~as follows:



	First Quarter 2018
	(in millions)			(% change)
Natural gas – prior year	$	1,530
Estimated change resulting from –
Infrastructure replacement programs and base rate increases	47			3.0	%
Tax reform regulatory liabilities	(37		)	(2.4	)
Gas costs and other cost recovery	1			0.1
Weather	8			0.5
Wholesale gas services	35			2.3
Other	23			1.5
Natural gas – current year	$	1,607		5.0	%

The increase in ~~additional~~natural gas revenue primarily relates to continued infrastructure investments recovered through replacement programs and increases in base rate revenues ~~generated from~~at gas distribution operations, an increase in commercial activity at wholesale gas services, colder weather, fixed and guaranteed bill revenue at gas marketing services as a result of ~~continued investment in infrastructure replacement programs~~adopting a new revenue recognition standard, and ~~a $2 million decrease attributable~~revenue from the Dalton Pipeline at gas midstream operations. These increases were partially offset by revenues deferred as regulatory liabilities for expected adjustments to ~~warmer-than-normal weather, net of hedging.~~

Natural gas revenues for the predecessor second quarter 2016 reflected recovery of $184 million in cost of natural gas and $95 million in net losses from wholesale gas services, primarily due to mark-to-market losses on storage, transportation, and forward commodity derivatives.

Natural gas revenues for the successor year-to-date 2017 included recovery of $951 million in cost of natural gas and $119 million in net revenues from wholesale gas services. Also included in natural gas revenues was $45 million in additional revenues generated from gas distribution operationscustomer billings as a result of ~~continued investment in infrastructure replacement programs and a $15 million decrease attributable to warmer-than-normal weather, net~~the regulatory treatment of ~~hedging.~~

Natural gas revenues for the predecessor year-to-date 2016 reflected recovery of $755 million in cost of natural gas and $32 million in net losses from wholesale gas services. Also included in natural gas revenues was a $7 million decrease attributable to warmer-than-normal weather, net of hedging.Tax Reform Legislation impacts.

See ~~"Segment Information"~~Notes (A) and (B) to the Condensed Financial Statements herein under "Recently Adopted Accounting Standards – Revenue" and "Regulatory Matters – Southern Company Gas," respectively, for additional ~~information on wholesale gas services' revenues~~information. Also see "Segment Information – Wholesale Gas Services," " – Gas Marketing Services," and ~~losses.~~" – Gas Midstream Operations" herein.

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During Heating Season, ~~is the period from November through March when~~ natural gas usage and operating revenues are generally higher. Weather typically does not have a significant net income impact other than during the ~~non-Heating~~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.


	Second Quarter			2017 vs. 2016		2017 vs. normal		Year-to-Date			2017 vs. 2016		2017 vs. normal		First Quarter			2018 vs. 2017		2018 vs. normal
	Normal^(a)	2017	2016	(warmer)		(warmer)		Normal^(a)	2017	2016	(warmer)		(warmer)		Normal^(*)	2018	2017	colder		(warmer)
Illinois^(b)	639	555	639	(13	)%	(13	)%	3,760	3,110	3,340	(7	)%	(17	)%	3,070	3,042	2,560	18.8	%	(0.9	)%
Georgia	137	75	114	(34	)%	(45	)%	1,636	1,000	1,448	(31	)%	(39	)%	1,456	1,364	925	47.5	%	(6.3	)%


~~(a)~~(*)	Normal represents the 10-year average from January 1, ~~2007~~2008 through ~~June 30, 2016~~March 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.

Southern Company Gas hedged its exposure to warmer-than-normal weather at Nicor Gas in Illinois; therefore, the weather-related negative pre-tax income impact on gas distribution operations was limited to $2 million ($2 million after tax) and $6 million ($4 million after tax) for the first quarter 2018 and 2017, respectively. Southern Company Gas also hedged its exposure at gas marketing services to warmer-than-normal weather in Georgia and Illinois; therefore, the weather-related negative pre-tax income impact on gas marketing services was limited to $3 million ($2 million after tax) and $7 million ($4 million after tax) for the first quarter 2018 and 2017, respectively.

The following table provides the number of customers served by Southern Company Gas at March 31, 2018 and 2017:



	March 31,
	2018		2017		2018 vs. 2017
	(in thousands, except market share %)				(% change)
Gas distribution operations^(a)	4,654		4,618		0.8	%
Gas marketing services
Energy customers^(b)	779		661		17.9	%
Market share of energy customers in Georgia	29.2	%	29.3	%
Service contracts^(c)	1,175		1,197		(1.8	)%


(a)	Includes approximately 297,000 customers at Elizabethtown Gas and Elkton Gas. See OVERVIEW herein and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Elizabethtown Gas and Elkton Gas" herein for additional information.


(b)	~~The 10-year average Heating Degree Days established by the Illinois Commission in Nicor Gas' 2009 rate case is 617~~Includes approximately 140,000 customers as of March 31, 2018 that were contracted to serve beginning April 1, 2017.

(c)

On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement for the ~~second quarter~~sale of Pivotal Home Solutions. See OVERVIEW herein and ~~3,519~~Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" herein for ~~the first six months from 1998 through 2007.~~additional information.

~~For~~Southern Company Gas anticipates overall customer growth trends at gas distribution operations to continue as it expects continued improvement in the ~~successor second quarter 2017~~new housing market and ~~the predecessor second quarter 2016, the weather-related negative pre-tax income impact was limited~~low natural gas prices. Southern Company Gas uses a variety of targeted marketing programs to ~~$2 million in each period.~~attract new customers and to retain existing customers.

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Southern Company Gas hedged its exposure to warmer-than-normal weather at Nicor Gas in Illinois; therefore, the weather-related negative pre-tax income impact on gas distribution operations was limited to $5 million ($3 million after tax) and $7 million ($5 million after tax) for the successor year-to-date 2017 and the predecessor year-to-date 2016, respectively. Southern Company Gas also hedged its exposure at gas marketing services to warmer-than-normal weather in Georgia; therefore, the weather-related negative pre-tax income impact on gas marketing services was limited to $10 million ($6 million after tax) for the successor year-to-date 2017 and there was no impact for the predecessor year-to-date 2016.

~~The following table provides the number of customers served by Southern Company Gas at June 30, 2017 and 2016:~~

June 30,
2017 2016 2017 vs. 2016
(in thousands, except market share %) (% change)
Gas distribution operations 4,573
4,544
0.6 %
Gas marketing services
Energy customers^(*)
768
630
21.9 %
Market share of energy customers in Georgia 29.1 % 29.3 %
Service contracts 1,188
1,197
(0.8 )%


~~(*)~~	~~Includes approximately 140,000 customers as of June 30, 2017 that were contracted to serve beginning April 1, 2017.~~

Southern Company Gas anticipates overall customer growth trends at gas distribution operations to continue in 2017, as it expects continued improvement in the new housing market and low natural gas prices.

Gas marketing services' market share in Georgia decreased slightly at June 30, 2017 compared to June 30, 2016 as a result of a highly competitive marketing environment, which Southern Company Gas expects to continue for the foreseeable future. Southern Company Gas will continue efforts at gas marketing services to enter into targeted markets and expand its energy customers and service contracts.

Cost of Natural Gas

Cost of natural gas was $232 million for the successor second quarter 2017 and $184 million for the predecessor second quarter 2016, which primarily reflected an increase of 63% in natural gas prices during the successor second quarter 2017 compared to the corresponding period in 2016, partially offset by lower demand for natural gas driven by warmer-than-normal weather.

Cost of natural gas was $951 million for the successor year-to-date 2017 and $755 million for the predecessor year-to-date 2016, which primarily reflected an increase of 61% in natural gas prices during the successor year-to-date 2017 compared to the corresponding period in 2016, partially offset by lower demand for natural gas driven by warmer-than-normal weather.



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$1		0.1

Natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, ~~recoverable~~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 84.0% of total cost of natural gas for first quarter 2018. For additional information, see MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Cost of Natural ~~Gas"~~Gas and Other Sales" of Southern Company Gas in Item 7 of the Form 10-K and ~~"Natural~~"Natural Gas ~~Revenues"~~Revenues" herein.

In the first quarter 2018, cost of natural gas was $720 million compared to $719 million for the corresponding period in 2017. The increase reflects an increase in volumes of natural gas sold in 2018 as a result of colder weather, substantially offset by a 9% decrease in natural gas prices during the first quarter 2018 compared to the corresponding period in 2017.

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



	First Quarter		2018 vs. 2017
	2018	2017	% Change
Gas distribution operations (mmBtu in millions)
Firm	314	263	19.4	%
Interruptible	25	25	—	%
Total	339	288	17.7	%
Gas marketing services (mmBtu in millions)
Firm:
Georgia	16	12	33.3	%
Illinois	6	5	20.0	%
Other emerging markets	10	5	100.0	%
Interruptible large commercial and industrial	4	4	—	%
Total	36	26	38.5	%
Wholesale gas services (mmBtu in millions/day)
Daily physical sales	6.8	6.7	1.5	%

Other Operations and Maintenance Expenses



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$21		8.2

In the first quarter 2018, other operations and maintenance expenses were $276 million compared to $255 million for the corresponding period in 2017. The increase was primarily related to a $16 million increase in compensation and benefit costs, a $12 million increase for the adoption of a new paid time off policy to align with the Southern Company system, and $2 million of expense associated with the pending sales of Elizabethtown Gas and Elkton Gas. These increases were partially offset by a $10 million decrease in cost recovery mechanisms primarily related

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

Second Quarter 2017
vs.
2016 Year-to-Date 2017
vs.
2016
2017 2016 % Change 2017 2016 % Change
Gas distribution operations
(mmBtu in millions)

Firm 102
107
(4.7 )% 365
396
(7.8 )%
Interruptible 23
22
4.5 % 48
49
(2.0 )%
Total 125
129
(3.1 )% 413
445
(7.2 )%
Gas marketing services
(mmBtu in millions)

Firm:
Georgia 4
4
— % 17
21
(19.0 )%
Illinois 2
2
— % 7
8
(12.5 )%
Other emerging markets 3
2
50.0 % 8
7
14.3 %
Interruptible:
Large commercial and industrial 3
4
(25.0 )% 7
8
(12.5 )%
Total 12
12
— % 39
44
(11.4 )%
Wholesale gas services
(mmBtu in millions/day)

Daily physical sales 6.2
7.2
(13.9 )% 6.4
7.6
(15.8 )%

~~Other Operations and Maintenance Expenses~~

~~Other operations and maintenance expenses were $213 million for both the successor second quarter 2017 and the predecessor second quarter 2016.~~

Other operations and maintenance expenses were $467 million for the successor year-to-date 2017 and $454 million for the predecessor year-to-date 2016. Other operations and maintenance expense for the successor year-to-date period reflected increased compensation expenses and pipeline and maintenance expenses, partially offset by lowto bad debt ~~expense.~~expense at gas distribution operations. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy.

Depreciation and Amortization

~~Depreciation~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$9		7.5

In the first quarter 2018, depreciation and amortization was ~~$125~~$129 million compared to $120 million for the ~~successor second quarter 2017 and $104 million for the predecessor second quarter 2016.~~corresponding period in 2017. The successor second quarter 2017 included $9 million of additional net amortization of intangible assets as a result of fair value adjustments in acquisition accounting at gas midstream operations and gas distribution operations, as well as $7 million in additional depreciationincrease was primarily due to continued infrastructure investments recovered through replacement programs at gas distribution ~~operations due to a $1.1 billion increase in gross property, plant, and equipment since June 30, 2016.~~

Depreciation and amortization was $244 million for the successor year-to-date 2017 and $206 million for the predecessor year-to-date 2016. The successor year-to-date 2017 included $19 million of additional net amortization of intangible assets as a result of fair value adjustments in acquisition accounting at gas midstream operations and gas distribution operations, as well as $13 million in additional depreciation at gas distribution operations due to additional assets placed in service.operations.

Taxes Other Than Income Taxes

~~For~~



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$7		10.0

In the ~~successor second~~first quarter ~~2017 and the predecessor second quarter 2016,~~2018, taxes other than income taxes were ~~$44~~$77 million compared to $70 million for the corresponding period in 2017. The increase primarily reflects an increase in revenue tax expenses as a result of higher revenues as well as payroll taxes related to benefits under the new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy.

Goodwill Impairment



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$42		N/A

N/A - Not applicable

In the first quarter 2018, a $42 million goodwill impairment charge was recorded in contemplation of the proposed sale of Pivotal Home Solutions.

See Note (A) to the Condensed Financial Statements under "Goodwill and ~~$37~~Other Intangible Assets" and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" herein for additional information.

Interest Expense, Net of Amounts Capitalized



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$13		28.3

In the first quarter 2018, interest expense, net of amounts capitalized was $59 million ~~respectively. For~~compared to $46 million for the ~~successor year-to-date 2017~~corresponding period in 2017. The increase was primarily due to additional interest expense on new debt issuances and ~~the predecessor year-to-date~~additional commercial paper borrowings as well as a reduction in capitalized interest due to assets placed into service.

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~~2016, taxes~~Other Income (Expense), Net



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$5		71.4

In the first quarter 2018, other ~~than~~ income ~~taxes were $114~~(expense), net was $12 million ~~and $99~~compared to $7 million ~~respectively. Taxes other than income taxes consist~~for the corresponding period in 2017. The increase was primarily ~~of revenue tax expenses, property taxes, and payroll taxes. Taxes other than income taxes in the successor periods reflected increased revenue-based taxes~~ due to ~~higher revenues at gas distribution operations.~~

~~Earnings~~a $7 million gain from ~~Equity Method Investments~~

~~For~~ the ~~successor second quarter 2017, earnings from equity method investments were $29 million, which consisted~~settlement of ~~$24 million in earnings from SNG and $5 million in earnings from all other investments. For the predecessor second quarter 2016, earnings from equity method investments were not material.~~

For the successor year-to-date 2017, earnings from equity method investments were $68 million, which consisted of $58 million in earnings from SNG and $10 million in earnings from all other investments. For the predecessor year-to-date 2016, earnings from equity method investments were not material.

a contractor litigation claim. See ~~Notes 4 and 11~~Note 3 to the financial statements of Southern Company Gas under ~~"Equity Method Investments~~ "Regulatory Matters – ~~SNG" and "Investment in SNG," respectively,~~PRP Settlement" in Item 8 of the Form 10-K for additional information on contractor litigation claims.

Income Taxes



First Quarter 2018 vs. First Quarter 2017
(change in millions)		(% change)
$(46)		(30.7)

In the first quarter 2018, income taxes were $104 million compared to $150 million for the corresponding period in 2017. The decrease was primarily due to a lower federal income tax rate and amortization of excess deferred taxes as a result of the Tax Reform Legislation, partially offset by higher pre-tax earnings. See Note ~~(J)~~(H) to the Condensed Financial Statements under "~~Southern Company Gas~~ – ~~Equity Method Investments~~""Effective Tax Rate" herein for additional information.

~~Interest Expense, Net of Amounts Capitalized~~

For both the successor second quarter 2017 and the predecessor second quarter 2016, interest expense, net of amounts capitalized was $48 million. The successor second quarter 2017 reflects a $10 million reduction resulting from the fair value adjustment of long-term debt in acquisition accounting, partially offset by $6 million of additional interest expense on new debt issuances in 2017 and 2016.

For the successor year-to-date 2017 and the predecessor year-to-date 2016, interest expense, net of amounts capitalized was $94 million and $96 million, respectively. The successor year-to-date 2017 reflects a $19 million reduction resulting from the fair value adjustment of long-term debt in acquisition accounting, partially offset by $12 million of additional interest expense on new debt issuances in 2017 and 2016.

~~Income Taxes (Benefit)~~

~~For the successor second quarter 2017 and the predecessor second quarter 2016, income taxes (benefit) were $31 million and $(24) million, respectively, driven by pre-tax earnings.~~

For the successor year-to-date 2017 and the predecessor year-to-date 2016, income taxes were $180 million and $87 million, respectively, driven by pre-tax earnings and the non-deductibility of certain Merger-related expenses.

Performance and Non-GAAP Measures

Prior to the Merger, Southern Company Gas evaluated segment performance using earnings before interest and taxes (EBIT), which includes operating income, earnings from equity method investments, and other income (expense), net. EBIT excludes interest expense, net of amounts capitalized and income taxes (benefit), which were evaluated on a consolidated basis for those periods. EBIT is used herein to discuss the results of Southern Company Gas' segments for the predecessor period, as EBIT was the primary measure of segment profit or loss for that period. Subsequent to the Merger, Southern Company Gas changed its segment performance measure from EBIT to net income to better align with the performance measure utilized by Southern Company. EBIT for the successor second quarter and year-to-date 2017 presented herein is considered a non-GAAP measure. Southern Company Gas also discusses 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 that the presentation of segment EBIT for the successor second quarter and year-to-date 2017 is useful as it allows for a measure of comparability to the other companies with different capital and legal structures, which accordingly may be subject to different interest rates and effective tax rates. The applicable reconciliations of net income to consolidated EBIT and segment EBIT are provided herein.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Adjusted operating margin is a non-GAAP measure that is calculated as operating revenues ~~minus~~less cost of natural gas, cost of other sales, and revenue tax expense. Adjusted operating margin excludes other operations and maintenance expenses, depreciation and amortization, and taxes other than income taxes, ~~and Merger-related expenses,~~ which are included in the calculation of operating income as calculated in accordance with GAAP and reflected in the ~~consolidated~~ statements of income. The presentation of adjusted operating margin is believed to provide useful information regarding the contribution resulting from 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 marketing services, wholesale gas services, and gas midstream operations allows it to focus on a direct measure of adjusted operating margin before overhead costs. The applicable reconciliation of operating income to adjusted operating margin is provided herein.

~~EBIT and adjusted~~Adjusted operating margin should not be considered ~~alternatives~~an alternative to, or a more meaningful ~~indicators~~indicator of, Southern Company Gas' operating performance than ~~consolidated net income attributable to Southern Company Gas or~~ 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.


	Successor			Predecessor			Successor			Predecessor
	Second Quarter 2017			Second Quarter 2016			Year-to-Date 2017			Year-to-Date 2016			First Quarter 2018			First Quarter 2017
	(in millions)			(in millions)			(in millions)			(in millions)			(in millions)
Operating Income	$	96		$	(27	)	$	487		$	321		$	388		$	389
Other operating expenses^(a)	382			407			825			815			524			445
Revenue taxes^(b)	(18		)	(17		)	(65		)	(56		)	(50		)	(47		)
Adjusted Operating Margin	$	460		$	363		$	1,247		$	1,080		$	862		$	787


(a)	Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, and ~~Merger-related expenses.~~goodwill impairment.


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

Successor Predecessor Successor Predecessor
Second Quarter 2017 Second Quarter 2016 Year-to-Date 2017 Year-to-Date 2016
(in millions) (in millions) (in millions) (in millions)
Consolidated Net Income (Loss) Attributable to Southern Company Gas $ 49
$ (51 ) $ 288
$ 131
Net income attributable to noncontrolling interest ^(*)
—
3
—
14
Income taxes 31
(24 ) 180
87
Interest expense, net of amounts capitalized 48
48
94
96
EBIT $ 128
$ (24 ) $ 562
$ 328


~~(*)~~	~~See Note 4 to the financial statements of Southern Company Gas under "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.~~

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Segment Information

Adjusted operating margin, operating expenses, and ~~Southern Company Gas' primary performance metric~~net income for each segment is illustrated in the tables below. See Note ~~(K)~~(L) to the Condensed Financial Statements herein for additional information.


	Successor									Predecessor
	Second Quarter 2017									Second Quarter 2016									First Quarter 2018									First Quarter 2017
	Adjusted Operating			Operating			Net			Adjusted Operating			Operating						Adjusted Operating			Operating			Net Income			Adjusted Operating			Operating
	Margin^(*)			Expenses^(*)			Income			Margin^(*)			Expenses^(*)			EBIT			Margin^(a)			Expenses^(a)(b)			(Loss)			Margin^(a)			Expenses^(a)			Net Income
	(in millions)									(in millions)									(in millions)									(in millions)
Gas distribution operations	$	409		$	283		$	54		$	386		$	269		$	118		$	557		$	323		$	149		$	542		$	315		$	117
Gas marketing services	57			48			4			66			37			29			128			95			13			105			53			31
Wholesale gas services	(13		)	14			(17		)	(96		)	16			(112		)	163			22			104			131			15			68
Gas midstream operations	7			13			9			6			12			(5		)	16			15			23			9			12			15
All other	3			9			(1		)	2			58			(55		)	1			22			(10		)	2			5			8
Intercompany eliminations	(3		)	(3		)	—			(1		)	(2		)	1			(3		)	(3		)	—			(2		)	(2		)	—
Consolidated	$	460		$	364		$	49		$	363		$	390		$	(24	)	$	862		$	474		$	279		$	787		$	398		$	239


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

Successor Predecessor
Year-to-Date 2017 Year-to-Date 2016
Adjusted Operating Operating Net Adjusted Operating Operating

Margin^(*)

Expenses^(*)
Income
Margin^(*)

Expenses^(*)
EBIT
(in millions) (in millions)
Gas distribution operations $ 951
$ 596
$ 171
$ 911
$ 560
$ 353
Gas marketing services 162
101
35
190
81
109
Wholesale gas services 118
29
51
(36 ) 33
(68 )
Gas midstream operations 16
25
25
15
24
(6 )
All other 5
14
6
4
65
(60 )
Intercompany eliminations (5 ) (5 ) —
(4 ) (4 ) —
Consolidated $ 1,247
$ 760
$ 288
$ 1,080
$ 759
$ 328

~~(*)~~(b)

Operating ~~margin~~expenses include a $42 million goodwill impairment charge related to the proposed sale of Pivotal Home Solutions. See Note (A) to the Condensed Financial Statements under "Goodwill and ~~operating expenses are adjusted~~Other Intangible Assets" and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" herein for ~~Nicor Gas' revenue tax expenses, which are passed through directly to customers.~~additional information.

Gas Distribution Operations

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

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

First Quarter 2018 vs. First Quarter 2017

In the first quarter 2018, net income increased $32 million, or 27.4%, compared to the corresponding period in 2017. This increase primarily relates to an increase of $15 million in adjusted operating margin, an increase of $4 million in other income (expense), net, and a decrease in income tax expense of $27 million, partially offset by an increase of $8 million in operating expenses and an increase of $6 million in interest expense, net of amounts capitalized. The increase in adjusted operating margin primarily reflects $47 million in additional revenue from continued infrastructure investments recovered through replacement programs and base rate increases, partially offset by deferrals totaling $37 million as regulatory liabilities associated with the Tax Reform Legislation impacts. The increase in other income (expense), net primarily reflects a gain from the settlement of a contractor litigation claim in 2018. The decrease in income taxes is primarily due to a lower federal income tax rate and amortization of excess deferred taxes as a result of the Tax Reform Legislation. The increase in operating expenses primarily reflects additional depreciation due to additional assets placed in service and increased compensation and benefit costs, partially offset by a decrease in cost recovery mechanisms primarily related to bad debt expense. The increase

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~~Successor Second Quarter 2017~~

Net income of $54 million includes $409 million in adjusted operating margin, $283 million in operating expenses, and $2 million in other income (expense), net, which resulted in EBIT of $128 million. Net income also includes $40 million in interest expense ~~and $34 million~~includes the impact of the issuance of first mortgage bonds at Nicor Gas in income tax expense. Adjusted operating margin reflects $26 million in additional revenue from the continued investment in infrastructure replacement programs, a base rate increase at Atlanta Gas Light effective March 1, 2017 and ~~a $1 million positive impact of weather, net of hedging, despite warmer-than-normal weather. Operating expenses reflect~~ additional ~~depreciation due to continued investment in infrastructure programs and increased pipeline compliance and maintenance activities.~~commercial paper borrowings during the first quarter 2018.

~~Predecessor Second Quarter 2016~~

EBIT of $118 million includes $386 million in adjusted operating margin, $269 million in operating expenses, and $1 million in other income (expense), net. Adjusted operating margin reflects revenue from continued investment in infrastructure replacement programs and increased usage and customer growth, partially offset by a $1 million negative impact of warmer-than-normal weather, net of hedging. Operating expenses reflect depreciation associated with additional assets placed in service.

~~Successor Year-to-Date 2017~~

Net income of $171 million includes $951 million in adjusted operating margin, $596 million in operating expenses, and $6 million in other income (expense), net, which resulted in EBIT of $361 million. Net income also includes $80 million in interest expense and $110 million in income tax expense. Adjusted operating margin reflects $45 million in additional revenue from continued investment in infrastructure replacement programs and a base rate increase at Atlanta Gas Light effective March 1, 2017. Also included in adjusted operating margin was increased customer growth, partially offset by a $5 million negative impact of warmer-than-normal weather, net of hedging. Operating expenses reflect a $13 million increase in depreciation associated with additional assets placed in service, as well as increased compensation expense, legal expenses, and pipeline compliance and maintenance activities.

~~Predecessor Year-to-Date 2016~~

EBIT of $353 million includes $911 million in adjusted operating margin, $560 million in operating expenses, and $2 million in other income (expense), net. Adjusted operating margin reflects revenue from continued investment in infrastructure replacement programs and increased usage and customer growth, partially offset by a $7 million negative impact of warmer-than-normal weather, net of hedging. Operating expenses reflect depreciation associated with additional assets placed in service.

Gas Marketing Services

Gas marketing services consists of several businesses that provide energy-related products and services to natural gas markets, including warranty sales. 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. ~~Operating expenses primarily reflect employee costs, marketing, and bad debt expenses.~~

~~Successor Second~~First Quarter 2018 vs. First Quarter 2017

~~Net~~In the first quarter 2018, net income decreased $18 million, or 58.1%, compared to the corresponding period in 2017. This decrease was driven by a $42 million goodwill impairment charge recorded as of ~~$4 million includes $57 million~~March 31, 2018 in ~~adjusted operating margin~~contemplation of the sale of Pivotal Home Solutions. See Note (A) to the Condensed Financial Statements under "Goodwill and ~~$48 million in operating expenses, which resulted in EBIT~~Other Intangible Assets" and Note (J) to the Condensed Financial Statements under "Southern Company Gas – Proposed Sale of ~~$9 million. Net income also includes $2 million in interest expense and $3 million in income tax expense.~~Pivotal Home Solutions" herein for additional information. Adjusted operating margin ~~reflects a $3~~increased by $23 million ~~negative impact of warmer-than-normal weather, net of hedging. Operating expenses reflect $10 million in additional amortization of intangible assets~~ due to ~~fair value adjustments to certain assets~~$14 million for fixed and ~~liabilities in the application of acquisition accounting.~~

~~Predecessor Second Quarter 2016~~

EBIT of $29 million includes $66 million in adjusted operating margin and $37 million in operating expenses. Adjusted operating margin reflects $7 million in unrealized hedge gains and a $1 million negative impact of

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~weather, net of hedging. Earnings in the predecessor period include $3 million attributable to noncontrolling interest.~~

~~Successor Year-to-Date 2017~~

Net income of $35 million includes $162 million in adjusted operating margin and $101 million in operating expenses, which resulted in EBIT of $61 million. Net income also includes $3 million in interest expense and $23 million in income tax expense. Adjusted operating margin reflects $2 million of additionalguaranteed bill revenue as a result of ~~fair value adjustments to certain assets and liabilities~~adopting a new revenue recognition standard, $4 million for colder weather in ~~the application of acquisition accounting, as well as a $10 million negative impact of warmer-than-normal weather,~~2018, net of hedging, and $7$4 million ~~in unrealized hedge losses. Operating expenses also reflect $20 million in~~from energy customers served beginning April 1, 2017 pursuant to the award of a natural gas supply agreement. See Note (A) under "Recently Adopted Accounting Standards" and Note (C) to the Condensed Financial Statements herein for additional ~~amortization of intangible assets due to fair value adjustments to certain assets and liabilities in the application of acquisition accounting.~~

~~Predecessor Year-to-Date 2016~~

EBIT of $109 million includes $190 million in adjusted operating margin and $81 million in operating expenses. Adjusted operating margin reflects $9 million in unrealized hedge gains. Earnings in the predecessor period include $14 million attributable to noncontrolling interest.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.

~~Successor Second~~First Quarter 2018 vs. First Quarter 2017

~~Net loss of $17~~In the first quarter 2018, net income increased $36 million, ~~includes $(13)~~or 52.9%, compared to the corresponding period in 2017. This increase primarily relates to a $32 million increase in adjusted operating margin and ~~$14 million in operating expenses, which resulted in~~ a ~~loss before interest and taxes~~decrease of ~~$27 million. Also included in net loss is $1 million in interest expense and~~ $11 million in income tax ~~benefit.~~

~~Predecessor Second Quarter 2016~~

~~Loss before interest and taxes~~expense, partially offset by an increase of ~~$112~~$7 million ~~includes $(96) million~~in operating expenses. Details of the increase in adjusted operating margin ~~and $16 million~~are provided in ~~operating expenses.~~

~~Successor Year-to-Date 2017~~

~~Net~~the table below. The decrease in income ~~of $51 million includes $118 million in adjusted operating margin and $29 million~~tax expense was driven by a lower federal income tax rate, partially offset by higher pretax earnings. The increase in operating expenses ~~which resulted in EBIT of $89 million. Net income also includes $3 million in interest expense~~primarily reflects higher compensation and ~~$35 million in income tax~~benefit expense.

~~Predecessor Year-to-Date 2016~~

~~Loss before interest and taxes of $68 million includes $(36) million in adjusted operating margin, $33 million in operating expenses, and $1 million in other income (expense), net.~~



	First Quarter 2018			First Quarter 2017
	(in millions)
Commercial activity recognized	$	172		$	80
Gain on storage derivatives	2			4
Gain (loss) on transportation and forward commodity derivatives	(16		)	44
LOCOM adjustments, net of current period recoveries	(3		)	—
Purchase accounting adjustments to fair value inventory and contracts	8			3
Adjusted operating margin	$	163		$	131

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~~The following table illustrates the components of wholesale gas services' adjusted operating margin for the periods presented.~~

Successor

Predecessor Successor Predecessor
Second Quarter 2017 Second Quarter 2016 Year-to-Date 2017 Year-to-Date 2016
(in millions)

(in millions) (in millions) (in millions)
Commercial activity recognized $ (18 ) $ (8 ) $ 69
$ 34
Gain (loss) on storage derivatives 17
(36 ) 18
(38 )
Gain (loss) on transportation and forward commodity derivatives (2 ) (52 ) 37
(31 )
LOCOM adjustments, net of current period recoveries (1 ) —
(1 ) (1 )
Impact of purchase accounting adjustments (9 ) —
(5 ) —
Adjusted Operating Margin $ (13 ) $ (96 ) $ 118
$ (36 )

Change in Commercial Activity

The increase in commercial activity ~~at wholesale~~in the first quarter 2018 compared to the corresponding period in 2017 was primarily due to natural gas ~~services includes recognition of storage and transportation values~~price volatility that ~~were~~was generated ~~in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur. Warmer-than-normal weather during the 2016/2017 Heating Season, lower~~by significantly colder weather. Also contributing to this increase was higher power generation volumes and ~~build-out of new U.S. pipeline infrastructure, along with increases in~~decreased natural gas supply, caused low volatility and a tightening of locational or transportation spreads in 2017, negatively impacting the amount of commercial activity revenues generated relative to demand fees for contracted pipeline transportation and storage capacity, and minimum sharing under asset management agreements. However, as natural gas prices and forward storage or time spreads increased, wholesale gas services was able to capture higher storage values that it expects to recognize as commercial activity revenues when natural gas is physically withdrawn from storage. Southern Company Gas anticipates continued low volatility in certain areas of wholesale gas services' portfolio.supply.

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. In 2017 and 2016, there was little price volatility; however, the potential exists for market fundamentals indicating some level of increased volatility that would benefit Southern Company Gas' portfolio of pipeline transportation capacity. Additionally, during the first six months of 2017,2018, forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions resulted in storage derivative gains. Transportation and forward commodity derivative ~~gains~~losses are primarily the result of ~~narrowing~~widening transportation ~~basis~~ spreads due to ~~some reduction in supply constraints resulting from new U.S. pipeline infrastructure and increases in natural gas supply and warmer-than-normal~~colder weather, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.

Withdrawal Schedule and Physical Transportation Transactions

The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage and the physical flow of natural gas between contracted transportation receipt and delivery points. Wholesale gas services' expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, ~~but are net of the~~and exclude estimated ~~impact of~~ profit sharing under ~~its~~ 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 ~~June 30,~~

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~~2017.~~March 31, 2018. 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 schedule

Total storage
(WACOG $2.75)

Expected net operating gains^(a)

Physical transportation transactions – expected net operating losses^(b)
(in mmBtu in millions) (in millions) (in millions)
2017 36.5
$ 5
$ (10 )
2018 and thereafter 30.9
12
(27 )
Total at June 30, 2017 67.4
$ 17
$ (37 )



	Storage withdrawal schedule
	Total storage (WACOG $2.37)	Expected net operating gains^(a)		Physical transportation transactions – expected net operating gains^(b)
	(in mmBtu in millions)	(in millions)		(in millions)
2018	17.6	$	3	$	4
2019 and thereafter	2.5	1		12
Total at March 31, 2018	20.1	$	4	$	16


(a)	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.


(b)	Represents the periods associated with the transportation derivative gains and (losses) 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.

The unrealized storage and transportation derivative gains do not change the underlying economic value of wholesale gas services' storage and transportation positions and will be reversed when the related transactions occur and are recognized. For more information on wholesale gas services' energy marketing and risk management activities, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K.

Gas Midstream Operations

Gas midstream operations consists primarily of gas pipeline investments, with storage and fuels also aggregated into this segment. Gas pipeline investments ~~consist of the~~include SNG, ~~interest,~~ Horizon Pipeline, Atlantic Coast Pipeline, PennEast Pipeline, ~~Dalton Pipeline, and Magnolia Enterprise Holdings, Inc. See Note (J) to the Condensed~~

~~Financial Statements herein and Notes 4 and 11 to the financial statements of Southern Company Gas under "Equity~~

~~Method Investments – SNG" and "Investment in SNG," respectively, in Item 8 of the Form 10-K for additional~~

~~information.~~

~~Successor Second Quarter 2017~~

Net income of $9 million includes $7 million in adjusted operating margin, $13 million in operating expenses, $28 million in earnings from equity method investments, which consists primarily of equity in earnings from the investment in SNG, and $1 million in other income (expense), net, which resulted in EBIT of $23 million. Also included in net income are $8 million in interest expense and $6 million in income tax expense.

~~Predecessor Second Quarter 2016~~

~~Loss before interest and taxes of $5 million includes $6 million in adjusted operating margin, $12 million in operating expenses, and $1 million of other income (expense), net.~~

~~Successor Year-to-Date 2017~~

Net income of $25 million includes $16 million in adjusted operating margin, $25 million in operating expenses, $66 million in earnings from equity method investments, which consists primarily of equity in earnings from the investment in SNG, and $2 million in other income (expense), net, which resulted in EBIT of $59 million. Also included in net income are $17 million in interest expense and $17 million in income tax expense.

~~Predecessor Year-to-Date 2016~~

~~Loss before interest and taxes of $6 million includes $15 million in adjusted operating margin, $24 million in operating expenses, and $3 million of other income (expense), net.~~

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Dalton Pipeline, and Magnolia Enterprise Holdings, Inc. See Note (K) to the Condensed Financial Statements herein and Note 4 to the financial statements of Southern Company Gas in Item 8 of the Form 10-K for additional information.

First Quarter 2018 vs. First Quarter 2017

In the first quarter 2018, net income increased $8 million, or 53.3%, compared to the corresponding period in 2017. This increase primarily relates to a $7 million increase in adjusted operating margin primarily due to the Dalton Pipeline being placed in service, lower costs at the storage facilities, and a $3 million net increase in earnings from equity method investments in SNG, PennEast Pipeline, and Horizon Pipeline.

All Other

All other includes Southern Company Gas' 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) associated with affiliate financing arrangements. ~~There were no Merger-related expenses for~~

First Quarter 2018 vs. First Quarter 2017

In the ~~successor second~~first quarter ~~or year-to-date~~2018, net income decreased $18 million compared to the corresponding period in 2017. ~~For the predecessor second quarter 2016 and year-to-date 2016, Merger-related expenses included~~This decrease primarily reflects a $17 million increase in operating expenses ~~were $53~~and a $4 million increase in interest expense, net of amounts capitalized, partially offset by a $4 million decrease in income taxes. The increase in operating expenses primarily reflects a $12 million increase in compensation expense resulting from the adoption of the new paid time off policy. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters" of Southern Company Gas in Item 7 of the Form 10-K for additional information on the new paid time off policy. The increase in interest expense was primarily associated with new debt issuances and ~~$56 million, respectively.~~additional commercial paper borrowings. The decrease in income taxes is primarily due to a lower federal income tax rate.

Segment Reconciliations

Reconciliations of ~~consolidated net income attributable to Southern Company Gas to EBIT for the successor second quarter and year-to-date 2017, and~~ operating income to adjusted operating margin for ~~all periods presented,~~the first quarter 2018 and 2017 are reflected in the following tables. See Note ~~(K)~~(L) to the Condensed Financial Statements herein for additional information.

Successor

Second Quarter 2017

Gas Distribution Operations Gas Marketing Services Wholesale Gas Services Gas Midstream Operations All Other Intercompany Elimination Consolidated

(in millions)
Consolidated Net Income $ 54
$ 4
$ (17 ) $ 9
$ (1 ) $ —
$ 49
Income taxes 34
3
(11 ) 6
(1 ) —
31
Interest expense, net of
amounts capitalized 40
2
1
8
(3 ) —
48
EBIT $ 128
$ 9
$ (27 ) $ 23
$ (5 ) $ —
$ 128

Successor
Year-to-Date 2017
Gas Distribution Operations Gas Marketing Services Wholesale Gas Services Gas Midstream Operations All Other Intercompany Elimination Consolidated
(in millions)
Consolidated Net Income $ 171
$ 35
$ 51
$ 25
$ 6
$ —
$ 288
Income taxes 110
23
35
17
(5 ) —
180
Interest expense, net of
amounts capitalized 80
3
3
17
(9 ) —
94
EBIT $ 361
$ 61
$ 89
$ 59
$ (8 ) $ —
$ 562


	Successor
	Second Quarter 2017																				First Quarter 2018
	Gas Distribution Operations			Gas Marketing Services		Wholesale Gas Services			Gas Midstream Operations			All Other			Intercompany Elimination			Consolidated			Gas Distribution Operations			Gas Marketing Services		Wholesale Gas Services		Gas Midstream Operations		All Other			Intercompany Elimination			Consolidated
	(in millions)																				(in millions)
Operating Income (Loss)	$	126		$	9	$	(27	)	$	(6	)	$	(6	)	$	—		$	96		$	234		$	33	$	141	$	1	$	(21	)	$	—		$	388
Other operating expenses^(a)	301			48		14			13			9			(3		)	382			373			95		22		15		22			(3		)	524
Revenue tax expense^(b)	(18		)	—		—			—			—			—			(18		)	(50		)	—		—		—		—			—			(50		)
Adjusted Operating Margin	$	409		$	57	$	(13	)	$	7		$	3		$	(3	)	$	460		$	557		$	128	$	163	$	16	$	1		$	(3	)	$	862

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Successor
Year-to-Date 2017
Gas Distribution Operations Gas Marketing Services Wholesale Gas Services Gas Midstream Operations All Other Intercompany Elimination Consolidated
(in millions)
Operating Income (Loss) $ 355
$ 61
$ 89
$ (9 ) $ (9 ) $ —
$ 487
Other operating expenses^(a)
661
101
29
25
14
(5 ) 825
Revenue tax expense^(b)
(65 ) —
—
—
—
—
(65 )
Adjusted Operating Margin $ 951
$ 162
$ 118
$ 16
$ 5
$ (5 ) $ 1,247

Predecessor

Second Quarter 2016

Gas Distribution Operations Gas Marketing Services Wholesale Gas Services Gas Midstream Operations All Other Intercompany Elimination Consolidated

(in millions)
Operating Income (Loss) $ 117
$ 29
$ (112 ) $ (6 ) $ (56 ) $ 1
$ (27 )
Other operating expenses^(a)
286
37
16
12
58
(2 ) 407
Revenue tax expense^(b)
(17 ) —
—
—
—
—
(17 )
Adjusted Operating Margin $ 386
$ 66
$ (96 ) $ 6
$ 2
$ (1 ) $ 363


	Predecessor
	Year-to-Date 2016																				First Quarter 2017
	Gas Distribution Operations			Gas Marketing Services		Wholesale Gas Services			Gas Midstream Operations			All Other			Intercompany Elimination			Consolidated			Gas Distribution Operations			Gas Marketing Services		Wholesale Gas Services		Gas Midstream Operations			All Other			Intercompany Elimination			Consolidated
	(in millions)																				(in millions)
Operating Income (Loss)	$	351		$	109	$	(69	)	$	(9	)	$	(61	)	$	—		$	321		$	227		$	52	$	116	$	(3	)	$	(3	)	$	—		$	389
Other operating expenses^(a)	616			81		33			24			65			(4		)	815			362			53		15		12			5			(2		)	445
Revenue tax expense^(b)	(56		)	—		—			—			—			—			(56		)	(47		)	—		—		—			—			—			(47		)
Adjusted Operating Margin	$	911		$	190	$	(36	)	$	15		$	4		$	(4	)	$	1,080		$	542		$	105	$	131	$	9		$	2		$	(2	)	$	787


(a)	Includes other operations and maintenance, depreciation and amortization, taxes other than income taxes, and ~~Merger-related expenses.~~goodwill impairment.


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

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company Gas' future earnings potential. The level of Southern Company Gas' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of ~~its~~Southern Company Gas' primary business of natural gas distribution and its complementary businesses in the gas marketing services, wholesale gas services, and gas midstream operations sectors. These factors include Southern Company Gas' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, Southern Company Gas' ability to optimize its transportation and storage positions, and its ability to re-contract storage rates at favorable prices.

Future earnings ~~in the near term~~ will ~~depend, in part, upon maintaining~~be driven by customer growth and ~~growing sales and customers which~~ are subject to a ~~number~~variety of other factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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 ~~economic growth. The~~the pace of economic growth ~~and natural gas demand~~that may be affected by changes in regional and global economic conditions, which may impact future earnings.

Current proposals related to potential federal tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Southern Company Gas' financial statements.

On July 6, 2017, the State of Illinois enacted tax legislation that increased the effective corporate income tax rate from 5.25% to 7.0% (making the total corporate tax rate 9.5% when combined with the 2.5% personal property replacement tax) effective July 1, 2017. In addition to increasing taxes on future earnings, this legislation will require Southern Company Gas to adjust existing accumulated deferred income tax liabilities to reflect an increased tax rate, and any portion not recoverable through rates will impact earnings. Southern Company Gas is currently evaluating these changes. The ultimate impact of this legislation cannot be determined at this time, but could have a material impact on Southern Company Gas' financial statements.

Volatility of natural gas prices has a significant impact on Southern Company Gas' customer rates, 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,~~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. 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, including the new housing market, 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.

~~For additional information relating to these issues, see "Risk Factors" of Southern Company Gas in Item 1A of the Form 10-K.~~

In September 2016, Southern Company Gas acquired a 50% equity interest in SNG. See OVERVIEW – "Merger and Acquisition Activities" and Note (J) to the Condensed Financial Statements herein and Notes 4 and 11 to the financial statements of Southern Company Gas under "Equity Method Investments – SNG" and "Investment in SNG," respectively, in Item 8 of the Form 10-K for additional information. 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.

In October 2017, Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements for the sale of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc; the asset sales are expected to be completed by the end of the third quarter 2018. Net income attributable to Elizabethtown Gas and Elkton Gas for the three months ended March 31, 2018 was $30 million. However, 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, the first quarter 2018 net income is not necessarily indicative of the results to be expected for any other period.

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On April 11, 2018, Southern Company Gas and its subsidiary Pivotal Home Solutions entered into a stock purchase agreement with American Water Enterprises LLC for the sale of Pivotal Home Solutions; the stock purchase agreement is expected to be completed by the end of the second quarter 2018. Net income attributable to Pivotal Home Solutions for the three months ended March 31, 2018 was $4 million, exclusive of the goodwill impairment charge.

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

See OVERVIEW and Note (J) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information on these dispositions. See OVERVIEW – "Seasonality of Results" for additional information on seasonality.

Environmental Matters

~~Compliance costs related to federal and state~~New or revised environmental ~~statutes~~laws and regulations could affect many areas of Southern Company Gas' operations. The impact of any such changes cannot be determined at this time. Environmental compliance costs could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through market-based contracts. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed.basis. Further, ~~higher~~increased costs that are recovered through regulated rates could contribute to reduced demand for natural gas, which could negatively affect results of operations, cash flows, and financial condition. Additionally, many commercial and industrial customers may also be affected by existing and future environmental requirements, which for some may have the potential to ultimately affect their demand for natural gas. See Note (B) under ""Environmental Matters –Environmental Remediation" to the Condensed Financial Statements herein and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company Gas in Item 7 and Note 3 to the financial statements of Southern Company Gas under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

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~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~FERC Matters~~

~~See MANAGEMENT'S DISCUSSION AND ANALYSIS~~ – ~~FUTURE EARNINGS POTENTIAL~~ – "FERC Matters" of Southern Company Gas in Item 7 and Note 4 to the financial statements of Southern Company Gas in Item 8 of the Form 10-K for additional information regarding the Dalton Pipeline project.

~~On August 1, 2017, the Dalton Pipeline was placed in service as authorized by the FERC and transportation service for customers commenced.~~

Regulatory Matters

See Note 3 to the financial statements of Southern Company Gas under "Regulatory Matters" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information regarding Southern Company Gas' regulatory matters.

Riders

~~Nicor Gas has established a variable tax cost adjustment rider, which was approved by~~On April 19, 2018, the Illinois Commission ~~effective July 16, 2017.~~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 related to the ~~invested capital tax imposed on Nicor Gas through an annual true-up and reconciliation mechanism. Accordingly, this rider will not have a significant effect on Southern Company Gas' net income.~~2018 impacts are expected to begin in July 2018.

Natural Gas Cost Recovery

Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. 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.

Base Rate Cases

Settled Base Rate ~~Cases~~

On February 21, 2017, the Georgia PSC approved the Georgia Rate Adjustment Mechanism (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, based on the previously approved ROE of 10.75% and does not collect revenue through special riders and surcharges. Various infrastructure programs previously authorized by the Georgia PSC under Atlanta Gas Light's STRIDE program, which include the Integrated Vintage Plastic Replacement Program, Integrated System Reinforcement Program, and Integrated Customer Growth Program, will continue under GRAM and the recovery of and return on the infrastructure program investments will be included in annual base rate adjustments. The Georgia PSC will review Atlanta Gas Light's performance annually under GRAM.

Beginning with the next rate adjustment in June 2018, Atlanta Gas Light's recovery of the previously unrecovered Pipeline Replacement Program revenue through 2014, as well as the mitigation costs associated with the Pipeline Replacement Program that were not previously included in its rates, will also be included in GRAM. In connection with the GRAM approval, the last monthly Pipeline Replacement Program surcharge increase became effective March 1, 2017.Case

In ~~September 2016, Elizabethtown~~October 2017, Florida City Gas filed a general base rate case with the ~~New Jersey BPU~~Florida PSC requesting aan annual revenue increase of $19 million, which included an interim rate increase ~~in annual base rate revenues. The requested increase~~of $5 million annually that was ~~based on a projected 12-month test year ending~~approved and became effective January 12, 2018, subject to refund. On March ~~31, 2017 and a ROE of 10.25%. On June 30, 2017,~~26, 2018, the ~~New Jersey BPU~~Florida PSC approved a settlement that, after including the impact of the Tax Reform Legislation, provides for ~~a $13~~an $11.5 million increase in annual base rate revenues, effective ~~July~~June 1, ~~2017,~~2018, based on a ROE of ~~9.6%~~10.19%. ~~Also included in~~Under the terms of the settlement, ~~was~~Florida City Gas agreed not to file a new ~~composite depreciation~~base rate ~~that is expected~~case with an effective date prior to ~~result~~June 1, 2022 and will receive full recovery of the costs related to its LNG facility to be constructed through additional increases in ~~a $3 million~~ annual ~~reduction~~base rate revenues of ~~depreciation.~~

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$2.5 million on June 1, 2019 or the in-service date, whichever is later, and $1.3 million on December 1, 2019. If the facility is placed in service after December 1, 2019, the entire additional $3.8 million increase will take effect upon the in-service date of the LNG facility.

Pending Base Rate Cases

On ~~March 10, 2017, Nicor~~February 15, 2018, Chattanooga Gas filed a general base rate case with the ~~Illinois~~Tennessee Public Utility Commission (PUC) requesting a ~~$208~~$7 million increase in annual base rate revenues. The requested increase, iswhich, in accordance with a Tennessee PUC order, incorporated the effects of the Tax Reform Legislation, was based on a ~~2018~~ projected test year ending June 30, 2019 and a ROE of ~~10.7%~~11.25%. 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.~~

On March 31, 2017, Virginia Natural Gas filed a general base rate case with the Virginia Commission requesting a $44 million increase in annual base rate revenues. The requested increase is based on a projected 12-month test year beginning September 1, 2017 and a ROE of 10.25%. The requested increase includes $13 million related to the recovery of investments under the Steps to Advance Virginia's Energy (SAVE) program. The Virginia CommissionTennessee PUC is expected to rule on the requested increase in the ~~first~~third quarter 2018. ~~Rate adjustments are~~

In accordance with an Illinois Commission order and pursuant to its rehearing request, on April 13, 2018, Nicor Gas filed for revised base rates with the Illinois Commission, which would result in a decrease of approximately $44 million in annual base rate revenues effective ~~September 1, 2017, subject~~in the second quarter 2018 to ~~refund.~~incorporate the reduction in the federal income tax rate as a result of the Tax Reform Legislation. Nicor Gas' previously-authorized capital structure and ROE of 9.8% were not addressed in the rehearing and remain unchanged. The Illinois Commission is expected to rule on the request on May 2, 2018.

The ultimate outcome of these ~~pending base rate cases~~matters cannot be determined at this time.

Other

The New Jersey BPU, Maryland PSC, and Virginia Commission each issued an order effective January 1, 2018 that requires utilities in their respective states to defer as a regulatory liability the impact of the Tax Reform Legislation, including the reduction in the corporate income tax rate to 21% and the impact of excess deferred income taxes. On March 26, 2018, the New Jersey BPU approved an $11 million reduction in Elizabethtown Gas' annual base rate revenues effective April 1, 2018 on an interim basis, subject to refund, pending final approval. On March 28, 2018, the Maryland PSC approved a $0.1 million reduction in Elkton Gas' annual base rate revenues effective April 1, 2018. Credits will be issued to customers in New Jersey and Maryland later in 2018 for the impact of the Tax Reform Legislation on the January 2018 through March 2018 billing periods. On April 25, 2018, the Virginia Commission issued an order indicating that any proposal beyond a proposed base rate reduction to reflect the cost savings from the Tax Reform Legislation must be made through a general base rate case. Virginia Natural Gas expects to finalize its strategy to address the impacts of the Tax Reform Legislation on or before July 1, 2018.

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

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Regulatory Infrastructure Programs

~~Nicor Gas~~

~~In 2014, the Illinois Commission approved Nicor Gas' nine-year regulatory infrastructure program, Investing~~ Expenditures incurred in ~~Illinois. Under this program, Nicor Gas placed into service $75 million of qualifying assets during~~ the first ~~six~~three months of ~~2017.~~2018 were as follows:

~~Atlanta Gas Light~~

Atlanta Gas Light's STRIDE program, which started in 2009, consists of three individual programs that update and expand gas distribution systems and liquefied natural gas facilities as well as improve system reliability to meet operational flexibility and customer growth. Through the programs under STRIDE, Atlanta Gas Light invested $94 million during the first six months of 2017.

In August 2016, Atlanta Gas Light filed a petition with the Georgia PSC for approval of a four-year extension of its Integrated System Reinforcement Program (i-SRP) seeking approval to invest an additional $177 million to improve and upgrade its core gas distribution system in years 2017 through 2020.



Utility	Program	First Quarter 2018
		(in millions)
Nicor Gas	Investing in Illinois	$	31
Atlanta Gas Light	Georgia Rate Adjustment Mechanism (GRAM) infrastructure spending	62
Virginia Natural Gas	Steps to Advance Virginia's Energy	11
Florida City Gas	Safety, Access, and Facility Enhancement Program	2
Total		$	106

~~The recovery~~See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Infrastructure Replacement Programs and Capital Projects" of Southern Company Gas in Item 7 and ~~return on current and future capital investments~~Note 3 to the financial statements of Southern Company Gas under "Regulatory Matters – Regulatory Infrastructure Programs" in Item 8 of the STRIDE program will be included in the annual base rate revenue adjustment under GRAM rather than a separate surcharge. The proposed capital investments associated with the extension of i-SRP were included in the 2017 annual base rate revenue under GRAM that was approved by the Georgia PSC on February 21, 2017. See "~~Base Rate Cases" herein~~Form 10-K for additional information.

~~Elizabethtown Gas~~Income Tax Matters

In 2013, the New Jersey BPU approved the extension of Elizabethtown Gas' Aging Infrastructure Replacement program, under which Elizabethtown Gas invested $12 million during the first six months of 2017.

~~Virginia Natural Gas~~

~~In March 2016, the Virginia Commission approved an extension to the SAVE program, under which Virginia Natural Gas invested $14 million during the first six months of 2017.~~

~~Florida City Gas~~

~~The Florida PSC approved Florida City Gas' Safety, Access, and Facility Enhancement program in 2015. Under the program, Florida City Gas invested $7 million during the first six months of 2017.~~

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See MANAGEMENT'S DISCUSSION AND ANALYSIS OF

– FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company Gas in Item 7 of the Form 10-K and FINANCIAL CONDITION AND ~~RESULTS OF OPERATIONS~~

LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.

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. The ultimate outcome of such pending or potential litigation ~~against Southern Company Gas~~or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company Gas' financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies and regulatory matters, and other matters being litigated which may affect future earnings potential.

~~Nicor Gas and Nicor Energy Services Company, wholly-owned subsidiaries of~~ Southern Company Gas ~~and Nicor Inc. were defendants~~owns a 50% interest in a ~~putative class action initially filed~~planned LNG liquefaction and storage facility in ~~2011~~Jacksonville, Florida. Once construction is complete and the facility is operational, it will be outfitted with a 2.0 million gallon storage tank with the capacity to produce in excess of 120,000 gallons of LNG per day. It is expected to be operational in the ~~state court in Cook County, Illinois.~~first half of 2018. The ~~plaintiffs purported to represent a class~~ultimate outcome of the customers who purchased the Gas Line Comfort Guard product from Nicor Energy Services Company and variously alleged that the marketing, sale, and billing of the Gas Line Comfort Guard product violated the Illinois Consumer Fraud and Deceptive Business Practices Act, constituting common law fraud and resulting in unjust enrichment of these entities. The plaintiffs sought, on behalf of the classes they purported to represent, actual and punitive damages, interest, costs, attorney fees, and injunctive relief. On February 8, 2017, the judge denied the plaintiffs' motion for class certification and Southern Company Gas' motion for summary judgment. On March 7, 2017, the parties reached a settlement, which was finalized and effective on April 3, 2017. The settlement did not have a material impact on Southern Company Gas' financial statements.this matter cannot be determined at this time.

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 Note 1 to the financial statements of Southern Company Gas in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company Gas' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company Gas in Item 7 of the Form 10-K for a complete discussion of Southern Company Gas' critical accounting policies and estimates related to Utility Regulation, Pushdown of Acquisition Accounting, Assessment of Assets, Derivatives and Hedging Activities, Pension and Other Postretirement Benefits, and Contingent Obligations.

~~Recently Issued Accounting Standards~~

While Southern Company Gas expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of Southern Company Gas' revenue, including energy provided to customers, is from tariff offerings that provide natural gas without a defined contractual term, as well as longer-term contractual agreements, including non-derivative natural gas asset management and optimization arrangements. Southern Company Gas expects that the revenue from contracts with these customers will not result in a significant shift in the timing of revenue recognition for such sales.

Southern Company Gas' ongoing evaluation of other revenue streams and related contracts includes unregulated sales to customers. Some revenue arrangements, such as energy-related derivatives and alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on Southern Company Gas' financial statements. In addition, the power

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and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Southern Company Gas ~~expects CIAC to be out~~in Item 7 of the ~~scope~~Form 10-K for a complete discussion of ~~ASC 606.~~Southern Company Gas' critical accounting policies and estimates.

~~The new standard is effective for interim and annual reporting periods beginning after December 15, 2017.~~Recently Issued Accounting Standards

See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Company Gas ~~intends~~in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to ~~use~~ the modified retrospective method of adoption effective January 1, 2018. Southern Company Gas has also elected to utilize practical expedients which allow it to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction priceCondensed Financial Statements herein for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effect adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of revenues recognized inregarding Southern Company Gas' ~~financial statements, Southern Company Gas will continue to evaluate the requirements, as well as any additional clarifying guidance that may be issued.~~

~~On March 10, 2017, the FASB issued ASU No. 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Southern Company Gas is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Southern Company Gas' operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Southern Company Gas' financial statements.recently adopted accounting standards.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company Gas in Item 7 of the Form 10-K for additional information. As a result of the Merger that closed on July 1, 2016, the results reported herein include disclosure of the successor second quarter and year-to-date 2017 and the predecessor second quarter and year-to-date 2016. See ~~OVERVIEW~~ ~~– "Merger and Acquisition Activities" and Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information.~~

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Southern Company Gas' financial condition remained stable at ~~June 30, 2017.~~March 31, 2018. Southern Company Gas intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

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. Due to the increased working capital requirements associated with Nicor Gas' Investing in Illinois infrastructure replacement program, since 2015, Nicor Gas has temporarily ceased distributing dividends to Southern Company Gas. Elizabethtown Gas is restricted by its dividend policy as established by theThe New Jersey BPU inrestricts the amount itElizabethtown Gas can dividend to its parent company to ~~the extent of~~ 70% of its quarterly net income. Additionally, as stipulated in the New Jersey BPU's order approving the Merger, Southern Company Gas is prohibited from paying dividends to its parent company, Southern Company, if Southern Company Gas' senior unsecured debt rating falls below investment grade. ~~As of June 30, 2017,~~At March 31, 2018, the amount of subsidiary retained earnings and net income ~~available~~restricted to dividend totaled ~~$739~~$776 million. These restrictions did not have any impact on Southern Company Gas' ability to meet its cash obligations, nor does management expect such restrictions to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.

Net cash provided from operating activities totaled ~~$1.2 billion~~$978 million for the ~~successor~~ first ~~six~~three months of ~~2017 and $1.1 billion for~~2018, an increase of $222 million compared to the ~~predecessor~~ first ~~six~~three months of ~~2016. These~~2017. The increase in net cash ~~flows were~~provided from operating activities was primarily ~~driven by the sale~~due to increased volumes of natural gas ~~inventory~~sold during the ~~respective periods.~~

first three months of 2018. Net cash used for investing activities totaled ~~$781~~$361 million for the ~~successor~~ first ~~six~~three months of ~~2017,~~2018 primarily due to gross property additions related to capital expenditures for infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments in pipelines. Net cash used for ~~investing~~financing activities totaled ~~$559~~$595 million for the ~~predecessor~~ first ~~six~~three months of ~~2016, primarily due to gross property additions related to capital expenditures for infrastructure replacement programs at gas distribution operations.~~

~~Net cash used for financing activities totaled $351 million for the successor first six months of 2017,~~2018 primarily due to net repayments of commercial paper borrowings and a common stock dividend ~~payments~~payment to Southern ~~Company, partially offset by proceeds from debt issuances and capital contributions from Southern~~ Company. Net cash used for financing activities totaled $558 million for the predecessor first six months of 2016, primarily due to net repayments of commercial paper borrowings, the redemption of long-term debt, and common stock dividend payments to shareholders, partially offset by proceeds from debt issuances. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes at ~~June 30, 2017~~March 31, 2018 include ~~an increase~~a decrease of $514 million in total property, plant, and equipment primarily due to capital expenditures for infrastructure replacement programs, an increase in long-term debt of $418 million primarily due to $450 million of senior notes issued in May 2017, and decreases of $223$413 million in natural gas for sale, ~~including~~net of temporary LIFO liquidation, due to the use of stored natural gas ~~stored during the first six months of 2017,~~ and ~~$631~~a $483 million decrease in notes payable primarily related ~~primarily~~ to net repayments of commercial paper ~~borrowings at Nicor Gas.~~borrowings. Other significant balance sheet changes include decreases of ~~$141~~$54 million in accounts payable as well as $159 million and ~~$63~~$109 million in energy marketing receivables and payables, respectively, due to lower natural gas ~~prices.~~prices, and an increase of $169 million in total property, plant, and equipment primarily due to infrastructure investments recovered through replacement programs.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company Gas in Item 7 of the Form 10-K for a description of Southern Company Gas' capital requirements and contractual obligations. Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds issued for its infrastructure programs, scheduled maturities of long-term debt and the related interest, as well as pipeline charges, storage capacity, and gas supply, operating leases, asset management agreements, standby letters of credit and performance/surety bonds, financial derivative obligations, pension and other postretirement benefit ~~plans, and other purchase commitments, primarily related~~ to ~~environmental remediation liabilities. Approximately $22~~be redeemed. An additional $335 million will be required through ~~June 30, 2018~~March 31, 2019 to fund ~~maturities of long-term debt. See "Sources of Capital" herein for additional information.~~

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announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.

The regulatory infrastructure programs and other construction programs are subject to periodic review and revision, and actual costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in FERC rules and regulations; state regulatory approvals; changes in legislation; the cost and efficiency of labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 3 to the consolidated financial statements of Southern Company Gas in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for information regarding additional factors that may impact infrastructure investment expenditures.

Sources of Capital

Southern Company Gas plans to obtain the funds to meet its future capital needs through operating cash flows, ~~short-term debt borrowings under its commercial paper programs,~~ external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Company Gas plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to pay the income taxes resulting from the sales, to retire existing debt, and for general corporate purposes. However, the amount, type, and timing of any future financings, if needed, depend upon ~~regulatory approval,~~ prevailing market conditions, regulatory approval, and other factors. The issuance of securities by Nicor Gas is generally subject to the approval of the Illinois Commission. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company Gas in Item 7 of the Form 10-K for additional information.

At ~~June 30, 2017,~~March 31, 2018, Southern Company Gas' current liabilities exceeded current assets by ~~$572~~$972 million primarily as a result of ~~$626 million~~$1.0 billion in notes payable. 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. Southern Company Gas intends to utilize operating cash flows, ~~commercial paper, and debt~~external securities issuances, ~~as market conditions permit, as well as~~borrowings from financial institutions, equity contributions from Southern Company, and the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to fund its short-term capital needs. Southern Company Gas has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.

At ~~June 30, 2017,~~March 31, 2018, Southern Company Gas had ~~approximately $38~~$94 million of cash and cash equivalents. Committed credit arrangements with banks at ~~June 30, 2017~~March 31, 2018 were as follows:


	Expires
Company	2022		Unused		Expires 2022		Unused
	(in millions)				(in millions)
Southern Company Gas Capital	$	1,200	$	1,149
Southern Company Gas Capital^(a)					$	1,400	$	1,390
Nicor Gas	700		700		500		500
Total	$	1,900	$	1,849
Total^(b)					$	1,900	$	1,890

Additionally, Pivotal Utility Holdings is party to a series of loan agreements with the New Jersey Economic Development Authority and Brevard County, Florida under which five series of gas facility revenue bonds totaling $200 million have been issued.


(a)	Southern Company Gas guarantees the obligations of Southern Company Gas Capital.


(b)	Pursuant to the credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted.

See Note 6 to the consolidated financial statements of Southern Company Gas under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note ~~(E)~~(F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

~~As reflected in the table above, in May 2017,~~The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas ~~terminated their existing credit arrangements for $1.3 billion and $700 million, respectively, which were to mature in 2017 and 2018, and entered into a new multi-year credit arrangement~~ (Facility) ~~currently allocated for $1.2 billion and $700 million, respectively, with a maturity date of 2022.~~

~~The Facility included in the table above~~ contains a covenant that limits the ratio of debt to capitalization (as defined in ~~each facility)~~the Facility) to a maximum of 70% for each of Southern Company Gas and Nicor Gas 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. AtThe term loan agreement for Pivotal Utility Holdings contains similar

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~~June 30, 2017, each of the applicable~~provisions related to Southern Company Gas. At March 31, 2018, both companies ~~was~~were in compliance with such covenant. The Facility does not contain a material adverse change clause at the time of borrowings.

Subject to applicable market conditions, the applicable company expects to renew or replace the Facility as needed, prior to expiration. In connection therewith, the applicable company may extend the maturity dates and/or increase or decrease the lending commitments thereunder. A portion of unused credit with banks provides liquidity support to Southern Company Gas.

Southern Company Gas makes short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Commercial paper borrowings are included in notes payable in the balance sheets.

Details of short-term borrowings were as follows:


	Short-term Debt at June 30, 2017				Short-term Debt During the Period^(*)						Short-Term Debt at March 31, 2018				Short-Term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding		Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
Commercial paper:	(in millions)				(in millions)				(in millions)		(in millions)				(in millions)				(in millions)
Southern Company Gas Capital	$	581	1.5	%	$	558	1.3	%	$	750	$	855	2.4	%	$	960	2.0	%	$	1,261
Nicor Gas	45		1.4		143		1.2		308		180		2.2		189		1.8		275
Short-term loans:
Southern Company Gas	—		—		—		4.0		40		—		—	%	92		2.8	%	100
Total	$	626	1.5	%	$	701	1.3	%			$	1,035	2.4	%	$	1,241	2.0	%


(*)	Average and maximum amounts are based upon daily balances during the ~~successor~~ three-month period ended ~~June 30, 2017.~~March 31, 2018.

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

Additionally, at March 31, 2018, Pivotal Utility Holdings was party to a series of loan agreements with the New Jersey Economic Development Authority and Brevard County, Florida under which five series of gas facility revenue bonds totaling $200 million had been issued. The Elizabethtown Gas asset sale agreement requires that bonds representing $180 million of the total that are currently eligible for redemption at par be redeemed on or prior to consummation of the sale. See "Financing Activities" herein for additional information regarding the redemption of these bonds.

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 ~~requirements~~requirement under these contracts at ~~June 30, 2017 were $9~~March 31, 2018 was $11 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 March 24, 2017, S&P revised its consolidated~~While it is unclear how the credit rating ~~outlook for~~agencies and the relevant state regulatory bodies may respond to 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~~including Southern Company Gas, may be negatively impacted. Absent actions by Southern Company and its subsidiaries, including Southern Company Gas, ~~Capital, and Nicor Gas) from stable to negative.~~

~~Financing Activities~~

The long-term debt on Southern Company Gas' consolidated balance sheets includes both principal and non-principal components. As of June 30, 2017, the non-principal components totaled $537 million, which consisted of the unamortized portions of the fair value adjustment recorded in purchase accounting, debt premiums, debt discounts, and debt issuance costs.

In May 2017, Southern Company Gas Capital issued $450 million aggregate principal amount of Series 2017A 4.40% Senior Notes due May 30, 2047. The proceeds were used to repay Southern Company Gas' short-term indebtedness and for general corporate purposes.

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~~Subsequent~~ to ~~June 30, 2017, Atlanta~~mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets, Southern Company Gas', Southern Company Gas ~~Light~~Capital's, and Nicor Gas' credit ratings could be negatively affected. See Note 3 to the financial statements of Southern Company Gas under "Regulatory Matters" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information.

Financing Activities

The long-term debt on Southern Company Gas' balance sheets includes both principal and non-principal components. As of March 31, 2018, the non-principal components totaled $494 million, which consisted of the unamortized portions of the fair value adjustment recorded in purchase accounting, debt premiums, debt discounts, and debt issuance costs.

On January 4, 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. On March 28, 2018, Southern Company Gas repaid ~~at maturity $22 million of Series C medium-term notes.~~this promissory note.

Subsequent to ~~June 30, 2017, Nicor Gas agreed to issue $400~~March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of ~~First Mortgage Bonds in~~gas facility revenue bonds to be redeemed and provided notice of its intent to cause, on May 23, 2018, the remaining $180 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. Subsequent to March 31, 2018, Pivotal Utility Holdings, as borrower, and Southern Company Gas, as guarantor, entered into a ~~private placement, $200~~$181 million short-term delayed draw floating rate bank term loan agreement. Pivotal Utility Holdings has the right to borrow up to $181 million on or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds to be used to repay the remaining $180 million of ~~which is expected to be issued in each of August 2017 and November 2017.~~gas facility revenue bonds.

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

Market Price Risk

Other than the items discussed below, there were no material changes to Southern Company Gas' disclosures about market price risk during the ~~successor second~~first quarter ~~and year-to-date 2017.~~2018. For an in-depth discussion of Southern Company Gas' market price risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K. Also see Notes ~~(C)~~(D) and ~~(H)~~(I) to the Condensed Financial Statements herein for information relating to derivative instruments.

Southern Company Gas is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms, the natural gas distribution utilities of Southern Company Gas that sell natural gas directly to end-use customers have limited exposure to market volatility of natural gas prices. Certain natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and over-the-counter energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Some of these economic hedge activities may not qualify, or are not designated, for hedge accounting treatment. ~~The following table illustrates~~For the ~~change~~periods presented below, the changes in ~~the~~ net fair value of Southern Company Gas' derivative ~~instruments during all periods presented, and provides details~~contracts were as follows:

153

Table of ~~the net fair value of contracts outstanding as of the dates presented.~~Contents

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	Successor			Predecessor			Successor			Predecessor
	Second Quarter			Second Quarter			Year-to-Date			Year-to-Date			First Quarter			First Quarter
	2017			2016			2017			2016			2018			2017
	(in millions)			(in millions)			(in millions)			(in millions)			(in millions)
Contracts outstanding at beginning of period, assets (liabilities), net	$	64		$	(44	)	$	12		$	75		$	(106	)	$	12
Contracts realized or otherwise settled	(20		)	8			(16		)	(77		)	49			4
Current period changes^(a)	7			(48		)	55			(82		)	(13		)	48
Contracts outstanding at the end of period, assets (liabilities), net	51			(84		)	51			(84		)	(70		)	64
Netting of cash collateral	71			120			71			120			223			92
Cash collateral and net fair value of contracts outstanding at end of period^(b)	$	122		$	36		$	122		$	36		$	153		$	156


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


(b)	Net fair value of derivative ~~instruments~~contracts outstanding ~~includes premiums~~excludes premium and the intrinsic ~~values~~value associated with weather derivatives of ~~$11~~$4 million at ~~June 30, 2017~~March 31, 2018 and $5includes premium and the intrinsic value associated with weather derivatives of $19 million at ~~June 30, 2016.~~March 31, 2017.

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~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The maturities of Southern Company Gas' energy-related derivative contracts at ~~June 30, 2017~~March 31, 2018 were as follows:


				Fair Value Measurements											Fair Value Measurements
				Successor – June 30, 2017											March 31, 2018
	Total Fair Value			Maturity								Total Fair Value			Maturity
	Total Fair Value			Year 1		Years 2 & 3			Years 4 and thereafter			Total Fair Value			Year 1			Years 2 & 3			Years 4 and thereafter
	(in millions)											(in millions)
Level 1^(a)	$	(12	)	$	5	$	(14	)	$	(3	)	$	(146	)	$	(51	)	$	(68	)	$	(27	)
Level 2^(b)	63			27		30			6			76			22			16			38
Fair value of contracts outstanding at end of period^(c)	$	51		$	32	$	16		$	3		$	(70	)	$	(29	)	$	(52	)	$	11


(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 ~~$71~~$223 million as well as premium and associated intrinsic value associated with weather derivatives of $4 million at ~~June 30, 2017.~~March 31, 2018.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

FOR

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

(UNAUDITED)

INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS

INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT

The following unaudited notes to the condensed financial statements are a combined presentation. The list below indicates the registrants to which each footnote applies.



Registrant	Applicable Notes
Southern Company	A, B, C, D, E, F, G, H, I, J, K, L
Alabama Power	A, B, C, E,D, F, G, H, I
Georgia Power	A, B, C, E,D, F, G, H, I
Gulf Power	A, B, C, E,D, F, G, H, I
Mississippi Power	A, B, C, E,D, F, G, H, I
Southern Power	A, B, C, D, E, F, G, H, I, J
Southern Company Gas	A, B, C, E,D, F, G, H, I, J, K, L

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

(UNAUDITED)


(A)	INTRODUCTION

The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, ~~2016~~2017 have been derived from the audited financial statements of each registrant. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended ~~June 30, 2017~~March 31, 2018 and ~~2016.~~2017. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented are not necessarily indicative of the operating results to be expected for the full year.

Southern Company's financial statements reflect its investments in its subsidiaries, including Southern Company Gas as a result of the Merger, on a consolidated basis. Southern Company Gas' results of operations and cash flows for the three and six months ended June 30, 2017 and financial condition as of June 30, 2017 and December 31, 2016 are reflected within Southern Company's consolidated amounts in these accompanying notes herein. The equity method is used for entities in which Southern Company has significant influence but does not control, including Southern Company Gas' investment in SNG, and for variable interest entities where Southern Company has an equity investment but is not the primary beneficiary. See Note (I) under "~~Southern Company~~– ~~Merger with Southern Company Gas" for additional information regarding the Merger.~~

Pursuant to the Merger, Southern Company pushed down the application of the acquisition method of accounting to the consolidated financial statements of Southern Company Gas such that the assets and liabilities are recorded at their respective fair values, and goodwill has been established for the excess of the purchase price over the fair value of net identifiable assets. Accordingly, the consolidated financial statements of Southern Company Gas for periods before and after July 1, 2016 (acquisition date) reflect different bases of accounting, and the financial positions and results of operations of those periods are not comparable. Throughout Southern Company Gas' condensed consolidated financial statements and the accompanying notes herein, periods prior to July 1, 2016 are identified as "predecessor," while periods after the acquisition date are identified as "successor."

Certain prior year data presented in the financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on the results of operations, financial position, or cash flows of any registrant.

Recently Adopted Accounting Standards

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~Recently~~See Note 1 to the financial statements of the registrants under "Recently Issued Accounting ~~Standards~~Standards" in Item 8 of the Form 10-K for additional information.

Revenue

In 2014, the FASB issued ASC 606,Revenue from Contracts with Customers (ASC 606), replacing the existing accounting standard and ~~industry specific~~industry-specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 became effective on January 1, 2018 and the registrants adopted it using the modified retrospective method applied to open contracts and only to the version of the contracts in effect as of January 1, 2018. In accordance with the modified retrospective method, the registrants' previously issued financial statements have not been restated to comply with ASC 606 and the registrants did not have a cumulative-effect adjustment to retained earnings. The ~~new standard also~~adoption of ASC 606 had no significant impact on the timing of revenue recognition compared to previously reported results; however, it requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with ~~customers.~~

~~While the registrants expect most of their revenue to be~~customers, which are included in ~~the scope of~~ Note (C).

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

ASC 606 ~~they have not fully completed the evaluation of all revenue arrangements. The majority of Southern Company's, the traditional electric operating companies'~~provided additional clarity on financial statement presentation that resulted in reclassifications into other revenues and other operations and maintenance from other income/(expense), net at Alabama Power and ~~Southern Company Gas' revenue, including energy provided~~Georgia Power related to customers, is from tariff offerings that provide electricity or natural gas without a defined contractual term, as well as longer-term contractual commitments, including PPAs and non-derivative natural gas asset management and optimization arrangements. The majority of Southern Power's revenues includes longer-term PPAs for generation capacity and energy. The registrants expect the adoption of ASC 606 will not result in a significant shift from the current timing of revenue recognition for such transactions.

~~The registrants' ongoing evaluation of other revenue streams and related contracts includes~~certain unregulated sales ~~to customers. Some revenue arrangements, such as certain PPAs~~, ~~energy-related derivatives~~,of products and alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and disclosed or presented separately from revenues under ASC 606 on the registrants' financial statements.services. In addition, contract assets related to certain fixed retail revenues and pole attachment revenues at Georgia Power have been reclassified from unbilled revenue and other accounts and notes receivable, respectively, in accordance with the ~~power and utilities industry continues to evaluate other specific industry issues, including the applicability of ASC 606 to contributions~~guidance in aid of construction (CIAC). Although final implementation guidance has not been issued, Southern Company, the traditional electric operating companies, and Southern Company Gas expect CIAC to be out of the scope of ASC 606.

~~The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. The registrants intend to use the modified retrospective method~~ Neither of adoption effective January 1, 2018. The registrants have also elected to utilize practical expedients which allow them to apply the standard to open contracts at the date of adoption and to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price for contracts modified before the effective date. Under the modified retrospective method of adoption, prior year reported results are not restated; however, a cumulative-effectthese changes resulted in an adjustment to retained earnings at January 1, 2018 is recorded. In addition, disclosures will include comparative information on 2018 financial statement line items under current guidance. While the adoption of ASC 606, including the cumulative-effect adjustment, is not expected to have a material impact on either the timing or amount of the recognition of revenues or cash flows. ASC 606 also provided additional guidance on over-time revenue recognition, resulting in a change in the timing of revenue recognized from guaranteed and fixed billing arrangements at Southern Company Gas. The increase in natural gas revenues recognized in the ~~registrants'~~first quarter 2018 relates primarily to the seasonal nature of natural gas usage and is expected to be offset by decreases in natural gas revenue recognized in future periods during 2018.

The net impact of accounting for revenue under ASC 606 increased Southern Company's consolidated net income and net income per share by $10 million and $0.01 per basic share, respectively, for the three months ended March 31, 2018.

The specific impacts of applying ASC 606 to revenues from contracts with customers on the financial statements of Southern Company, Alabama Power, Georgia Power, and Southern Company Gas as of and for the ~~registrants will continue~~three months ended March 31, 2018 compared to ~~evaluate the requirements, as well as any additional clarifying~~previously recognized guidance ~~that may be issued.~~is shown below.



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company
Condensed Consolidated Statements of Income
Natural gas revenues	$	1,607		$	1,593		$	14
Other revenues	413			412			1
Other operations and maintenance	1,451			1,441			10
Operating income	1,376			1,371			5
Other income (expense), net	60			51			9
Earnings before income taxes	1,049			1,035			14
Income taxes	113			109			4
Consolidated net income	936			926			10
Consolidated net income attributable to Southern Company	938			928			10
Basic earnings per share	$	0.93		$	0.92		$	0.01
Diluted earnings per share	$	0.92		$	0.91		$	0.01

Condensed Consolidated Statements of Cash Flow
Consolidated net income	$	936		$	926		$	10
Changes in certain current assets and liabilities:
Receivables	197			211			(14		)
Other current assets	7			(7		)	14
Accrued taxes	(79		)	(75		)	(4		)
Other current liabilities	81			67			14

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported		Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Condensed Consolidated Balance Sheet
Unbilled revenues	$	777	$	822		$	(45	)
Other accounts and notes receivable	703		709			(6		)
Other current assets	286		235			51
Accrued taxes	368		364			4
Other current liabilities	923		937			(14		)
Retained earnings	9,257		9,247			10

Alabama Power
Condensed Statements of Income
Other revenues	$	63	$	55		$	8
Other operations and maintenance	387		377			10
Operating income	372		374			(2		)
Other income (expense), net	5		3			2

Georgia Power
Condensed Statements of Income
Other revenues	$	109	$	94		$	15
Other operations and maintenance	408		394			14
Operating income	513		512			1
Other income (expense), net	38		39			(1		)

Condensed Statements of Cash Flows
Changes in certain current assets and liabilities:
Receivables	$	135	$	145		$	(10	)
Other current assets	9		(1		)	10

Condensed Balance Sheet
Unbilled revenues	$	189	$	202		$	(13	)
Other accounts and notes receivable	77		83			(6		)
Other current assets	39		20			19

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company Gas
Condensed Statements of Income
Natural gas revenues	$	1,631		$	1,617		$	14
Operating income	388			374			14
Earnings before income taxes	383			369			14
Income taxes	104			100			4
Net income	279			269			10

Condensed Statements of Cash Flows
Net income	$	279		$	269		$	10
Changes in certain current assets and liabilities:
Accrued taxes	28			32			(4		)
Other current liabilities	48			34			14

Condensed Consolidated Balance Sheet
Accrued income taxes	$	77		$	73		$	4
Other current liabilities	143			157			(14		)
Accumulated deficit	(55		)	(65		)	10

Other

~~On January 26, 2017,~~In 2016, the FASB issued ASU No. ~~2017-04,~~2016-18, ~~Intangibles – Goodwill and Other~~Statement of Cash Flows (Topic ~~350)~~230): ~~Simplifying the Test for Goodwill Impairment~~Restricted Cash (ASU ~~2017-04)~~2016-18). ASU ~~2017-04 removes~~2016-18 eliminates the ~~requirement~~need to ~~compare~~reflect transfers between cash and restricted cash in operating, investing, and financing activities in the ~~implied fair value~~statements of ~~goodwill with~~cash flows. In addition, the ~~carrying amount~~net change in cash and cash equivalents during the period includes amounts generally described as part of Step 2 of the goodwill impairment test. Under the new standard, the goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value, not exceeding the total amount of goodwill allocated to that reporting unit, which may increase the frequency of goodwill impairment charges if a future goodwill impairment test does not pass the Step 1 evaluation.restricted cash or restricted cash equivalents. The registrants adopted ASU ~~2017-04 is~~2016-18 effective ~~prospectively for annual and interim periods beginning on or after December 15, 2019, and early adoption is permitted on testing dates after~~ January 1, ~~2017.~~2018 with no material impact on their financial statements. Southern Company, Southern Power, and Southern Company Gas retrospectively applied ASU 2016-18 effective January 1, 2018 and have restated prior periods in the statements of cash flows by immaterial amounts. The change in restricted cash in the statements of cash flows was previously disclosed in operating activities for Southern Company and Southern Company Gas and in investing activities for Southern Company and Southern Power. See "Restricted Cash" herein for additional information.

OnIn March ~~10,~~ 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the statements of income ~~statement~~ outside of income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. ~~However, all cost components remain eligible~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~for capitalization under FERC regulations.~~The registrants adopted ASU 2017-07 ~~will be~~effective January 1, 2018 with no material impact on their financial statements. ASU 2017-07 has been applied retrospectively for the presentation of the service cost component and the other components of net periodic ~~pension and postretirement~~ benefit costs in the statements of income ~~statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective~~ for ~~annual periods beginning after December 15, 2017, including interim periods within those annual periods.~~ Southern Company, the traditional electric operating companies, and Southern Company ~~Gas are currently evaluating~~Gas. Since Southern Power did not participate in the ~~new standard. The presentation changes required for net periodic~~qualified pension and postretirement benefit plans until December 2017, no retrospective presentation of Southern Power's net periodic benefits costs ~~will result in~~is required. The requirement to limit capitalization to the service cost component of net periodic benefit costs has been applied on a ~~decrease in Southern Company's,~~

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

prospective basis from the ~~traditional electric operating companies', and Southern Company Gas' operating income and an increase in other income~~date of adoption for ~~2016 and 2017 and are expected to result~~all registrants. The presentation changes resulted in a decrease in operating income and an increase in other income for ~~2018. The adoption of ASU 2017-07 is not expected to have a material impact on~~the three months ended March 31, 2018 and 2017 for Southern ~~Company's,~~Company, the traditional electric operating ~~companies', or Southern Company Gas' financial statements.~~

~~Affiliate Transactions~~

~~Prior to the completion of Southern Company Gas' acquisition of its 50% equity interest in SNG, SCS (as agent for Alabama Power, Georgia Power, and Southern Power)~~companies, and Southern Company ~~Gas had entered into long-term interstate natural gas transportation agreements~~Gas.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 makes more financial and non-financial hedging strategies eligible for hedge accounting, amends the related presentation and disclosure requirements, and simplifies hedge effectiveness assessment requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with ~~SNG.~~early adoption permitted. The ~~interstate transportation service provided~~registrants adopted ASU 2017-12 effective January 1, 2018 with no material impact on their financial statements. See Note (I) for disclosures required by ASU 2017-12.

On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) to ~~Alabama Power, Georgia Power, Southern Power,~~address the application of ASC 740, Income Taxes (ASC 740) to certain provisions of the Tax Reform Legislation. ASU 2018-02 specifically addresses the ASC 740 requirement that the effect of a change in tax laws or rates on deferred tax assets and ~~Southern Company Gas by SNG pursuant~~liabilities be included in income from continuing operations, even when the tax effects were initially recognized directly in OCI at the previous rate, which strands the income tax rate differential in accumulated OCI. The amendments in ASU 2018-02 allow a reclassification from accumulated OCI to ~~these agreements is governed by~~retained earnings for stranded tax effects resulting from the terms and conditions of SNG's natural gas tariff and is subject to FERC regulation. For the six months ended June 30, 2017, transportation costs under these agreements for Alabama Power, Georgia Power, Southern Power, and Southern Company Gas were approximately $4 million, $51 million, $13 million, and $16 million, respectively.

~~SCS, as agent for Georgia Power and Southern Power, has agreements~~Tax Reform Legislation. The registrants adopted ASU 2018-02 effective January 1, 2018 with certain subsidiaries of Southern Company Gas to purchase natural gas. For the six months ended June 30, 2017, natural gas purchases made by Georgia Power and Southern Power from Southern Company Gas' subsidiaries were approximately $9 million and $56 million, respectively.no material impact on their financial statements.

Goodwill and Other Intangible Assets

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, goodwill was as follows:


	Goodwill				Goodwill
	At June 30, 2017		At December 31, 2016		At March 31, 2018		At December 31, 2017
	(in millions)				(in millions)
Southern Company	$	6,271	$	6,251	$	6,226	$	6,268
Southern Power	$	2	$	2	$	2	$	2
Southern Company Gas
Gas distribution operations	$	4,702	$	4,702	$	4,702	$	4,702
Gas marketing services	1,265		1,265		1,223		1,265
Southern Company Gas total	$	5,967	$	5,967	$	5,925	$	5,967

On April 11, 2018, Southern Company Gas entered into a stock purchase agreement for the sale of Pivotal Home Solutions. In contemplation of the transaction, a goodwill impairment charge of $42 million was recorded as of March 31, 2018. See Note (J) under "Southern Company Gas" for additional information.

Goodwill is not amortized, but is subject to an annual impairment test during the fourth quarter of each year, or more frequently if impairment indicators arise.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Other intangible assets were as follows:


	At June 30, 2017							At December 31, 2016							At March 31, 2018							At December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Other Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization			Other Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization			Other Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization			Other Intangible Assets, Net
	(in millions)							(in millions)							(in millions)							(in millions)
Southern Company
Other intangible assets subject to amortization:
Customer relationships	$	288	$	(57	)	$	231	$	268	$	(32	)	$	236	$	288	$	(93	)	$	195	$	288	$	(83	)	$	205
Trade names	159		(11		)	148		158		(5		)	153		159		(19		)	140		159		(17		)	142
Patents	4		—			4		4		—			4
Backlog	5		(1		)	4		5		(1		)	4
Storage and transportation contracts	64		(21		)	43		64		(2		)	62		64		(40		)	24		64		(34		)	30
Software and other	4		(1		)	3		2		—			2
PPA fair value adjustments	456		(35		)	421		456		(22		)	434		456		(54		)	402		456		(47		)	409
Other															18		(6		)	12		17		(5		)	12
Total other intangible assets subject to amortization	$	980	$	(126	)	$	854	$	957	$	(62	)	$	895	$	985	$	(212	)	$	773	$	984	$	(186	)	$	798
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	$	75	$	—		$	75	$	75	$	—		$	75	75		—			75		75		—			75
Total other intangible assets	$	1,055	$	(126	)	$	929	$	1,032	$	(62	)	$	970	$	1,060	$	(212	)	$	848	$	1,059	$	(186	)	$	873

Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	456	$	(35	)	$	421	$	456	$	(22	)	$	434	$	456	$	(54	)	$	402	$	456	$	(47	)	$	409

Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services
Customer relationships	$	221	$	(53	)	$	168	$	221	$	(30	)	$	191	$	221	$	(86	)	$	135	$	221	$	(77	)	$	144
Trade names	115		(6		)	109		115		(2		)	113		115		(10		)	105		115		(9		)	106
Wholesale gas services
Storage and transportation contracts	64		(21		)	43		64		(2		)	62		64		(40		)	24		64		(34		)	30
Total other intangible assets subject to amortization	$	400	$	(80	)	$	320	$	400	$	(34	)	$	366	$	400	$	(136	)	$	264	$	400	$	(120	)	$	280

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Amortization associated with other intangible assets was as follows:


	Three Months Ended		Six Months Ended		Three Months Ended
	June 30, 2017				March 31, 2018
	(in millions)				(in millions)
Southern Company	$	29	$	65	$	26
Southern Power	$	6	$	13	$	7
Southern Company Gas	$	20	$	46	$	16

Restricted Cash

The registrants adopted ASU 2016-18 as of January 1, 2018. See Note 12 to the financial statements of Southern Company under "Southern Power" and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information regarding Southern Power's PPA fair value adjustments related to its business acquisitions. Also see Note (I) under "~~Southern Company~~"Recently Adopted Accounting Standards – ~~Acquisition of PowerSecure" and "~~ –~~Merger with Southern Company Gas" for additional information.~~

~~Property Damage Reserve~~

~~See Note 1 to the financial statements of Gulf Power under "Property Damage Reserve" in Item 8 of the Form 10-K~~Other" herein for additional information.

~~Gulf Power's cost~~At December 31, 2017, Southern Power had restricted cash primarily related to certain acquisitions and construction projects. At both March 31, 2018 and December 31, 2017, Southern Company Gas had restricted cash held as collateral for worker's compensation, life insurance, and long-term disability insurance.

The following tables provide a reconciliation of ~~repairing damages from major storms~~cash, cash equivalents, and ~~other uninsured property damages, including uninsured damages~~restricted cash reported within the condensed balance sheets that total to ~~transmission and distribution facilities, generation facilities, and other property is charged to Gulf Power's property damage reserve. In accordance with a settlement agreement approved by~~ the Florida PSC on April 4, 2017 (2017 Rate Case Settlement Agreement), Gulf Power suspended further property damage reserve accruals effective April 2017. Gulf Power may make discretionary accruals, but is required to resume accruals of $3.5 million annually if the reserve balance falls below zero. In addition, Gulf Power may initiate a storm surcharge to recover costs associated with any tropical systems named by the National Hurricane Center or other catastrophic storm events that reduce the property damage reserveamounts shown in the ~~aggregate by approximately $31 million (75%~~condensed statements of cash flows for the ~~April 1, 2017 balance)~~ registrants that had restricted cash at March 31, 2018 and/or more. The storm surcharge would begin, on an interim basis, 60 days following the filing of a cost recovery petition, would be limited to $4.00/month for a 1,000 KWH residential customer unless Gulf Power incurs in excess of $100 million in qualified storm recovery costs in a calendar year, and would replenish the storm reserve to approximately $40 million. See Note (B) under "~~Regulatory Matters~~–~~Gulf Power~~– ~~Retail Base Rate Cases" for additional details regarding the 2017 Rate Case Settlement Agreement.~~December 31, 2017:



	Southern Company		Southern Company Gas
	(in millions)
At March 31, 2018
Cash and cash equivalents	$	2,284	$	94
Restricted cash:
Other accounts and notes receivable	6		6
Total cash, cash equivalents, and restricted cash	$	2,290	$	100



	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

Natural Gas for Sale

Southern Company Gas' natural gas distribution utilities, with the exception of Nicor Gas, carry natural gas inventory on a WACOG basis.

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. Southern Company Gas' inventory decrement at ~~June 30, 2017~~March 31, 2018 is expected

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

to be restored prior to year end. 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.

Natural gas inventories for Southern Company Gas' non-utility businesses are carried at the lower of weighted average cost or current market price, with cost determined on a WACOG basis. For any declines in market prices below the WACOG considered to be other than temporary, an adjustment is recorded to reduce the value of natural gas inventories to market value. Southern Company Gas had no material LOCOM adjustment in any period presented.

Hypothetical Liquidation at Book Value

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~Southern Power has consolidated renewable generation projects that are partially financed by a third-party tax equity investor. The related contractual provisions represent profit-sharing arrangements because the allocations of cash distributions and tax benefits are not based on fixed ownership percentages. Therefore, the noncontrolling interest is accounted for under a balance sheet approach utilizing the hypothetical liquidation at book value (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 hypothetical liquidation at the end of the period compared to the beginning of the period.

~~(UNAUDITED)~~


(B)	CONTINGENCIES AND REGULATORY MATTERS

See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.

General Litigation Matters

Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, the business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, 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 against each registrant and any subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on such registrant's financial statements.

Southern Company

OnIn January ~~20,~~ 2017, a purported securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia, 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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

made materially false and misleading statements regarding the Kemper ~~IGCC~~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. OnIn June ~~12,~~ 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. OnIn July ~~27,~~ 2017, the defendants filed a motion to dismiss the plaintiffs' amended complaint with ~~prejudice.~~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 and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. On April 26, 2018, the defendants filed a motion for reconsideration of the court's order, seeking the dismissal of the remaining claims in the lawsuit.

OnIn May ~~15,~~ 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 ~~IGCC.~~County energy facility. The complaint further alleges that the individual defendants authorized or failed to correct false and misleading statements regarding the Kemper ~~IGCC~~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'

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

fees and costs in bringing the lawsuit. The plaintiff also seeks certain unspecified changes to Southern Company's corporate governance and internal processes.

Georgia Power

In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of municipal franchise fees (all of which are remitted to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state tort law claims. In ~~November~~ 2016, the Georgia Court of Appeals reversed the trial court's previous dismissal of the case and remanded the case to the trial court for further proceedings. Georgia Power ~~has~~ filed a petition for writ of certiorari with the Georgia Supreme ~~Court.~~Court, which was granted in August 2017. A decision from the Georgia Supreme Court is expected in late 2018. Georgia Power believes the plaintiffs' claims have no merit and intends to vigorously defend itself in this matter. The ultimate outcome of this matter cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Mississippi Power

Southern Company and Mississippi Power believe this legal challenge has no merit; however, an adverse outcome in this proceeding could have a material impact on Southern Company's and Mississippi Power's results of operations, financial condition, and liquidity. Southern Company and Mississippi Power will vigorously defend itself in this matter, the ultimate outcome of which cannot be determined at this time.

Southern Power

During 2015, Southern Power indirectly acquired a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, LLC and was subsequently placed in service in November 2016. Prior to placing the facility in service, certain solar panels were damaged during installation. While the facility currently is generating energy consistent with operational expectations and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace these solar panels. In connection therewith, Southern Power is withholding payments of approximately $26 million from the construction contractor, who has placed a lien on the Roserock facility for the same amount. The amounts withheld are included in other accounts and notes payable and other current liabilities on Southern Company's consolidated balance sheets and other accounts payable and other current liabilities on Southern Power's consolidated balance sheets. OnIn May ~~18,~~ 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas, against ~~X.L.~~XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from a hail storm and certain installation practices by the construction contractor, McCarthy Building Companies, Inc. (McCarthy). OnAlso in May ~~19,~~ 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breach of warranty for the damages sustained at the Roserock facility, which has since been moved to the U.S. District Court for the Western District of Texas. OnAdditionally in May ~~22,~~ 2017, McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL, and North American Elite in the U.S. District Court for the Western District of Texas alleging, among other things, breach of contract, and requesting foreclosure of mechanic's liens against Roserock. OnIn July ~~18,~~ 2017, the U.S. District Court for the Western District of Texas consolidated the two pending lawsuits. In December 2017, the U.S. District Court for the Western District of Texas dismissed McCarthy's claims against Canadian Solar (USA), Inc. and dismissed cross-claims that XL and North American Elite had sought to bring against Roserock. Southern Power intends to vigorously pursue and defend these matters, the ultimate outcome of which cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~Southern Company Gas~~Environmental Matters

Nicor Gas and Nicor Energy Services Company, wholly-owned subsidiaries of Southern Company Gas, and Nicor Inc. were defendants in a putative class action initially filed in 2011 in the state court in Cook County, Illinois. The plaintiffs purported to represent a class of the customers who purchased the Gas Line Comfort Guard product from Nicor Energy Services Company and variously alleged that the marketing, sale, and billing of the Gas Line Comfort Guard product violated the Illinois Consumer Fraud and Deceptive Business Practices Act, constituting common law fraud and resulting in unjust enrichment of these entities. The plaintiffs sought, on behalf of the classes they purported to represent, actual and punitive damages, interest, costs, attorney fees, and injunctive relief. On February 8, 2017, the judge denied the plaintiffs' motion for class certification and Southern Company Gas' motion for summary judgment. On March 7, 2017, the parties reached a settlement, which was finalized and effective on April 3, 2017. The settlement did not have a material impact on Southern Company's or Southern Company Gas' financial statements.

Environmental Remediation

The Southern Company system must comply with environmental laws and regulations ~~that cover~~governing the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the Southern Company system could incur substantial costs to clean up affected sites. The traditional electric operating companies and the natural gas distribution utilities in Illinois, New Jersey, Georgia, and Florida have ~~each~~all received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental compliance costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies.

Georgia Power's environmental remediation liability was ~~$12 million and $17~~$22 million as of ~~June 30, 2017~~both March 31, 2018 and December 31, ~~2016, respectively.~~2017. Georgia Power has been designated or identified as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act, and assessment and potential cleanup of such sites is expected.

Gulf Power's environmental remediation liability includes estimated costs of environmental remediation projects of approximately ~~$51~~$49 million and ~~$44~~$52 million as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively. These estimated costs primarily relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for potential impacts to soil and groundwater from herbicide applications at Gulf Power's substations. The schedule for completion of the remediation projects is subject to FDEP approval. ~~The projects have been approved by the Florida PSC for recovery through Gulf Power's environmental cost recovery clause; therefore, these liabilities have no impact on net income.~~

Southern Company Gas' environmental remediation liability was ~~$416~~$369 million and ~~$426~~$388 million as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, based on the estimated cost of environmental investigation and remediation associated with known current and former manufactured gas plant operating sites. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the applicable state regulatory agencies of the natural gas distribution utilities, with the exception of one site representing $5$2 million of the total accrued remediation costs.

The ~~final~~ultimate outcome of these matters cannot be determined at this ~~time. However,~~time; however, as a result of the regulatory treatment for environmental remediation expenses described above, the final disposition of these matters is not expected to have a material impact on the financial statements of Southern Company, Georgia Power, Gulf Power, or Southern Company Gas.

FERC Matters

~~Municipal~~Market-Based Rate Authority

The traditional electric operating companies and ~~Rural Associations Tariff~~Southern Power have authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional electric operating companies and Southern Power filed a triennial market power analysis in 2014, which included continued reliance on the energy auction as tailored mitigation. In 2015, the FERC issued an order finding that the traditional electric operating companies' and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional electric operating companies and in some adjacent areas. The FERC directed the traditional electric operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional electric operating companies and Southern Power filed a request for rehearing and filed their response with the FERC in 2015.

~~See Note 3~~In 2016, the traditional electric operating companies and Southern Power filed an amendment to their market-based rate tariff that proposed certain changes to the ~~financial statements~~energy auction, as well as several non-tariff changes. In February 2017, the FERC issued an order accepting all such changes subject to an additional condition of ~~Mississippi Power under "FERC Matters" in Item 8~~cost-based price caps for certain sales outside of the ~~Form 10-K for additional information regarding a settlement agreement entered into by Mississippi Power regarding the~~energy auction, finding that all of these changes would provide adequate

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~establishment of a regulatory asset~~alternative mitigation for ~~Kemper IGCC-related costs. See "Integrated Coal Gasification Combined Cycle" herein for information regarding the Kemper IGCC.~~

In March 2016, Mississippi Power reached a settlement agreement with its wholesale customers, which was subsequently approved by the FERC, for an increase in wholesale base revenues under the MRA cost-based electric tariff, primarily as a result of placing scrubbers for Plant Daniel Units 1 and 2 in service in 2015. The settlement agreement became effective for services rendered beginning May 1, 2016, resulting in an estimated annual revenue increase of $7 million under the MRA cost-based electric tariff. Additionally, under the settlement agreement, the tariff customers agreed to similar regulatory treatment for MRA tariff ratemaking as the treatment approved for retail ratemaking through an order issued by the Mississippi PSC in December 2015 (In-Service Asset Rate Order). This regulatory treatment primarily includes (i) recovery of the Kemper IGCC assets currently operational and providing service to customers and other related costs, (ii) amortization of the Kemper IGCC-related regulatory assets included in rates under the settlement agreement over the 36 months ending April 30, 2019, (iii) Kemper IGCC-related expenses included in rates under the settlement agreement no longer being deferred and charged to expense, and (iv) removing all of the Kemper IGCC CWIP from rate base with a corresponding increase in accrual of AFUDC. The additional resulting AFUDC totaled approximately $22 million through the suspension of Kemper IGCC start-up activities.

~~See "Integrated Coal Gasification Combined Cycle" herein for additional information.~~

~~Fuel Cost Recovery~~

~~See Note 3 to the financial statements of Mississippi Power under "FERC Matters~~ – ~~Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information.~~

~~Market-Based Rate Authority~~

~~See Note 3 to the financial statements of Southern Company and Mississippi Power under "FERC Matters~~ – Market-Based Rate Authority" and Note 3 to the financial statements of Alabama Power, Georgia Power, Gulf Power, and Southern Power under "FERC Matters" in Item 8 of the Form 10-K for additional information regarding the traditional electric operating companies' and Southern Power's potential to exert market power ~~proceeding~~in certain areas served by the traditional electric operating companies and ~~amendment to their market-rate tariff.~~

Onin some adjacent areas. In May ~~17,~~ 2017, the FERC accepted the traditional electric operating companies' and Southern Power's compliance filing accepting the terms of the order. While the FERC's February 2, 2017 order ~~regarding~~references the market power proceeding discussed above, it remains a separate, ongoing matter.

In October 2017, the FERC issued an ~~amendment by~~order in response to the traditional electric operating companies' and Southern Power's June 29, 2017 triennial updated market power analysis. The FERC directed the traditional electric operating companies and Southern Power to ~~their~~show cause within 60 days why market-based rate ~~tariff. While~~authority should not be revoked in certain areas adjacent to the ~~FERC's~~area presently under mitigation in accordance with the February 2017 order ~~references~~or to provide a mitigation plan to further address market power concerns. In November 2017, the traditional electric operating ~~companies'~~companies and Southern ~~Power's market power proceeding, it remains a separate, ongoing matter.~~Power responded to the FERC and proposed to resolve matters by applying the alternative mitigation authorized by the February 2017 order to the adjacent areas made the subject of the October 2017 order.

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

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~Cooperative Energy Power Supply Agreement

~~(UNAUDITED)~~

See Note 3 to the financial statements of Mississippi Power under "FERC Matters – Cooperative Energy Power Supply Agreement" in Item 8 of the Form 10-K for additional information regarding Cooperative Energy's network integration transmission service agreement (NITSA) with SCS.

On March 23, 2018, the FERC accepted the amendment to the NITSA between Cooperative Energy and SCS, effective April 1, 2018.

Regulatory Matters

Alabama Power

See Note 3 to the financial statements of Southern Company and Alabama Power under "Regulatory Matters – Alabama Power" and "Retail Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Alabama Power's recovery of retail costs through various regulatory clauses and accounting orders. The balance of each regulatory clause recovery on the balance sheet follows:


Regulatory Clause	Balance Sheet Line Item	June 30, 2017		December 31, 2016		Balance Sheet Line Item	March 31, 2018		December 31, 2017
		(in millions)					(in millions)
Rate CNP Compliance^(*)	Deferred under recovered regulatory clause revenues	$	6	$	9
Rate CNP Compliance						Deferred under recovered regulatory clause revenues	$	15	$	17
Rate CNP PPA	Over recovered regulatory clause revenues	1		—		Deferred under recovered regulatory clause revenues	8		12
	Deferred under recovered regulatory clause revenues	—		142
Retail Energy Cost Recovery	Other regulatory liabilities, current	11		76		Deferred under recovered regulatory clause revenues	78		25
Natural Disaster Reserve	Other regulatory liabilities, deferred	56		69		Other regulatory liabilities, deferred	38		38


~~(*)~~	In accordance with an accounting order issued on February 17, 2017 by the Alabama PSC, Alabama Power reclassified $36 million of its under recovered balance for Rate CNP Compliance to a deferred regulatory asset account.

~~Georgia~~On May 1, 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 plans 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.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Rate ~~Plans~~RSE

Generally, if Alabama Power's actual WCER range 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%.

In conjunction with these modifications to Rate RSE, Alabama Power committed to a moratorium on any upward adjustments under Rate RSE for 2019 and 2020. Additionally, Alabama Power will return $50 million to customers through bill credits in 2019. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.

Rate ECR

On May 1, 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 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 35 to the financial statements of Southern Company and ~~Georgia~~Alabama Power under ~~"Regulatory Matters – Georgia~~"Federal Tax Reform Legislation" and of Alabama Power ~~– Rate Plans"~~under "Current and ~~"Retail Regulatory Matters – Rate Plans," respectively,~~Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to ~~the~~certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under ~~"Regulatory Matters – Georgia Power – Nuclear~~"Nuclear Construction" and Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see "Fuel Cost Recovery" herein and Note 3 to the financial statements of Southern Company

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" and Georgia Power under "Retail Regulatory Matters – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery.

~~Integrated Resource Plan~~Rate Plans

See Note 3 to the financial statements of Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – ~~Integrated Resource Plan"~~Rate Plans" and "Retail Regulatory Matters – ~~Integrated Resource Plan,~~Rate Plans," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's ~~triennial Integrated Resource Plan.~~2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.

On ~~March 7, 2017,~~April 3, 2018, the Georgia PSC approved a settlement agreement between Georgia ~~Power's decision to suspend work at a future generation site in Stewart County, Georgia, due to changing economics, including load forecasts~~Power and ~~lower fuel costs. The timing~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

the staff of ~~recovery for costs incurred of approximately $50 million will be determined by~~ the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation (Georgia Power Tax Reform Settlement Agreement). Pursuant to the Georgia Power Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a ~~future~~regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.

To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail equity ratio to the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. ~~The ultimate outcome~~Benefits from reduced federal income tax rates in excess of ~~this matter cannot~~the amounts refunded to customers will be ~~determined at this time.~~retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.

Fuel Cost Recovery

See Note 3 to the financial statements of Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – Fuel Cost Recovery" and "Retail Regulatory Matters – Fuel Cost Recovery," respectively, in Item 8 of the Form 10-K for additional information.

As of ~~June 30,~~March 31, 2018 and December 31, 2017, Georgia Power's under recovered fuel balance totaled ~~$61~~$156 million and $165 million, respectively, and is included in ~~other deferred charges and~~current assets on Southern Company's and Georgia Power's condensed balance sheets. ~~As of December 31, 2016,~~The Georgia PSC will review Georgia Power's cumulative over or under recovered fuel balance no later than September 1, 2018 and evaluate the need to file a fuel case. 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 ~~totaled $84 million and is included in other current liabilities on Southern Company's and Georgia Power's condensed balance sheets.~~exceeds $200 million.

Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's or Georgia Power's revenues or net income, but will affect cash flow.

~~Nuclear Construction~~

See Note 3 to the financial statements of Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – Nuclear Construction" and "Retail Regulatory Matters – Nuclear Construction," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's construction of Plant Vogtle Units 3 and 4, Vogtle Construction Monitoring (VCM) reports, the NCCR tariff, and the Contractor Settlement Agreement.

~~Vogtle 3 and 4 Agreement and EPC Contractor Bankruptcy~~

The Vogtle 3 and 4 Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million (approximately $420 million based on Georgia Power's ownership interest). Under the Toshiba Guarantee, Toshiba guaranteed certain payment obligations of the EPC Contractor, including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Vogtle Owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under the Vogtle 3 and 4 Agreement. The Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020 and require 60 days' written notice to Georgia Power in the event the Westinghouse Letters of Credit will not be renewed.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Contractor for subcontractors and vendors for services performed or goods provided, with these amounts paid to the EPC Contractor, except that amounts accrued for Fluor Corporation (Fluor) were paid directly to Fluor; (ii) the EPC Contractor provided certain engineering, procurement, and management services for Plant Vogtle Units 3 and 4, to the same extent as contemplated by the Vogtle 3 and 4 Agreement, and Georgia Power, on behalf of the Vogtle Owners, made payments of $5.4 million per week for these services; (iii) Georgia Power had the right to make payments, on behalf of the Vogtle Owners, directly to subcontractors and vendors who had accounts past due with the EPC Contractor; (iv) the EPC Contractor used commercially reasonable efforts to provide information reasonably requested by Georgia Power as was necessary to continue construction and investigation of the completion status of Plant Vogtle Units 3 and 4; (v) the EPC Contractor rejected or accepted the Vogtle 3 and 4 Agreement by the termination of the Interim Assessment Agreement; and (vi) Georgia Power did not exercise any remedies against Toshiba under the Toshiba Guarantee. Under the Interim Assessment Agreement, all parties expressly reserved all rights and remedies under the Vogtle 3 and 4 Agreement and all related security and collateral under applicable law.

On June 9, 2017, Georgia Power and the other Vogtle Owners and Toshiba entered into a settlement agreement regarding the Toshiba Guarantee (Guarantee Settlement Agreement). Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the amount of its obligation under the Toshiba Guarantee is $3.68 billion (Guarantee Obligations), of which Georgia Power's proportionate share is approximately $1.7 billion, and that the Guarantee Obligations exist regardless of whether Plant Vogtle Units 3 and 4 are completed. The Guarantee Settlement Agreement also provides for a schedule of payments for the Guarantee Obligations, beginning in October 2017 and continuing through January 2021. In the event Toshiba receives certain payments, including sale proceeds, from or related to Westinghouse (or its subsidiaries) or Toshiba Nuclear Energy Holdings (UK) Limited (or its subsidiaries), it will hold a portion of such payments in trust for the Vogtle Owners and promptly pay them as offsets against any remaining Guarantee Obligations. Under the Guarantee Settlement Agreement, the Vogtle Owners will forbear from exercising certain remedies, including drawing on the Westinghouse Letters of Credit, until June 30, 2020, unless certain events of nonpayment, insolvency, or other material breach of the Guarantee Settlement Agreement by Toshiba occur. If such an event occurs, the balance of the Guarantee Obligations will become immediately due and payable, and the Vogtle Owners may exercise any and all rights and remedies, including drawing on the Westinghouse Letters of Credit without restriction. In addition, the Guarantee Settlement Agreement does not restrict the Vogtle Owners from fully drawing on the Westinghouse Letters of Credit in the event they are not renewed or replaced prior to the expiration date.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4 and, therefore, on Southern Company's and Georgia Power's financial statements.~~

Additionally, on June 9, 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into a services agreement (Services Agreement), which was amended and restated on July 20, 2017, for the EPC Contractor to transition construction management of Plant Vogtle Units 3 and 4 to Southern Nuclear and to provide ongoing design, engineering, and procurement services to Southern Nuclear. On July 20, 2017, the bankruptcy court approved the EPC Contractor's motion seeking authorization to (i) enter into the Services Agreement, (ii) assume and assign to the Vogtle Owners certain project-related contracts, (iii) join the Vogtle Owners as counterparties to certain assumed project-related contracts, and (iv) reject the Vogtle 3 and 4 Agreement. The Services Agreement, and the EPC Contractor's rejection of the Vogtle 3 and 4 Agreement, became effective upon approval by the DOE on July 27, 2017. The Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.

~~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 nuclear construction projects certified by the Georgia PSC. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff by including the related CWIP accounts in rate base during the construction period. As of June 30, 2017, Georgia Power had recovered approximately $1.4 billion of financing costs.

On December 20, 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving the following prudence matters: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report will be disallowed from rate base on the basis of imprudence; (ii) the Contractor Settlement Agreement is reasonable and prudent and none of the amounts paid or to be paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) financing costs on verified and approved capital costs will be deemed prudent provided they are incurred prior to December 31, 2019 and December 31, 2020 for Plant Vogtle Units 3 and 4, respectively; and (iv) (a) the in-service capital cost forecast will be adjusted to $5.680 billion (Revised Forecast), which includes a contingency of $240 million above Georgia Power's then current forecast of $5.440 billion, (b) capital costs incurred up to the Revised Forecast will be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, and (c) Georgia Power would have the burden to show that any capital costs above the Revised Forecast are reasonable and prudent. Under the terms of the Vogtle Cost Settlement Agreement, the certified in-service capital cost for purposes of calculating the NCCR tariff will remain at $4.418 billion. Construction capital costs above $4.418 billion will accrue AFUDC through the date each unit is placed in service. The ROE used to calculate the NCCR tariff was reduced from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016. For purposes of the AFUDC calculation, the ROE on costs between $4.418 billion and $5.440 billion will also be 10.00% and the ROE on any amounts above $5.440 billion would be Georgia Power's average cost of long-term debt. If the Georgia PSC adjusts Georgia Power's ROE rate setting point in a rate case prior to Plant Vogtle Units 3 and 4 being placed into retail rate base, then the ROE for purposes of calculating both the NCCR tariff and AFUDC will likewise be 95 basis points lower than the revised ROE rate setting point. If Plant Vogtle Units 3 and 4 are not placed in service by December 31, 2020, then (i) the ROE for purposes of calculating the NCCR tariff will be reduced an additional 300 basis points, or $8 million per month, and may, at the Georgia PSC's discretion, be accrued to be used for the benefit of customers, until such time as the units are placed in service and (ii) the ROE used to calculate AFUDC will be Georgia Power's average cost of long-term debt.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

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

~~Revised Cost and Schedule~~

Preliminary Cancellation Cost Estimate
(in billions)
CWIP as of June 30, 2017 $ 4.5
Financing costs collected, net of tax 1.4
Cancellation costs^(*)
0.4
Total $ 6.3


~~(*)~~	The estimate for cancellation costs includes, but is not limited to, costs to terminate contracts for construction and other services, as well as costs to secure the Plant Vogtle Units 3 and 4 construction site.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

costs, in future retail rates. Georgia Power will continue working with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4, including, but not limited to, the status of construction and rate recovery, and currently expects to include its recommendation in its seventeenth VCM report to be filed with the Georgia PSC in late August 2017.

~~The ultimate outcome of these matters is dependent on the completion of the assessments described above, as well as the related regulatory treatment, and cannot be determined at this time.~~

~~Other Matters~~

As of June 30, 2017, Georgia Power had borrowed $2.6 billion related to Plant Vogtle Units 3 and 4 costs through a loan guarantee agreement between Georgia Power and the DOE and a multi-advance credit facility among Georgia Power, the DOE, and the FFB. See Note 6 to the financial statements of Southern Company and Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (E) under "~~DOE Loan Guarantee Borrowings" for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.~~

The IRS has allocated PTCs to Plant Vogtle Units 3 and 4 which require that the applicable unit be placed in service prior to 2021. The net present value of Georgia Power's PTCs is estimated at approximately $400 million per unit.

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 if construction proceeds. 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 Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise if construction proceeds, 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.~~

Gulf Power

See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information regarding Gulf Power's rates and charges for service to retail customers.

Retail Base Rate ~~Cases~~Case

See Note 3 to the financial statements of Southern Company and Gulf Power under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" and "Retail Regulatory Matters – Retail Base Rate Cases," respectively, in Item 8 of the Form 10-K for additional information.

~~In 2013,~~As a continuation of a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement), on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement (2013 Rate Case Settlement Agreement) that authorized Gulf Power to reduce depreciation and record a regulatory asset up to $62.5 million from January 2014 through June 2017. In any given month, such depreciation reduction could not exceed the amount necessary for the retail ROE, as reported to the Florida PSC monthly, to reach the midpoint of the authorized retail ROE range then in effect. For 2014 and 2015, Gulf Power recognized reductions in depreciation of $8.4 million and $20.1 million, respectively. No net reduction in depreciation was recorded in 2016. In the first six months of 2017, Gulf Power recognized the remaining allowable reductions in depreciation totaling $34.0 million.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~On April 4, 2017, the Florida PSC approved the 2017 Rate Case Settlement Agreement~~ among Gulf Power and three intervenors ~~with respect~~addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's ~~request~~revenues of $18.2 million from base rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, and also provides for a one-time refund of $69.4 million for the retail portion of unprotected (not subject to ~~increase retail base rates. Under~~normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the ~~terms~~remainder of 2018. As a result of the ~~2017 Rate Case~~Gulf Power Tax Reform Settlement Agreement, ~~Gulf Power increased rates effective with~~ the ~~first billing cycle in July 2017 to provide~~Florida PSC also approved an ~~annual overall net customer impact of approximately $54.3 million. The net customer impact consists of a $62.0 million~~ increase in annual base revenues less an annual equivalent credit of approximately $7.7 million for 2017 for certain wholesale revenues to be provided through December 2019 through the purchased power capacity cost recovery clause. In addition, Gulf ~~Power continued its authorized retail ROE midpoint (10.25%) and range (9.25% to 11.25%), is deemed to have an~~Power's maximum equity ratio offrom 52.5% to 53.5% for all retail regulatory ~~purposes, and implemented new dismantlement accruals effective July 1, 2017.~~purposes.

~~Cost Recovery Clauses~~Regulatory Infrastructure Programs



Utility	Program	First Quarter 2018
		(in millions)
Nicor Gas	Investing in Illinois	$	31
Atlanta Gas Light	Georgia Rate Adjustment Mechanism (GRAM) infrastructure spending	62
Virginia Natural Gas	Steps to Advance Virginia's Energy	11
Florida City Gas	Safety, Access, and Facility Enhancement Program	2
Total		$	106

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Infrastructure Replacement Programs and Capital Projects" of Southern Company Gas in Item 7 and Note 3 to the financial statements of ~~Gulf Power~~Southern Company Gas under ~~"Retail~~ "Regulatory Matters – Regulatory ~~Matters – Cost Recovery Clauses"~~Infrastructure Programs" in Item 8 of the Form 10-K for additional information.

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company Gas in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas," and Note (H) to the Condensed Financial Statements herein for information regarding ~~Gulf Power's recovery~~the Tax Reform Legislation and related regulatory actions.

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 ~~retail~~business. The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company Gas' financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies and regulatory matters, and other matters being litigated which may affect future earnings potential.

Southern Company Gas owns a 50% interest in a planned LNG liquefaction and storage facility in Jacksonville, Florida. Once construction is complete and the facility is operational, it will be outfitted with a 2.0 million gallon storage tank with the capacity to produce in excess of 120,000 gallons of LNG per day. It is expected to be operational in the first half of 2018. The ultimate outcome of this matter cannot be determined at this time.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

149

Table of Contents

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southern Company Gas in Item 7 of the Form 10-K for a complete discussion of Southern Company Gas' critical accounting policies and estimates.

Recently Issued Accounting Standards

See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Recently Issued Accounting Standards" of Southern Company Gas in Item 7 of the Form 10-K for additional information regarding ASU No. 2016-02, Leases (Topic 842). See Note (A) to the Condensed Financial Statements herein for information regarding Southern Company Gas' recently adopted accounting standards.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company Gas in Item 7 of the Form 10-K for additional information. Southern Company Gas' financial condition remained stable at March 31, 2018. Southern Company Gas intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

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. The New Jersey BPU restricts the amount Elizabethtown Gas can dividend to its parent company to 70% of its quarterly net income. Additionally, as stipulated in the New Jersey BPU's order approving the Merger, Southern Company Gas is prohibited from paying dividends to its parent company, Southern Company, if Southern Company Gas' senior unsecured debt rating falls below investment grade. At March 31, 2018, the amount of subsidiary retained earnings and net income restricted to dividend totaled $776 million. These restrictions did not have any impact on Southern Company Gas' ability to meet its cash obligations, nor does management expect such restrictions to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.

Net cash provided from operating activities totaled $978 million for the first three months of 2018, an increase of $222 million compared to the first three months of 2017. The increase in net cash provided from operating activities was primarily due to increased volumes of natural gas sold during the first three months of 2018. Net cash used for investing activities totaled $361 million for the first three months of 2018 primarily due to gross property additions related to capital expenditures for infrastructure investments recovered through replacement programs at gas distribution operations and capital contributed to equity method investments in pipelines. Net cash used for financing activities totaled $595 million for the first three months of 2018 primarily due to net repayments of commercial paper borrowings and a common stock dividend payment to Southern Company. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes at March 31, 2018 include a decrease of $413 million in natural gas for sale, net of temporary LIFO liquidation, due to the use of stored natural gas and a $483 million decrease in notes payable primarily related to net repayments of commercial paper borrowings. Other significant balance sheet changes include decreases of $54 million in accounts payable as well as $159 million and $109 million in energy marketing receivables and payables, respectively, due to lower natural gas prices, and an increase of $169 million in total property, plant, and equipment primarily due to infrastructure investments recovered through replacement programs.

Capital Requirements and Contractual Obligations

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announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.

Sources of Capital

Southern Company Gas plans to obtain the funds to meet its future capital needs through ~~various~~operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Company Gas plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to pay the income taxes resulting from the sales, to retire existing debt, and for general corporate purposes. However, the amount, type, and timing of any future financings, if needed, depend upon prevailing market conditions, regulatory ~~clauses~~approval, and ~~accounting orders. Gulf Power~~other factors. The issuance of securities by Nicor Gas is generally subject to the approval of the Illinois Commission. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company Gas in Item 7 of the Form 10-K for additional information.

At March 31, 2018, Southern Company Gas' current liabilities exceeded current assets by $972 million primarily as a result of $1.0 billion in notes payable. 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. Southern Company Gas intends to utilize operating cash flows, external securities issuances, borrowings from financial institutions, equity contributions from Southern Company, and the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to fund its short-term capital needs. Southern Company Gas has ~~four regulatory clauses which are approved by~~substantial cash flow from operating activities and access to the ~~Florida PSC. The balance~~capital markets and financial institutions to meet liquidity needs.

At March 31, 2018, Southern Company Gas had $94 million of ~~each regulatory clause recovery on the balance sheet~~cash and cash equivalents. Committed credit arrangements with banks at March 31, 2018 were as follows:

Regulatory Clause Balance Sheet Line Item June 30,
2017 December 31,
2016

(in millions)
Fuel Cost Recovery Under recovered regulatory clause revenues $ 7
$ —
Fuel Cost Recovery Other regulatory liabilities, current —
15
Purchased Power Capacity Recovery Under recovered regulatory clause revenues 5
—
Environmental Cost Recovery Under recovered regulatory clause revenues 12
13
Energy Conservation Cost Recovery Under recovered regulatory clause revenues 2
4



Company	Expires 2022		Unused
	(in millions)
Southern Company Gas Capital^(a)	$	1,400	$	1,390
Nicor Gas	500		500
Total^(b)	$	1,900	$	1,890


(a)	Southern Company Gas guarantees the obligations of Southern Company Gas Capital.


(b)	Pursuant to the credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted.

See Note 6 to the consolidated financial statements of Southern Company Gas under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

~~As discussed previously,~~The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas (Facility) contains a covenant that limits the ~~2017 Rate Case Settlement Agreement resolved~~ratio of debt to capitalization (as defined in the ~~remaining issues~~Facility) to a maximum of 70% for each of Southern Company Gas and Nicor Gas 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. The term loan agreement for Pivotal Utility Holdings contains similar

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provisions related to ~~Gulf Power's inclusion~~Southern Company Gas. At March 31, 2018, both companies were in compliance with such covenant. The Facility does not contain a material adverse change clause at the time of ~~certain costs associated~~borrowings.

Details of short-term borrowings were as follows:



	Short-Term Debt at March 31, 2018				Short-Term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
Commercial paper:	(in millions)				(in millions)				(in millions)
Southern Company Gas Capital	$	855	2.4	%	$	960	2.0	%	$	1,261
Nicor Gas	180		2.2		189		1.8		275
Short-term loans:
Southern Company Gas	—		—	%	92		2.8	%	100
Total	$	1,035	2.4	%	$	1,241	2.0	%


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.

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

Additionally, at March 31, 2018, Pivotal Utility Holdings was party to a series of loan agreements with the ~~ongoing ownership~~New Jersey Economic Development Authority and ~~operation~~Brevard County, Florida under which five series of ~~Plant Scherer Unit 3~~gas facility revenue bonds totaling $200 million had been issued. The Elizabethtown Gas asset sale agreement requires that bonds representing $180 million of the total that are currently eligible for redemption at par be redeemed on or prior to consummation of the sale. See "Financing Activities" herein for additional information regarding the redemption of these bonds.

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 ~~environmental~~event of a credit rating change below BBB- and/or Baa3. These contracts are for physical gas purchases and sales and energy price risk management. The maximum potential collateral requirement under these contracts at March 31, 2018 was $11 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 ~~recovery clause~~at which it does so.

While it is unclear how the credit rating agencies and ~~no adjustment~~the relevant state regulatory bodies may respond to the ~~environmental cost recovery clause rate approved~~Tax Reform Legislation, certain financial metrics, such as the funds from operations to debt percentage, used by the ~~Florida PSC in November 2016 was made.~~credit rating agencies to assess Southern Company and its subsidiaries, including Southern Company Gas, may be negatively impacted. Absent actions by Southern Company and its subsidiaries, including Southern Company Gas,

~~Mississippi Power~~

~~Performance Evaluation Plan~~

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to mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets, Southern Company Gas', Southern Company Gas Capital's, and Nicor Gas' credit ratings could be negatively affected. See Note 3 to the financial statements of ~~Mississippi Power~~Southern Company Gas under ~~"Retail Regulatory~~"Regulatory Matters" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – ~~Performance Evaluation Plan"~~Southern Company Gas" herein for additional information.

Financing Activities

Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of gas facility revenue bonds to be redeemed and provided notice of its intent to cause, on May 23, 2018, the remaining $180 million aggregate principal amount of gas facility revenue bonds issued for its benefit to be redeemed. Subsequent to March 31, 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 agreement. Pivotal Utility Holdings has the right to borrow up to $181 million on or before May 31, 2018, upon satisfaction of certain customary conditions. Pivotal Utility Holdings expects the proceeds to be used to repay the remaining $180 million of gas facility revenue bonds.

Market Price Risk

Other than the items discussed below, there were no material changes to Southern Company Gas' disclosures about market price risk during the first quarter 2018. For an in-depth discussion of Southern Company Gas' market price risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Southern Company Gas in Item 7 of the Form 10-K. Also see Notes (D) and (I) to the Condensed Financial Statements herein for information relating to derivative instruments.

Southern Company Gas is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms, the natural gas distribution utilities of Southern Company Gas that sell natural gas directly to end-use customers have limited exposure to market volatility of natural gas prices. Certain natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and over-the-counter energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Some of these economic hedge activities may not qualify, or are not designated, for hedge accounting treatment. For the periods presented below, the changes in net fair value of Southern Company Gas' derivative contracts were as follows:

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	First Quarter			First Quarter
	2018			2017
	(in millions)
Contracts outstanding at beginning of period, assets (liabilities), net	$	(106	)	$	12
Contracts realized or otherwise settled	49			4
Current period changes^(a)	(13		)	48
Contracts outstanding at the end of period, assets (liabilities), net	(70		)	64
Netting of cash collateral	223			92
Cash collateral and net fair value of contracts outstanding at end of period^(b)	$	153		$	156


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


(b)	Net fair value of derivative contracts outstanding excludes premium and the intrinsic value associated with weather derivatives of $4 million at March 31, 2018 and includes premium and the intrinsic value associated with weather derivatives of $19 million at March 31, 2017.

The maturities of Southern Company Gas' energy-related derivative contracts at March 31, 2018 were as follows:



				Fair Value Measurements
				March 31, 2018
	Total Fair Value			Maturity
	Total Fair Value			Year 1			Years 2 & 3			Years 4 and thereafter
	(in millions)
Level 1^(a)	$	(146	)	$	(51	)	$	(68	)	$	(27	)
Level 2^(b)	76			22			16			38
Fair value of contracts outstanding at end of period^(c)	$	(70	)	$	(29	)	$	(52	)	$	11


(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 $223 million as well as premium and associated intrinsic value associated with weather derivatives of $4 million at March 31, 2018.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

FOR

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

(UNAUDITED)

INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS

INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT

The following unaudited notes to the condensed financial statements are a combined presentation. The list below indicates the registrants to which each footnote applies.



Registrant	Applicable Notes
Southern Company	A, B, C, D, E, F, G, H, I, J, K, L
Alabama Power	A, B, C, D, F, G, H, I
Georgia Power	A, B, C, D, F, G, H, I
Gulf Power	A, B, C, D, F, G, H, I
Mississippi Power	A, B, C, D, F, G, H, I
Southern Power	A, B, C, D, E, F, G, H, I, J
Southern Company Gas	A, B, C, D, F, G, H, I, J, K, L

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

(UNAUDITED)


(A)	INTRODUCTION

The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2017 have been derived from the audited financial statements of each registrant. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended March 31, 2018 and 2017. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented are not necessarily indicative of the operating results to be expected for the full year.

Recently Adopted Accounting Standards

See Note 1 to the financial statements of the registrants under "Recently Issued Accounting Standards" in Item 8 of the Form 10-K for additional information.

Revenue

In 2014, the FASB issued ASC 606, Revenue from Contracts with Customers (ASC 606), replacing the existing accounting standard and industry-specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 became effective on January 1, 2018 and the registrants adopted it using the modified retrospective method applied to open contracts and only to the version of the contracts in effect as of January 1, 2018. In accordance with the modified retrospective method, the registrants' previously issued financial statements have not been restated to comply with ASC 606 and the registrants did not have a cumulative-effect adjustment to retained earnings. The adoption of ASC 606 had no significant impact on the timing of revenue recognition compared to previously reported results; however, it requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers, which are included in Note (C).

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

ASC 606 provided additional clarity on financial statement presentation that resulted in reclassifications into other revenues and other operations and maintenance from other income/(expense), net at Alabama Power and Georgia Power related to certain unregulated sales of products and services. In addition, contract assets related to certain fixed retail revenues and pole attachment revenues at Georgia Power have been reclassified from unbilled revenue and other accounts and notes receivable, respectively, in accordance with the guidance in ASC 606. Neither of these changes resulted in an adjustment to the timing or amount of the recognition of revenues or cash flows. ASC 606 also provided additional guidance on over-time revenue recognition, resulting in a change in the timing of revenue recognized from guaranteed and fixed billing arrangements at Southern Company Gas. The increase in natural gas revenues recognized in the first quarter 2018 relates primarily to the seasonal nature of natural gas usage and is expected to be offset by decreases in natural gas revenue recognized in future periods during 2018.

The specific impacts of applying ASC 606 to revenues from contracts with customers on the financial statements of Southern Company, Alabama Power, Georgia Power, and Southern Company Gas as of and for the three months ended March 31, 2018 compared to previously recognized guidance is shown below.



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company
Condensed Consolidated Statements of Income
Natural gas revenues	$	1,607		$	1,593		$	14
Other revenues	413			412			1
Other operations and maintenance	1,451			1,441			10
Operating income	1,376			1,371			5
Other income (expense), net	60			51			9
Earnings before income taxes	1,049			1,035			14
Income taxes	113			109			4
Consolidated net income	936			926			10
Consolidated net income attributable to Southern Company	938			928			10
Basic earnings per share	$	0.93		$	0.92		$	0.01
Diluted earnings per share	$	0.92		$	0.91		$	0.01

Condensed Consolidated Statements of Cash Flow
Consolidated net income	$	936		$	926		$	10
Changes in certain current assets and liabilities:
Receivables	197			211			(14		)
Other current assets	7			(7		)	14
Accrued taxes	(79		)	(75		)	(4		)
Other current liabilities	81			67			14

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported		Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Condensed Consolidated Balance Sheet
Unbilled revenues	$	777	$	822		$	(45	)
Other accounts and notes receivable	703		709			(6		)
Other current assets	286		235			51
Accrued taxes	368		364			4
Other current liabilities	923		937			(14		)
Retained earnings	9,257		9,247			10

Alabama Power
Condensed Statements of Income
Other revenues	$	63	$	55		$	8
Other operations and maintenance	387		377			10
Operating income	372		374			(2		)
Other income (expense), net	5		3			2

Georgia Power
Condensed Statements of Income
Other revenues	$	109	$	94		$	15
Other operations and maintenance	408		394			14
Operating income	513		512			1
Other income (expense), net	38		39			(1		)

Condensed Statements of Cash Flows
Changes in certain current assets and liabilities:
Receivables	$	135	$	145		$	(10	)
Other current assets	9		(1		)	10

Condensed Balance Sheet
Unbilled revenues	$	189	$	202		$	(13	)
Other accounts and notes receivable	77		83			(6		)
Other current assets	39		20			19

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company Gas
Condensed Statements of Income
Natural gas revenues	$	1,631		$	1,617		$	14
Operating income	388			374			14
Earnings before income taxes	383			369			14
Income taxes	104			100			4
Net income	279			269			10

Condensed Statements of Cash Flows
Net income	$	279		$	269		$	10
Changes in certain current assets and liabilities:
Accrued taxes	28			32			(4		)
Other current liabilities	48			34			14

Condensed Consolidated Balance Sheet
Accrued income taxes	$	77		$	73		$	4
Other current liabilities	143			157			(14		)
Accumulated deficit	(55		)	(65		)	10

Other

In 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 eliminates the need to reflect transfers between cash and restricted cash in operating, investing, and financing activities in the statements of cash flows. In addition, the net change in cash and cash equivalents during the period includes amounts generally described as restricted cash or restricted cash equivalents. The registrants adopted ASU 2016-18 effective January 1, 2018 with no material impact on their financial statements. Southern Company, Southern Power, and Southern Company Gas retrospectively applied ASU 2016-18 effective January 1, 2018 and have restated prior periods in the statements of cash flows by immaterial amounts. The change in restricted cash in the statements of cash flows was previously disclosed in operating activities for Southern Company and Southern Company Gas and in investing activities for Southern Company and Southern Power. See "Restricted Cash" herein for additional information.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the statements of income outside of income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. The registrants adopted ASU 2017-07 effective January 1, 2018 with no material impact on their financial statements. ASU 2017-07 has been applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs in the statements of income for Southern Company, the traditional electric operating companies, and Southern Company Gas. Since Southern Power did not participate in the qualified pension and postretirement benefit plans until December 2017, no retrospective presentation of Southern Power's net periodic benefits costs is required. The requirement to limit capitalization to the service cost component of net periodic benefit costs has been applied on a

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

prospective basis from the date of adoption for all registrants. The presentation changes resulted in a decrease in operating income and an increase in other income for the three months ended March 31, 2018 and 2017 for Southern Company, the traditional electric operating companies, and Southern Company Gas.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 makes more financial and non-financial hedging strategies eligible for hedge accounting, amends the related presentation and disclosure requirements, and simplifies hedge effectiveness assessment requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The registrants adopted ASU 2017-12 effective January 1, 2018 with no material impact on their financial statements. See Note (I) for disclosures required by ASU 2017-12.

On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) to address the application of ASC 740, Income Taxes (ASC 740) to certain provisions of the Tax Reform Legislation. ASU 2018-02 specifically addresses the ASC 740 requirement that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations, even when the tax effects were initially recognized directly in OCI at the previous rate, which strands the income tax rate differential in accumulated OCI. The amendments in ASU 2018-02 allow a reclassification from accumulated OCI to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. The registrants adopted ASU 2018-02 effective January 1, 2018 with no material impact on their financial statements.

Goodwill and Other Intangible Assets

At March 31, 2018 and December 31, 2017, goodwill was as follows:



	Goodwill
	At March 31, 2018		At December 31, 2017
	(in millions)
Southern Company	$	6,226	$	6,268
Southern Power	$	2	$	2
Southern Company Gas
Gas distribution operations	$	4,702	$	4,702
Gas marketing services	1,223		1,265
Southern Company Gas total	$	5,925	$	5,967

Goodwill is not amortized, but is subject to an annual impairment test during the fourth quarter of each year, or more frequently if impairment indicators arise.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Other intangible assets were as follows:



	At March 31, 2018							At December 31, 2017
	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	$	288	$	(93	)	$	195	$	288	$	(83	)	$	205
Trade names	159		(19		)	140		159		(17		)	142
Storage and transportation contracts	64		(40		)	24		64		(34		)	30
PPA fair value adjustments	456		(54		)	402		456		(47		)	409
Other	18		(6		)	12		17		(5		)	12
Total other intangible assets subject to amortization	$	985	$	(212	)	$	773	$	984	$	(186	)	$	798
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	75		—			75		75		—			75
Total other intangible assets	$	1,060	$	(212	)	$	848	$	1,059	$	(186	)	$	873

Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	456	$	(54	)	$	402	$	456	$	(47	)	$	409

Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services
Customer relationships	$	221	$	(86	)	$	135	$	221	$	(77	)	$	144
Trade names	115		(10		)	105		115		(9		)	106
Wholesale gas services
Storage and transportation contracts	64		(40		)	24		64		(34		)	30
Total other intangible assets subject to amortization	$	400	$	(136	)	$	264	$	400	$	(120	)	$	280

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Amortization associated with other intangible assets was as follows:



	Three Months Ended
	March 31, 2018
	(in millions)
Southern Company	$	26
Southern Power	$	7
Southern Company Gas	$	16

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, 2017, Southern Power had restricted cash primarily related to certain acquisitions and construction projects. At both March 31, 2018 and December 31, 2017, Southern Company Gas had restricted cash held as collateral for worker's compensation, life insurance, and long-term disability insurance.

The following tables provide a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed balance sheets that total to the amounts shown in the condensed statements of cash flows for the registrants that had restricted cash at March 31, 2018 and/or December 31, 2017:



	Southern Company		Southern Company Gas
	(in millions)
At March 31, 2018
Cash and cash equivalents	$	2,284	$	94
Restricted cash:
Other accounts and notes receivable	6		6
Total cash, cash equivalents, and restricted cash	$	2,290	$	100



	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

Natural Gas for Sale

Southern Company Gas' natural gas distribution utilities, with the exception of Nicor Gas, carry natural gas inventory on a WACOG basis.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Hypothetical Liquidation at Book Value

Southern Power has consolidated renewable generation projects that are partially financed by a third-party tax equity investor. The related contractual provisions represent profit-sharing arrangements because the allocations of cash distributions and tax benefits are not based on fixed ownership percentages. Therefore, the noncontrolling interest is accounted for under a balance sheet approach utilizing the hypothetical liquidation at book value (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 hypothetical liquidation at the end of the period compared to the beginning of the period.


(B)	CONTINGENCIES AND REGULATORY MATTERS

See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information ~~regarding Mississippi Power's base rates.~~relating to various lawsuits, other contingencies, and regulatory matters.

General Litigation Matters

On March ~~15,~~2, 2018, the Alabama Department of Environmental Management (ADEM) issued proposed administrative orders assessing a penalty of $1.25 million to Alabama Power for unpermitted discharge of fluids and/or pollutants to groundwater at five electric generating plants. The proposed orders also require the submission to the ADEM of a plan with a schedule for implementation of a comprehensive groundwater investigation, including an assessment of corrective measures, a report evaluating any deficiencies at the facilities that may have led to the unpermitted discharges, and quarterly progress reports. Alabama Power is awaiting finalization of the orders. The ultimate outcome of this matter cannot be determined at this time.

Southern Company

In January 2017, a purported securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power ~~submitted~~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 ~~annual PEP lookback filing~~officers, and certain former Mississippi Power officers

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

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 and dismissed the allegations related to a number of the statements that plaintiffs challenged as being false or misleading. On April 26, 2018, the defendants filed a motion for reconsideration of the court's order, seeking the dismissal of the remaining claims in the lawsuit.

In February 2017, Jean Vineyard filed a shareholder derivative lawsuit and, in May 2017, Judy Mesirov filed a shareholder derivative lawsuit, each in the U.S. District Court for the Northern District of Georgia. Each of these lawsuits names as defendants Southern Company, certain of its directors, certain of its officers, and certain former Mississippi Power officers. In August 2017, these two shareholder derivative lawsuits were consolidated in the U.S. District Court for the Northern District of Georgia and the court has deferred the consolidated case until after certain further action in the purported securities class action complaint discussed above. The complaints allege that the defendants caused Southern Company to make false or misleading statements regarding the Kemper County energy facility cost and schedule. Further, the complaints allege that the defendants were unjustly enriched and caused the waste of corporate assets and also allege that the individual defendants violated their fiduciary duties. Each plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on each plaintiff's own behalf, attorneys' fees and costs in bringing the lawsuit. Each plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes.

In 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. The court has deferred the lawsuit until after certain further action in the purported securities class action complaint discussed above.

Georgia Power

In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of municipal franchise fees (all of which are remitted to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state tort law claims. In 2016, the Georgia Court of Appeals reversed the trial court's previous dismissal of the case and remanded the case to the trial court for further proceedings. Georgia Power filed a petition for writ of certiorari with the Georgia Supreme Court, which ~~reflected~~was granted in August 2017. A decision from the ~~need for a $5 million surcharge~~Georgia Supreme Court is expected in late 2018. Georgia Power believes the plaintiffs' claims have no merit and intends to ~~be recovered from customers. The filing has been suspended for review by the Mississippi PSC.~~vigorously defend itself in this matter. The ultimate outcome of this matter cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Mississippi Power

Southern Power

During 2015, Southern Power indirectly acquired a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, ~~Efficiency~~LLC and was subsequently placed in service in November 2016. Prior to placing the facility in service, certain solar panels were damaged during installation. While the facility currently is generating energy consistent with operational expectations and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace these solar panels. In connection therewith, Southern Power is withholding payments of approximately $26 million from the construction contractor, who has placed a lien on the Roserock facility for the same amount. The amounts withheld are included in other accounts and notes payable and other current liabilities on Southern Company's consolidated balance sheets and other accounts payable and other current liabilities on Southern Power's consolidated balance sheets. In May 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas, against XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from a hail storm and certain installation practices by the construction contractor, McCarthy Building Companies, Inc. (McCarthy). Also in May 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breach of warranty for the damages sustained at the Roserock facility, which has since been moved to the U.S. District Court for the Western District of Texas. Additionally in May 2017, McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL, and North American Elite in the U.S. District Court for the Western District of Texas alleging, among other things, breach of contract, and requesting foreclosure of mechanic's liens against Roserock. In July 2017, the U.S. District Court for the Western District of Texas consolidated the two pending lawsuits. In December 2017, the U.S. District Court for the Western District of Texas dismissed McCarthy's claims against Canadian Solar (USA), Inc. and dismissed cross-claims that XL and North American Elite had sought to bring against Roserock. Southern Power intends to vigorously pursue and defend these matters, the ultimate outcome of which cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Environmental Matters

Environmental Remediation

The Southern Company system must comply with environmental laws and regulations governing the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the Southern Company system could incur substantial costs to clean up affected sites. The traditional electric operating companies and the natural gas distribution utilities in Illinois, New Jersey, Georgia, and Florida have all received authority from their respective state PSCs or other applicable state regulatory agencies to recover approved environmental compliance costs through regulatory mechanisms. These regulatory mechanisms are adjusted annually or as necessary within limits approved by the state PSCs or other applicable state regulatory agencies.

Georgia Power's environmental remediation liability was $22 million as of both March 31, 2018 and December 31, 2017. Georgia Power has been designated or identified as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act, and assessment and potential cleanup of such sites is expected.

Gulf Power's environmental remediation liability includes estimated costs of environmental remediation projects of approximately $49 million and $52 million as of March 31, 2018 and December 31, 2017, respectively. These estimated costs primarily relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for potential impacts to soil and groundwater from herbicide applications at Gulf Power's substations. The schedule for completion of the remediation projects is subject to FDEP approval.

Southern Company Gas' environmental remediation liability was $369 million and $388 million as of March 31, 2018 and December 31, 2017, respectively, based on the estimated cost of environmental investigation and remediation associated with known current and former manufactured gas plant operating sites. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the applicable state regulatory agencies of the natural gas distribution utilities, with the exception of one site representing $2 million of the total accrued remediation costs.

The ultimate outcome of these matters cannot be determined at this time; however, as a result of the regulatory treatment for environmental remediation expenses described above, the final disposition of these matters is not expected to have a material impact on the financial statements of Southern Company, Georgia Power, Gulf Power, or Southern Company Gas.

FERC Matters

Market-Based Rate Authority

The traditional electric operating companies and Southern Power have authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional electric operating companies and Southern Power filed a triennial market power analysis in 2014, which included continued reliance on the energy auction as tailored mitigation. In 2015, the FERC issued an order finding that the traditional electric operating companies' and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional electric operating companies and in some adjacent areas. The FERC directed the traditional electric operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional electric operating companies and Southern Power filed a request for rehearing and filed their response with the FERC in 2015.

In 2016, the traditional electric operating companies and Southern Power filed an amendment to their market-based rate tariff that proposed certain changes to the energy auction, as well as several non-tariff changes. In February 2017, the FERC issued an order accepting all such changes subject to an additional condition of cost-based price caps for certain sales outside of the energy auction, finding that all of these changes would provide adequate

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

alternative mitigation for the traditional electric operating companies' and Southern Power's potential to exert market power in certain areas served by the traditional electric operating companies and in some adjacent areas. In May 2017, the FERC accepted the traditional electric operating companies' and Southern Power's compliance filing accepting the terms of the order. While the FERC's February 2017 order references the market power proceeding discussed above, it remains a separate, ongoing matter.

In October 2017, the FERC issued an order in response to the traditional electric operating companies' and Southern Power's June 29, 2017 triennial updated market power analysis. The FERC directed the traditional electric operating companies and Southern Power to show cause within 60 days why market-based rate authority should not be revoked in certain areas adjacent to the area presently under mitigation in accordance with the February 2017 order or to provide a mitigation plan to further address market power concerns. In November 2017, the traditional electric operating companies and Southern Power responded to the FERC and proposed to resolve matters by applying the alternative mitigation authorized by the February 2017 order to the adjacent areas made the subject of the October 2017 order.

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

Cooperative Energy Power Supply Agreement

See Note 3 to the financial statements of Mississippi Power under ~~"Retail Regulatory~~"FERC Matters – Cooperative Energy ~~Efficiency"~~Power Supply Agreement" in Item 8 of the Form 10-K for additional information regarding ~~Mississippi Power's energy efficiency programs.~~Cooperative Energy's network integration transmission service agreement (NITSA) with SCS.

On ~~July 6, 2017,~~March 23, 2018, the ~~Mississippi PSC issued an order approving Mississippi Power's Energy Efficiency Cost Rider compliance filing, which increased annual retail revenues by approximately $2 million effective with~~FERC accepted the ~~first billing cycle for August 2017.~~

~~Environmental Compliance Overview Plan~~

~~On May 4, 2017, the Mississippi PSC approved Mississippi Power's ECO Plan filing for 2017, which requested the maximum 2% annual increase in revenues, approximately $18 million, primarily related~~amendment to the ~~Plant Daniel Units~~NITSA between Cooperative Energy and SCS, effective April 1, and 2 scrubbers placed in service in 2015. The rates became effective with the first billing cycle for June 2017. Approximately $26 million of related revenue requirements in excess of the 2% maximum was deferred for inclusion in the 2018 filing.2018.

~~Fuel Cost Recovery~~

Regulatory Matters

Alabama Power

See Note 3 to the financial statements of ~~Mississippi~~Southern Company and Alabama Power under "Regulatory Matters – Alabama Power" and "Retail Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Alabama Power's recovery of retail costs through various regulatory clauses and accounting orders. The balance of each regulatory clause recovery on the balance sheet follows:



Regulatory Clause	Balance Sheet Line Item	March 31, 2018		December 31, 2017
		(in millions)
Rate CNP Compliance	Deferred under recovered regulatory clause revenues	$	15	$	17
Rate CNP PPA	Deferred under recovered regulatory clause revenues	8		12
Retail Energy Cost Recovery	Deferred under recovered regulatory clause revenues	78		25
Natural Disaster Reserve	Other regulatory liabilities, deferred	38		38

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Rate RSE

Rate ECR

On May 1, 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 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to the financial statements of Southern Company and Alabama Power under "Federal Tax Reform Legislation" and of Alabama Power under "Current and Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Nuclear Construction" and Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see "Fuel Cost Recovery" herein and Note 3 to the financial statements of Southern Company

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~At June 30, 2017, the amount of over-recovered retail fuel costs included on Mississippi Power's condensed balance sheet was $14 million compared to $37 million at December 31, 2016.~~

~~Ad Valorem Tax Adjustment~~Rate Plans

See Note 3 to the financial statements of ~~Mississippi~~Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – Rate Plans" and "Retail Regulatory Matters – ~~Ad Valorem Tax Adjustment"~~Rate Plans," respectively, in Item 8 of the Form 10-K for additional information regarding ~~Mississippi~~Georgia Power's ~~ad valorem tax adjustments.~~2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.

On ~~July 6, 2017,~~April 3, 2018, the ~~Mississippi~~Georgia PSC approved ~~Mississippi~~a settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation (Georgia Power Tax Reform Settlement Agreement). Pursuant to the Georgia Power Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's ~~annual ad valorem tax adjustment factor filing for 2017,~~next base rate case, which ~~included an annual~~is scheduled to be filed by July 1, 2019. If there is not a base rate ~~increase of 0.85%, or $8~~case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.

To address the negative cash flow and credit metric impacts of the Tax Reform Legislation, the Georgia PSC also approved an increase in Georgia Power's retail ~~revenues, primarily due~~equity ratio to ~~increased assessments.~~the lower of (i) Georgia Power's actual common equity weight in its capital structure or (ii) 55%, until Georgia Power's next base rate case. Benefits from reduced federal income tax rates in excess of the amounts refunded to customers will be retained by Georgia Power to cover the carrying costs of the incremental equity in 2018 and 2019.

~~Southern Company Gas~~

~~Natural Gas~~Fuel Cost Recovery

As of March 31, 2018 and December 31, 2017, Georgia Power's under recovered fuel balance totaled $156 million and $165 million, respectively, and is included in current assets on Southern ~~Company Gas has established natural gas~~Company's and Georgia Power's condensed balance sheets. The Georgia PSC will review Georgia Power's cumulative over or under recovered fuel balance no later than September 1, 2018 and evaluate the need to file a fuel case. Georgia Power continues to be allowed to adjust its fuel cost recovery rates ~~approved by~~under an interim fuel rider prior to the ~~relevant state regulatory agencies in~~next fuel case if the ~~states in which it serves. Natural gas~~under or over recovered fuel balance exceeds $200 million.

Fuel cost recovery revenues are adjusted for differences in actual recoverable ~~natural gas~~fuel costs and amounts billed in current regulated rates. ~~Changes~~Accordingly, changes in the billing factor will not have a significant effect on Southern Company's or ~~Southern Company Gas'~~Georgia Power's revenues or net income, but will affect cash ~~flows.~~flow.

Gulf Power

Retail Base Rate ~~Cases~~Case

See Note 3 to the financial statements of Southern Company ~~Gas~~and Gulf Power under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" and "Retail Regulatory Matters – Retail Base Rate Cases," respectively, in Item 8 of the Form 10-K for additional information.

~~Settled Base~~As a continuation of a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate ~~Cases~~

~~On February 21, 2017,~~Case Settlement Agreement), on March 26, 2018, the ~~Georgia~~Florida PSC approved ~~the Georgia Rate Adjustment Mechanism (GRAM)~~a stipulation 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, based on the previously approved ROE of 10.75% and does not collect revenue through special riders and surcharges. Various infrastructure programs previously authorized by the Georgia PSC under Atlanta Gas Light's STRIDE program, which include the Integrated Vintage Plastic Replacement Program,settlement agreement

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~Integrated System Reinforcement Program,~~among Gulf Power and ~~Integrated Customer Growth Program, will continue under GRAM and~~three intervenors addressing the ~~recovery~~retail revenue requirement effects of ~~and return on~~ the ~~infrastructure program investments will be included~~Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

The Gulf Power Tax Reform Settlement Agreement results in annual reductions to Gulf Power's revenues of $18.2 million from base ~~rate adjustments. The Georgia PSC will review Atlanta Gas Light's performance annually under GRAM.~~

~~Beginning with the next rate adjustment in June~~rates and $15.6 million from environmental cost recovery rates, implemented April 1, 2018, Atlanta Gas Light's recovery of the previously unrecovered Pipeline Replacement Program revenue through 2014, as well as the mitigation costs associated with the Pipeline Replacement Program that were not previously included in its rates, willand also ~~be included in GRAM. In connection with the GRAM approval, the last monthly Pipeline Replacement Program surcharge increase became effective March 1, 2017.~~

In September 2016, Elizabethtown Gas filed a general base rate case with the New Jersey BPU requesting a $19 million increase in annual base rate revenues. The requested increase was based on a projected 12-month test year ending March 31, 2017 and a ROE of 10.25%. On June 30, 2017, the New Jersey BPU approved a settlement that provides for a ~~$13~~one-time refund of $69.4 million for the retail portion of unprotected (not subject to normalization) deferred tax liabilities through Gulf Power's fuel cost recovery rate over the remainder of 2018. As a result of the Gulf Power Tax Reform Settlement Agreement, the Florida PSC also approved an increase in ~~annual base rate revenues, effective July 1, 2017, based~~Gulf Power's maximum equity ratio from 52.5% to 53.5% for all retail regulatory purposes.

As part of the Gulf Power Tax Reform Settlement Agreement, a limited scope proceeding to address protected deferred tax liabilities consistent with IRS normalization principles was initiated on April 30, 2018. Pending resolution of this proceeding, Gulf Power is deferring the related amounts for 2018 as a ~~ROE of 9.6%. Also included~~regulatory liability. Unless otherwise agreed to by the parties to the Gulf Power Tax Reform Settlement Agreement, amounts recorded in ~~the settlement was a new composite depreciation rate that is expected to result in a $3 million annual reduction of depreciation.~~

~~Pending Base Rate Cases~~

~~On March 31, 2017, Virginia Natural Gas filed a general base rate case with the Virginia Commission requesting a $44 million increase~~refunded to retail customers in ~~annual base rate revenues. The requested increase is based on a projected 12-month test year beginning September 1, 2017 and a ROE of 10.25%. The requested increase includes $13 million related to the~~2019 through Gulf Power's fuel cost recovery of investments under the Steps to Advance Virginia's Energy (SAVE) program. The Virginia Commission is expected to rule on the requested increase in the first quarter 2018. Rate adjustments are expected to be effective September 1, 2017, subject to refund.

rates. The ultimate outcome of ~~these pending base rate cases~~this matter cannot be determined at this time.

Regulatory Infrastructure Programs



Utility	Program	First Quarter 2018
		(in millions)
Nicor Gas	Investing in Illinois	$	31
Atlanta Gas Light	Georgia Rate Adjustment Mechanism (GRAM) infrastructure spending	62
Virginia Natural Gas	Steps to Advance Virginia's Energy	11
Florida City Gas	Safety, Access, and Facility Enhancement Program	2
Total		$	106

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Infrastructure Replacement Programs and Capital Projects" of Southern Company Gas in Item 7 and Note 3 to the financial statements of Southern Company Gas under "Regulatory Matters – Regulatory Infrastructure Programs" in Item 8 of the Form 10-K for additional information.

Income Tax Matters

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company Gas in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – "Credit Rating Risk," Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas," and Note (H) to the Condensed Financial Statements herein for information regarding the Tax Reform Legislation and related regulatory actions.

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. The ultimate outcome of such pending or potential litigation or regulatory matters cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company Gas' financial statements. See Note (B) to the Condensed Financial Statements herein for a discussion of various other contingencies and regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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Southern Company Gas in Item 7 of the Form 10-K for a complete discussion of Southern Company Gas' critical accounting policies and estimates.

Recently Issued Accounting Standards

FINANCIAL CONDITION AND LIQUIDITY

Overview

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. The New Jersey BPU restricts the amount Elizabethtown Gas can dividend to its parent company to 70% of its quarterly net income. Additionally, as stipulated in the New Jersey BPU's order approving the Merger, Southern Company Gas is prohibited from paying dividends to its parent company, Southern Company, if Southern Company Gas' senior unsecured debt rating falls below investment grade. At March 31, 2018, the amount of subsidiary retained earnings and net income restricted to dividend totaled $776 million. These restrictions did not have any impact on Southern Company Gas' ability to meet its cash obligations, nor does management expect such restrictions to materially impact Southern Company Gas' ability to meet its currently anticipated cash obligations.

Capital Requirements and Contractual Obligations

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announced redemptions and maturities of long-term debt. See "Sources of Capital" herein for additional information.

Sources of Capital

Southern Company Gas plans to obtain the funds to meet its future capital needs through operating cash flows, external securities issuances, borrowings from financial institutions, and equity contributions from Southern Company. In addition, Southern Company Gas plans to utilize the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to pay the income taxes resulting from the sales, to retire existing debt, and for general corporate purposes. However, the amount, type, and timing of any future financings, if needed, depend upon prevailing market conditions, regulatory approval, and other factors. The issuance of securities by Nicor Gas is generally subject to the approval of the Illinois Commission. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company Gas in Item 7 of the Form 10-K for additional information.

At March 31, 2018, Southern Company Gas' current liabilities exceeded current assets by $972 million primarily as a result of $1.0 billion in notes payable. 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. Southern Company Gas intends to utilize operating cash flows, external securities issuances, borrowings from financial institutions, equity contributions from Southern Company, and the proceeds from the pending sales of Elizabethtown Gas, Elkton Gas, and Pivotal Home Solutions to fund its short-term capital needs. Southern Company Gas has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.

At March 31, 2018, Southern Company Gas had $94 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2018 were as follows:



Company	Expires 2022		Unused
	(in millions)
Southern Company Gas Capital^(a)	$	1,400	$	1,390
Nicor Gas	500		500
Total^(b)	$	1,900	$	1,890


(a)	Southern Company Gas guarantees the obligations of Southern Company Gas Capital.


(b)	Pursuant to the credit arrangement, the allocations between Southern Company Gas Capital and Nicor Gas may be adjusted.

The multi-year credit arrangement of Southern Company Gas Capital and Nicor Gas (Facility) contains a covenant that limits the ratio of debt to capitalization (as defined in the Facility) to a maximum of 70% for each of Southern Company Gas and Nicor Gas 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. The term loan agreement for Pivotal Utility Holdings contains similar

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provisions related to Southern Company Gas. At March 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.

Details of short-term borrowings were as follows:



	Short-Term Debt at March 31, 2018				Short-Term Debt During the Period^(*)
	Amount Outstanding		Weighted Average Interest Rate		Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
Commercial paper:	(in millions)				(in millions)				(in millions)
Southern Company Gas Capital	$	855	2.4	%	$	960	2.0	%	$	1,261
Nicor Gas	180		2.2		189		1.8		275
Short-term loans:
Southern Company Gas	—		—	%	92		2.8	%	100
Total	$	1,035	2.4	%	$	1,241	2.0	%


(*)	Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2018.

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

Credit Rating Risk

Southern Company Gas does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change below BBB- and/or Baa3. These contracts are for physical gas purchases and sales and energy price risk management. The maximum potential collateral requirement under these contracts at March 31, 2018 was $11 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.

While it is unclear how the credit rating agencies and the relevant state regulatory bodies may respond to 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. Absent actions by Southern Company and its subsidiaries, including Southern Company Gas,

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

to mitigate the resulting impacts, which, among other alternatives, could include adjusting capital structure and/or monetizing regulatory assets, Southern Company Gas', Southern Company Gas Capital's, and Nicor Gas' credit ratings could be negatively affected. See Note 3 to the financial statements of Southern Company Gas under "Regulatory Matters" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters – Southern Company Gas" herein for additional information.

Financing Activities

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 of Southern Company Gas that sell natural gas directly to end-use customers have limited exposure to market volatility of natural gas prices. Certain natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and over-the-counter energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Some of these economic hedge activities may not qualify, or are not designated, for hedge accounting treatment. For the periods presented below, the changes in net fair value of Southern Company Gas' derivative contracts were as follows:

153

Table of Contents

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	First Quarter			First Quarter
	2018			2017
	(in millions)
Contracts outstanding at beginning of period, assets (liabilities), net	$	(106	)	$	12
Contracts realized or otherwise settled	49			4
Current period changes^(a)	(13		)	48
Contracts outstanding at the end of period, assets (liabilities), net	(70		)	64
Netting of cash collateral	223			92
Cash collateral and net fair value of contracts outstanding at end of period^(b)	$	153		$	156


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


(b)	Net fair value of derivative contracts outstanding excludes premium and the intrinsic value associated with weather derivatives of $4 million at March 31, 2018 and includes premium and the intrinsic value associated with weather derivatives of $19 million at March 31, 2017.

The maturities of Southern Company Gas' energy-related derivative contracts at March 31, 2018 were as follows:



				Fair Value Measurements
				March 31, 2018
	Total Fair Value			Maturity
	Total Fair Value			Year 1			Years 2 & 3			Years 4 and thereafter
	(in millions)
Level 1^(a)	$	(146	)	$	(51	)	$	(68	)	$	(27	)
Level 2^(b)	76			22			16			38
Fair value of contracts outstanding at end of period^(c)	$	(70	)	$	(29	)	$	(52	)	$	11


(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 $223 million as well as premium and associated intrinsic value associated with weather derivatives of $4 million at March 31, 2018.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

FOR

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

(UNAUDITED)

INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS

INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT

The following unaudited notes to the condensed financial statements are a combined presentation. The list below indicates the registrants to which each footnote applies.



Registrant	Applicable Notes
Southern Company	A, B, C, D, E, F, G, H, I, J, K, L
Alabama Power	A, B, C, D, F, G, H, I
Georgia Power	A, B, C, D, F, G, H, I
Gulf Power	A, B, C, D, F, G, H, I
Mississippi Power	A, B, C, D, F, G, H, I
Southern Power	A, B, C, D, E, F, G, H, I, J
Southern Company Gas	A, B, C, D, F, G, H, I, J, K, L

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

ALABAMA POWER COMPANY

GEORGIA POWER COMPANY

GULF POWER COMPANY

MISSISSIPPI POWER COMPANY

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

(UNAUDITED)


(A)	INTRODUCTION

The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2017 have been derived from the audited financial statements of each registrant. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended March 31, 2018 and 2017. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented are not necessarily indicative of the operating results to be expected for the full year.

Recently Adopted Accounting Standards

See Note 1 to the financial statements of the registrants under "Recently Issued Accounting Standards" in Item 8 of the Form 10-K for additional information.

Revenue

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

The specific impacts of applying ASC 606 to revenues from contracts with customers on the financial statements of Southern Company, Alabama Power, Georgia Power, and Southern Company Gas as of and for the three months ended March 31, 2018 compared to previously recognized guidance is shown below.



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company
Condensed Consolidated Statements of Income
Natural gas revenues	$	1,607		$	1,593		$	14
Other revenues	413			412			1
Other operations and maintenance	1,451			1,441			10
Operating income	1,376			1,371			5
Other income (expense), net	60			51			9
Earnings before income taxes	1,049			1,035			14
Income taxes	113			109			4
Consolidated net income	936			926			10
Consolidated net income attributable to Southern Company	938			928			10
Basic earnings per share	$	0.93		$	0.92		$	0.01
Diluted earnings per share	$	0.92		$	0.91		$	0.01

Condensed Consolidated Statements of Cash Flow
Consolidated net income	$	936		$	926		$	10
Changes in certain current assets and liabilities:
Receivables	197			211			(14		)
Other current assets	7			(7		)	14
Accrued taxes	(79		)	(75		)	(4		)
Other current liabilities	81			67			14

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported		Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Condensed Consolidated Balance Sheet
Unbilled revenues	$	777	$	822		$	(45	)
Other accounts and notes receivable	703		709			(6		)
Other current assets	286		235			51
Accrued taxes	368		364			4
Other current liabilities	923		937			(14		)
Retained earnings	9,257		9,247			10

Alabama Power
Condensed Statements of Income
Other revenues	$	63	$	55		$	8
Other operations and maintenance	387		377			10
Operating income	372		374			(2		)
Other income (expense), net	5		3			2

Georgia Power
Condensed Statements of Income
Other revenues	$	109	$	94		$	15
Other operations and maintenance	408		394			14
Operating income	513		512			1
Other income (expense), net	38		39			(1		)

Condensed Statements of Cash Flows
Changes in certain current assets and liabilities:
Receivables	$	135	$	145		$	(10	)
Other current assets	9		(1		)	10

Condensed Balance Sheet
Unbilled revenues	$	189	$	202		$	(13	)
Other accounts and notes receivable	77		83			(6		)
Other current assets	39		20			19

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	As of and for the Three Months Ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company Gas
Condensed Statements of Income
Natural gas revenues	$	1,631		$	1,617		$	14
Operating income	388			374			14
Earnings before income taxes	383			369			14
Income taxes	104			100			4
Net income	279			269			10

Condensed Statements of Cash Flows
Net income	$	279		$	269		$	10
Changes in certain current assets and liabilities:
Accrued taxes	28			32			(4		)
Other current liabilities	48			34			14

Condensed Consolidated Balance Sheet
Accrued income taxes	$	77		$	73		$	4
Other current liabilities	143			157			(14		)
Accumulated deficit	(55		)	(65		)	10

Other

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 makes more financial and non-financial hedging strategies eligible for hedge accounting, amends the related presentation and disclosure requirements, and simplifies hedge effectiveness assessment requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The registrants adopted ASU 2017-12 effective January 1, 2018 with no material impact on their financial statements. See Note (I) for disclosures required by ASU 2017-12.

On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) to address the application of ASC 740, Income Taxes (ASC 740) to certain provisions of the Tax Reform Legislation. ASU 2018-02 specifically addresses the ASC 740 requirement that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations, even when the tax effects were initially recognized directly in OCI at the previous rate, which strands the income tax rate differential in accumulated OCI. The amendments in ASU 2018-02 allow a reclassification from accumulated OCI to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. The registrants adopted ASU 2018-02 effective January 1, 2018 with no material impact on their financial statements.

Goodwill and Other Intangible Assets

At March 31, 2018 and December 31, 2017, goodwill was as follows:



	Goodwill
	At March 31, 2018		At December 31, 2017
	(in millions)
Southern Company	$	6,226	$	6,268
Southern Power	$	2	$	2
Southern Company Gas
Gas distribution operations	$	4,702	$	4,702
Gas marketing services	1,223		1,265
Southern Company Gas total	$	5,925	$	5,967

Goodwill is not amortized, but is subject to an annual impairment test during the fourth quarter of each year, or more frequently if impairment indicators arise.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Other intangible assets were as follows:



	At March 31, 2018							At December 31, 2017
	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	$	288	$	(93	)	$	195	$	288	$	(83	)	$	205
Trade names	159		(19		)	140		159		(17		)	142
Storage and transportation contracts	64		(40		)	24		64		(34		)	30
PPA fair value adjustments	456		(54		)	402		456		(47		)	409
Other	18		(6		)	12		17		(5		)	12
Total other intangible assets subject to amortization	$	985	$	(212	)	$	773	$	984	$	(186	)	$	798
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	75		—			75		75		—			75
Total other intangible assets	$	1,060	$	(212	)	$	848	$	1,059	$	(186	)	$	873

Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	456	$	(54	)	$	402	$	456	$	(47	)	$	409

Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services
Customer relationships	$	221	$	(86	)	$	135	$	221	$	(77	)	$	144
Trade names	115		(10		)	105		115		(9		)	106
Wholesale gas services
Storage and transportation contracts	64		(40		)	24		64		(34		)	30
Total other intangible assets subject to amortization	$	400	$	(136	)	$	264	$	400	$	(120	)	$	280

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Amortization associated with other intangible assets was as follows:



	Three Months Ended
	March 31, 2018
	(in millions)
Southern Company	$	26
Southern Power	$	7
Southern Company Gas	$	16

Restricted Cash

The registrants adopted ASU 2016-18 as of January 1, 2018. See "Recently Adopted Accounting Standards – Other" herein for additional information.



	Southern Company		Southern Company Gas
	(in millions)
At March 31, 2018
Cash and cash equivalents	$	2,284	$	94
Restricted cash:
Other accounts and notes receivable	6		6
Total cash, cash equivalents, and restricted cash	$	2,290	$	100



	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

Natural Gas for Sale

Southern Company Gas' natural gas distribution utilities, with the exception of Nicor Gas, carry natural gas inventory on a WACOG basis.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Hypothetical Liquidation at Book Value


(B)	CONTINGENCIES AND REGULATORY MATTERS

See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.

General Litigation Matters

Southern Company

In January 2017, a purported securities class action complaint was filed against Southern Company, certain of its officers, and certain former Mississippi Power officers in the U.S. District Court for the Northern District of Georgia, 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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Georgia Power

In 2011, plaintiffs filed a putative class action against Georgia Power in the Superior Court of Fulton County, Georgia alleging that Georgia Power's collection in rates of municipal franchise fees (all of which are remitted to municipalities) exceeded the amounts allowed in orders of the Georgia PSC and alleging certain state tort law claims. In 2016, the Georgia Court of Appeals reversed the trial court's previous dismissal of the case and remanded the case to the trial court for further proceedings. Georgia Power filed a petition for writ of certiorari with the Georgia Supreme Court, which was granted in August 2017. A decision from the Georgia Supreme Court is expected in late 2018. Georgia Power believes the plaintiffs' claims have no merit and intends to vigorously defend itself in this matter. The ultimate outcome of this matter cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Mississippi Power

Southern Power

During 2015, Southern Power indirectly acquired a 51% membership interest in RE Roserock LLC (Roserock), the owner of the Roserock facility in Pecos County, Texas, which was under construction by Recurrent Energy, LLC and was subsequently placed in service in November 2016. Prior to placing the facility in service, certain solar panels were damaged during installation. While the facility currently is generating energy consistent with operational expectations and PPA obligations, Southern Power is pursuing remedies under its insurance policies and other contracts to repair or replace these solar panels. In connection therewith, Southern Power is withholding payments of approximately $26 million from the construction contractor, who has placed a lien on the Roserock facility for the same amount. The amounts withheld are included in other accounts and notes payable and other current liabilities on Southern Company's consolidated balance sheets and other accounts payable and other current liabilities on Southern Power's consolidated balance sheets. In May 2017, Roserock filed a lawsuit in the state district court in Pecos County, Texas, against XL Insurance America, Inc. (XL) and North American Elite Insurance Company (North American Elite) seeking recovery from an insurance policy for damages resulting from a hail storm and certain installation practices by the construction contractor, McCarthy Building Companies, Inc. (McCarthy). Also in May 2017, Roserock filed a separate lawsuit against McCarthy in the state district court in Travis County, Texas alleging breach of contract and breach of warranty for the damages sustained at the Roserock facility, which has since been moved to the U.S. District Court for the Western District of Texas. Additionally in May 2017, McCarthy filed a counter lawsuit against Roserock, Array Technologies, Inc., Canadian Solar (USA), Inc., XL, and North American Elite in the U.S. District Court for the Western District of Texas alleging, among other things, breach of contract, and requesting foreclosure of mechanic's liens against Roserock. In July 2017, the U.S. District Court for the Western District of Texas consolidated the two pending lawsuits. In December 2017, the U.S. District Court for the Western District of Texas dismissed McCarthy's claims against Canadian Solar (USA), Inc. and dismissed cross-claims that XL and North American Elite had sought to bring against Roserock. Southern Power intends to vigorously pursue and defend these matters, the ultimate outcome of which cannot be determined at this time.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Environmental Matters

Environmental Remediation

FERC Matters

Market-Based Rate Authority

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

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

Cooperative Energy Power Supply Agreement

On March 23, 2018, the FERC accepted the amendment to the NITSA between Cooperative Energy and SCS, effective April 1, 2018.

Regulatory Matters

Alabama Power



Regulatory Clause	Balance Sheet Line Item	March 31, 2018		December 31, 2017
		(in millions)
Rate CNP Compliance	Deferred under recovered regulatory clause revenues	$	15	$	17
Rate CNP PPA	Deferred under recovered regulatory clause revenues	8		12
Retail Energy Cost Recovery	Deferred under recovered regulatory clause revenues	78		25
Natural Disaster Reserve	Other regulatory liabilities, deferred	38		38

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Rate RSE

Rate ECR

On May 1, 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 which is expected to result in additional collections of approximately $100 million through December 31, 2018. The approved increase in the Rate ECR factor will have no significant effect on Alabama Power's net income, but will increase operating cash flows related to fuel cost recovery in 2018. The rate will return to 5.910 cents per KWH in 2019, absent a further order from the Alabama PSC. Alabama Power typically has three to five business days to indicate its acceptance of the Alabama PSC's actions following issuance of the related Alabama PSC order. The ultimate outcome of this matter cannot be determined at this time.

Accounting Order

On May 1, 2018, the Alabama PSC approved an accounting order that authorizes Alabama Power to defer the benefits of federal excess deferred income taxes associated with the Tax Reform Legislation for the year ending December 31, 2018 as a regulatory liability. Up to $30 million of such deferrals may be used to offset under-recovered amounts under Rate ECR, with any remaining amounts to be used for the benefit of customers as determined by the Alabama PSC. Alabama Power expects the benefits deferred to total approximately $30 million to $50 million. The ultimate outcome of this matter cannot be determined at this time. See Note 5 to the financial statements of Southern Company and Alabama Power under "Federal Tax Reform Legislation" and of Alabama Power under "Current and Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to certified construction costs of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through a separate fuel cost recovery tariff. See "Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Nuclear Construction" and Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the NCCR tariff. Also see "Fuel Cost Recovery" herein and Note 3 to the financial statements of Southern Company

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Rate Plans

See Note 3 to the financial statements of Southern Company and Georgia Power under "Regulatory Matters – Georgia Power – Rate Plans" and "Retail Regulatory Matters – Rate Plans," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's 2013 ARP and the Georgia PSC's 2018 order related to the Tax Reform Legislation.

On April 3, 2018, the Georgia PSC approved a settlement agreement between Georgia Power and the staff of the Georgia PSC regarding the retail rate impact of the Tax Reform Legislation (Georgia Power Tax Reform Settlement Agreement). Pursuant to the Georgia Power Tax Reform Settlement Agreement, to reflect the federal income tax rate reduction impact of the Tax Reform Legislation, Georgia Power will refund to customers a total of $330 million through bill credits of $131 million in October 2018, $96 million in June 2019, and $103 million in February 2020. In addition, Georgia Power is deferring as a regulatory liability (i) the revenue equivalent of the tax expense reduction resulting from legislation lowering the Georgia state income tax rate from 6.00% to 5.75% in 2019 and (ii) the entire benefit of approximately $700 million in federal and state excess accumulated deferred income taxes. The amortization of these regulatory liabilities is expected to be addressed in Georgia Power's next base rate case, which is scheduled to be filed by July 1, 2019. If there is not a base rate case in 2019, customers will receive $185 million in annual bill credits beginning in 2020, with any additional federal and state income tax savings deferred as a regulatory liability, until Georgia Power's next base rate case.

Fuel Cost Recovery

As of March 31, 2018 and December 31, 2017, Georgia Power's under recovered fuel balance totaled $156 million and $165 million, respectively, and is included in current assets on Southern Company's and Georgia Power's condensed balance sheets. The Georgia PSC will review Georgia Power's cumulative over or under recovered fuel balance no later than September 1, 2018 and evaluate the need to file a fuel case. 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.

Gulf Power

Retail Base Rate Case

As a continuation of a settlement agreement approved by the Florida PSC in April 2017 (2017 Gulf Power Rate Case Settlement Agreement), on March 26, 2018, the Florida PSC approved a stipulation and settlement agreement

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

among Gulf Power and three intervenors addressing the retail revenue requirement effects of the Tax Reform Legislation (Gulf Power Tax Reform Settlement Agreement).

Cost Recovery Clauses

See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses" in Item 8 of the Form 10-K for additional information regarding Gulf Power's recovery of retail costs through various regulatory clauses and accounting orders, as approved by the Florida PSC. Regulatory clause recovery balances included in the balance sheets are as follows:



Regulatory Clause	Balance Sheet Line Item	March 31, 2018		December 31, 2017
		(in millions)
Fuel Cost Recovery	Under recovered regulatory clause revenues	$	4	$	22
Purchased Power Capacity Recovery	Under recovered regulatory clause revenues	4		2
Environmental Cost Recovery^(*)	Under recovered regulatory clause revenues	2		2

(*)

At March 31, 2018 and December 31, 2017, the under recovered balance included in the balance sheets represents the current portion of the regulatory assets associated with projected environmental expenditures of approximately $12 million and $13 million, respectively, partially offset by the over recovered environmental cost recovery balance of approximately $10 million and $11 million, respectively.

Mississippi Power

See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information.

On April 10, 2018, the Mississippi PSC stated its intent to begin an operations review process for investor-owned utilities in Mississippi and instructed its legal staff and the Mississippi Public Utilities Staff to prepare an order and request for proposals for a review of Mississippi Power. Mississippi Power expects that the review will include its cost recovery framework and an analysis of potential participation in a regional transmission organization. The ultimate outcome of this matter cannot be determined at this time.

Performance Evaluation Plan

In 2014, 2015, 2016, and 2017, Mississippi Power submitted its annual PEP lookback filings for the prior years, which for 2013 and 2014 each indicated no surcharge or refund and for each of 2015 and 2016 indicated a $5 million surcharge. Additionally, in July 2016, in November 2016, and on November 15, 2017, Mississippi Power submitted its annual projected PEP filings for 2016, 2017, and 2018, respectively, which for 2016 and 2017

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

indicated no change in rates and for 2018 indicated a rate increase of 4%, or $38 million in annual revenues. The Mississippi PSC suspended each of these filings to allow more time for review.

On March 22, 2018, Mississippi Power submitted its annual PEP lookback filing for 2017, which reflected no surcharge or refund.

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

Environmental Compliance Overview Plan

On February 14, 2018, Mississippi Power submitted its ECO Plan filing for 2018, including the effects of the Tax Reform Legislation, which requested the maximum 2% annual increase in revenues, or approximately $17 million, primarily related to the carryforward from the prior year. Approximately $13 million of related revenue requirements in excess of the 2% maximum, along with related carrying costs, remains deferred for inclusion in the 2019 filing. The Mississippi PSC is expected to rule on this request in mid-2018. The ultimate outcome of this matter cannot be determined at this time.

Fuel Cost Recovery

At March 31, 2018, the amount of over-recovered retail fuel costs included in other regulatory liabilities, current on the condensed balance sheet was approximately $3 million compared to an approximately $6 million under-recovered balance in other accounts and notes receivable at December 31, 2017.

Ad Valorem Tax Adjustment

On March 23, 2018, Mississippi Power submitted its annual ad valorem tax adjustment factor filing for 2018, which included an annual rate increase of 0.8%, or $7 million in annual retail revenues, primarily due to increased assessments. The ultimate outcome of this matter cannot be determined at this time.

Southern Company Gas

See Note 3 to the financial statements of Southern Company and Southern Company Gas under "Regulatory Matters – Southern Company Gas" and "Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Southern Company Gas' regulatory matters.

Riders

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 related to the 2018 impacts are expected to begin in July 2018.

Natural Gas Cost Recovery

Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. 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's or Southern Company Gas' revenues or net income, but will affect cash flows.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Base Rate Cases

Settled Base Rate Case

In October 2017, Florida City Gas filed a general base rate case with the Florida PSC requesting an annual revenue increase of $19 million, which included an interim rate increase of $5 million annually that was approved and became effective January 12, 2018, subject to refund. On March 26, 2018, the Florida PSC approved a settlement that, after including the impact of the Tax Reform Legislation, provides for an $11.5 million increase in annual base rate revenues, effective June 1, 2018, based on a ROE of 10.19%. Under the terms of the settlement, Florida City Gas agreed not to file a new base rate case with an effective date prior to June 1, 2022 and will receive full recovery of the costs related to its LNG facility to be constructed through additional increases in annual base rate revenues of $2.5 million on June 1, 2019 or the in-service date, whichever is later, and $1.3 million on December 1, 2019. If the facility is placed in service after December 1, 2019, the entire additional $3.8 million increase will take effect upon the in-service date of the LNG facility.

Pending Base Rate Cases

On February 15, 2018, Chattanooga Gas filed a general base rate case with the Tennessee Public Utility Commission (PUC) requesting a $7 million increase in annual base rate revenues. The requested increase, which, in accordance with a Tennessee PUC order, incorporated the effects of the Tax Reform Legislation, was based on a projected test year ending June 30, 2019 and a ROE of 11.25%. The Tennessee PUC is expected to rule on the requested increase in the third quarter 2018.

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

Other

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

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

Regulatory Infrastructure Programs

Southern Company Gas is engaged in various infrastructure programs that update or expand its gas distribution systems to improve reliability and ensure the safety of its utility infrastructure, and recovers in rates its investment and a return associated with these infrastructure programs. See Note 3 to the financial statements of Southern Company and Southern Company Gas under "Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" and "Regulatory Matters – Regulatory Infrastructure Programs," respectively, in Item 8 of the Form 10-K for additional information.

~~Nicor Gas~~

Nuclear Construction

See Note 3 to the financial statements of Southern Company and Georgia Power under "Nuclear Construction" and "Retail Regulatory Matters – Nuclear Construction," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's construction of Plant Vogtle Units 3 and 4, VCM reports, and the NCCR tariff.

Project Status

In ~~2014,~~2009, the ~~Illinois Commission~~Georgia PSC certified construction of Plant Vogtle Units 3 and 4. In 2012, the NRC issued the related combined construction and operating licenses, which allowed full construction of the two AP1000 nuclear units (with electric generating capacity of approximately 1,100 MWs each) and related facilities to begin. Until March 2017, construction on Plant Vogtle Units 3 and 4 continued under the Vogtle 3 and 4 Agreement, which was a substantially fixed price agreement. In March 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

In connection with the EPC Contractor's bankruptcy filing, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into the Interim Assessment Agreement with the EPC Contractor to allow construction to continue. The Interim Assessment Agreement expired in July 2017 when the Vogtle Services Agreement became effective. In August 2017, following completion of comprehensive cost to complete and cancellation cost assessments, Georgia Power filed its seventeenth VCM report with the Georgia PSC, 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. In December 2017, the Georgia PSC approved ~~Nicor Gas' nine-year~~Georgia Power's recommendation to continue construction.

Georgia Power expects Plant Vogtle Units 3 and 4 to be placed in service by November 2021 and November 2022, respectively. Georgia Power's capital cost forecast for its 45.7% proportionate share of Plant Vogtle Units 3 and 4 is $8.8 billion ($7.3 billion after reflecting $1.7 billion received from Toshiba in 2017 under the Guarantee Settlement Agreement and $188 million in Customer Refunds recognized as a regulatory ~~infrastructure program, Investing~~liability in ~~Illinois. Under this program, Nicor Gas placed~~2017). Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was $3.6 billion at March 31, 2018, which is net of the Guarantee Settlement Agreement payments less the 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 $1.6 billion had been incurred through March 31, 2018.

Vogtle 3 and 4 Contracts

Effective in July 2017, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the EPC Contractor entered into ~~service $75 million~~the Vogtle Services Agreement, whereby Westinghouse will provide facility design and engineering services, procurement and technical support, and staff augmentation on a time and materials cost basis. The Vogtle Services Agreement will continue until the start-up and testing of ~~qualifying assets during~~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 ~~first six months of 2017.~~Vogtle Owners upon 30 days' written notice.

~~Atlanta Gas Light~~

~~Atlanta Gas Light's STRIDE program, which started in 2009, consists of three individual programs that update~~In October 2017, Georgia Power, acting for itself and ~~expand gas distribution systems and liquefied natural gas facilities~~ as ~~well~~agent for the other Vogtle Owners, entered into a construction completion agreement with Bechtel, whereby Bechtel will serve as ~~improve system reliability to meet operational flexibility and customer growth. Through~~ the ~~programs under STRIDE, Atlanta Gas Light invested $94 million during~~primary contractor for the ~~first six months of 2017.~~

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

remaining construction activities for Plant Vogtle Units 3 and 4 (Bechtel Agreement). The Bechtel Agreement is 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. Pursuant to the Loan Guarantee Agreement between Georgia Power and the DOE, Georgia Power is required to obtain the DOE's approval of the Bechtel Agreement prior to obtaining any further advances under the Loan Guarantee Agreement.

In ~~August 2016, Atlanta Gas Light filed~~November 2017, the Vogtle Owners entered into an amendment to their joint ownership agreements for Plant Vogtle Units 3 and 4 (as amended, Vogtle Joint Ownership Agreements) to provide for, among other conditions, additional Vogtle Owner approval requirements. Pursuant to the Vogtle Joint Ownership Agreements, 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 (i) the bankruptcy of Toshiba; (ii) termination or rejection in bankruptcy of certain agreements, including the Vogtle Services Agreement or the Bechtel Agreement; (iii) the Georgia PSC or Georgia Power 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 because such costs are deemed unreasonable or imprudent; or (iv) an increase in the construction budget contained in the seventeenth VCM report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. 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 ~~petition~~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. 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.

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. As of March 31, 2018, Georgia Power had recovered approximately $1.6 billion of financing costs. On March 20, 2018, the Georgia PSC approved a decrease to the NCCR tariff of approximately $50 million, effective April 1, 2018.

Georgia Power is required to file semi-annual VCM reports with the Georgia PSC ~~for approval of a four-year extension of its Integrated System Reinforcement Program (i-SRP) seeking approval to invest an additional $177 million to improve~~by February 28 and ~~upgrade its core gas distribution system~~August 31 each year. In 2013, in ~~years 2017 through 2020.~~

The recovery of and return on current and future capital investments under the STRIDE program will be included in the annual base rate revenue adjustment under GRAM rather than a separate surcharge. The proposed capital investments associatedconnection with the ~~extension~~eighth VCM report, the Georgia PSC approved a stipulation between Georgia Power and the staff of ~~i-SRP were included~~the Georgia PSC to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate in accordance with the ~~2017 annual base rate revenue under GRAM that was approved~~2009 certification order until the completion of Plant Vogtle Unit 3, or earlier if deemed appropriate by the Georgia PSC and Georgia Power.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

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 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 $25 million in 2017 and are estimated to have negative earnings impacts of approximately $100 million in 2018 and an aggregate of $585 million from 2019 to 2022. In its January 11, 2018 order, the Georgia PSC stated if other certain conditions and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, both Georgia Power and the Georgia PSC reserve the right to reconsider the decision to continue construction.

On February 12, 2018, Georgia Interfaith Power & Light, Inc. and Partnership for Southern Equity, Inc. 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 final decision and denial of Georgia Watch's motion for reconsideration. Georgia Power believes the two appeals have no merit; however, an adverse outcome in either appeal could have a material impact on Southern Company's and Georgia Power's results of operations, financial condition, and liquidity.

The IRS has allocated PTCs to each of Plant Vogtle Units 3 and 4. The nominal value of Georgia Power's portion of the PTCs is approximately $500 million per unit.

The Georgia PSC has approved seventeen VCM reports covering the periods through June 30, 2017, including total construction capital costs incurred through that date of $4.4 billion. Georgia Power filed its eighteenth VCM report on February ~~21,~~28, 2018 requesting approval of $448 million of construction capital costs (excluding the $1.7 billion received from Toshiba under the Guarantee Settlement Agreement and the $188 million in Customer Refunds recognized as a regulatory liability) incurred from July 1, 2017 through December 31, 2017.

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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Cost and Schedule

Georgia Power's approximate proportionate share of the remaining estimated capital cost to complete Plant Vogtle Units 3 and 4 with in-service dates of November 2021 and November 2022, respectively, is as follows:



	(in billions)
Project capital cost forecast	$	7.3
Net investment as of March 31, 2018	(3.7		)
Remaining estimate to complete	$	3.6

Georgia Power estimates that its financing costs for construction of Plant Vogtle Units 3 and 4 will total approximately $3.1 billion, of which $1.6 billion had been incurred through March 31, 2018.

Subsequent to the EPC Contractor bankruptcy filing, a number of subcontractors to the EPC Contractor alleged non-payment by the EPC Contractor for amounts owed for work performed on Plant Vogtle Units 3 and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken actions to remove liens filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, lawsuits against the EPC Contractor and the Vogtle Owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and other EPC Contractor pre-petition accounts payable have been paid or accrued as of March 31, 2018.

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 Inspections, Tests, Analyses, and Acceptance Criteria 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.

DOE Financing

As of March 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. This conditional commitment expires on June 30, 2018, 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 ~~"Base Rate Cases" herein~~Note 6 to the financial statements of Southern Company and Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional ~~information.~~information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.

~~Elizabethtown Gas~~

~~Virginia Natural Gas~~(UNAUDITED)

~~In March 2016, the Virginia Commission approved an extension to the SAVE program, under which Virginia Natural Gas invested $14 million during the first six months of 2017.~~

~~Florida City Gas~~

The ~~Florida PSC approved Florida City Gas' Safety, Access, and Facility Enhancement program in 2015. Under the program, Florida City Gas invested $7 million during the first six months~~ultimate outcome of ~~2017.~~these matters cannot be determined at this time.

~~Integrated Coal Gasification Combined Cycle~~Kemper County Energy Facility

~~See~~For additional information on the Kemper County energy facility, see Note 3 to the financial statements of Southern Company and Mississippi Power under ~~"Integrated Coal Gasification Combined Cycle"~~"Kemper County Energy Facility" in Item 8 of the Form ~~10-K for information regarding Mississippi Power's construction of~~10-K.

As the ~~Kemper IGCC.~~

~~Kemper IGCC Overview~~

The Kemper IGCC was designed to utilize IGCC technology with an expected output capacity of 582 MWs and to be fueled by locally mined lignite (an abundant, lower heating value coal) from a mine owned by Mississippi Power and situated adjacent to the Kemper IGCC. The mine, operated by North American Coal Corporation, started commercial operation in 2013. In connection with the Kemper IGCC, Mississippi Power constructed approximately 61 miles of CO₂ ~~pipeline infrastructure for the transport of captured CO~~₂ ~~for use in enhanced oil recovery.~~

~~Kemper IGCC Schedule and Cost Estimate~~

In 2012, the Mississippi PSC issued the 2012 MPSC CPCN Order, a detailed order confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC. The certificated cost estimate of the Kemper IGCC included in the 2012 MPSC CPCN Order was $2.4 billion, net of $245 million of grants awarded to the Kemper IGCC project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO₂ pipeline facilities, and AFUDC related to the Kemper IGCC. The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, with recovery of prudently-incurred costs subject to approval by the Mississippi PSC. The Kemper IGCC was originally projected to be placed in service in May 2014. Mississippi Power placed the combined cycle and the associated common facilities portion of the Kemper IGCC in service in August 2014. The remainder of the plant includes the gasifiers and the gas clean-up facilities. The initial production of syngas began on July 14, 2016 for gasifier "B" and on September 13, 2016 for gasifier "A." Mississippi Power achieved integrated operation of both gasifiers on January 29, 2017, including the production of electricity from syngas in both combustion turbines. During testing, the plant produced and captured CO₂, and produced sulfuric acid and ammonia, each of acceptable quality under the related off-take agreements. However, Mississippi Power experienced numerous challenges during the extended start-up process to achieve integrated operation of the

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

gasifiers on a sustained basis. Most recently, in May 2017, after achieving these milestones, Mississippi Power determined that a critical system component, the syngas coolers, would need replacement sooner than originally planned, which would require significant lead time and significant cost. In addition, the long-term natural gas price forecast has decreased significantly and the estimated cost of operating and maintaining the facility during the first five full years of operations increased significantly since certification.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Mississippi Power's Kemper IGCC 2010 project estimate, cost estimate at the time of project suspension (which includes the impacts of the Mississippi Supreme Court's (Court) decision discussed herein under "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order"), and actual costs incurred as of June 30, 2017, all of which include 100% of the costs for the Kemper IGCC, are as follows:

Cost Category
2010 Project Estimate^(a)

Cost Estimate
at
Suspension^(b)

June 30, 2017
Actual Costs
(in billions)
Plant Subject to Cost Cap^(c)(e)
$ 2.40
$ 5.95
$ 5.68
Lignite Mine and Equipment 0.21
0.23
0.23
CO₂ Pipeline Facilities
0.14
0.11
0.11
AFUDC^(d)
0.17
0.85
0.85
Combined Cycle and Related Assets Placed in
Service – Incremental^(e)
—
0.05
0.05
General Exceptions 0.05
0.10
0.08
Deferred Costs^(e)
—
0.23
0.23
Additional DOE Grants^(f)
—
(0.14 ) (0.14 )
Total Kemper IGCC $ 2.97
$ 7.38
$ 7.09


~~(a)~~	~~Represents the certificated cost estimate adjusted to include the certificated estimate for the CO~~₂ ~~pipeline facilities approved in 2011 by the Mississippi PSC, as well as the lignite mine and equipment, AFUDC, and general exceptions.~~


~~(b)~~	~~Represents actual costs through June 30, 2017 and projected costs at the time of project suspension, including estimated post-in-service costs which were expected to be subject to the cost cap.~~

~~(c)~~

~~The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, net of the Initial DOE Grants and excluding the cost of the lignite mine and equipment, the cost of the CO~~₂ pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). The Cost Estimate at Suspension and the Actual Costs include non-incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014 that are subject to the $2.88 billion cost cap and exclude post-in-service costs for the lignite mine. See "~~Rate Recovery of Kemper IGCC Costs~~ – ~~2013 MPSC Rate Order" herein for additional information.~~

~~(d)~~

~~(e)~~


~~(f)~~	~~On April 8, 2016, Mississippi Power received approximately $137 million in additional grants from the DOE for the Kemper IGCC (Additional DOE Grants).~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

While the ultimate disposition of the gasification portions of the Kemper IGCC remains subject to the Mississippi PSC's jurisdiction, including the potential resolution of the matters addressed in the Kemper Settlement Order, given the Mississippi PSC's stated intent regarding no further rate increasemining permit holder for the Kemper County energy facility, cost recovery of the gasification portions is no longer probable; therefore, Mississippi Power recorded an additional charge to income in June 2017 of $2.8 billion ($2.0 billion after tax), which includes estimated costs associated with the gasification portions of the plant and lignite mine. In the event the gasification portions of the project are ultimately canceled, additional pre-tax costs currently estimated at approximately $100 million to $200 million are expected to be incurred.

~~Rate Recovery of Kemper IGCC Costs~~

Given the variety of potential scenarios and the uncertainty of the outcome of future regulatory proceedings with the Mississippi PSC (and any subsequent related legal challenges), the ultimate outcome of the rate recovery matters discussed herein, including the resolution of legal challenges, cannot now be determined but could result in further material charges that could have a material impact on Southern Company's and Mississippi Power's results of operations, financial condition, and liquidity.

~~Kemper IGCC Settlement Docket~~

On June 21, 2017, the Mississippi PSC stated its intent to issue an order (which occurred on July 6, 2017) directing Mississippi Power to pursue a settlement under which the Kemper County energy facility would be operated as a natural gas plant, rather than an IGCC plant, and address all issues associated with the Kemper IGCC. The Kemper Settlement Order established a new docket for the purposes of pursuing a global settlement of costs of the Kemper IGCC (Kemper IGCC Settlement Docket). The Mississippi PSC requested any such proposed settlement agreement reflect: (i) at a minimum, no rate increase to Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifier and related assets; and (iii) modification or amendment of the CPCN for the Kemper IGCC to allow only for ownership and operation of a natural gas facility. The Kemper Settlement Order provides that any related settlement agreement be filed within 45 days from the effective date of the Kemper Settlement Order. If a settlement agreement is filed, a hearing will be set 45 days from the date of the settlement's filing, and the appropriate scheduling order will be established.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

As of June 30, 2017, Mississippi Power has recorded a total of approximately $1.3 billion in costs associated with the combined cycle portion of the Kemper IGCC including transmission and related regulatory assets, of which $0.8 billion is included in retail and wholesale rates. The $0.5 billion not included in current rates includes costs in excess of the original 2010 estimate for the combined cycle portion of the facility, as well as the 15% that was previously contracted to SMEPA. Mississippi Power has calculated the revenue requirements resulting from these remaining costs, using reasonable assumptions for amortization periods, and expects them to be recovered through rates consistent with the Mississippi PSC's requested settlement conditions. The ultimate outcome will be determined by the Mississippi PSC in the Kemper IGCC Settlement Docket proceedings.

~~Prudence~~

~~Economic Viability Analysis~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~and, to a lesser extent, the increase in the estimated Kemper IGCC operating costs, negatively impact the updated project economic viability analysis.~~

~~Mississippi Power expects the Mississippi PSC to address this matter in connection with the Kemper IGCC Settlement Docket.~~

~~2015 Rate Case~~

On August 13, 2015, the Mississippi PSC approved Mississippi Power's request for interim rates, which presented an alternative rate proposal (In-Service Asset Proposal) designed to recover Mississippi Power's costs associated with the Kemper IGCC assets that are commercially operational and currently providing service to customers (the transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs. The interim rates were designed to collect approximately $159 million annually and became effective in September 2015, subject to refund and certain other conditions.

On December 3, 2015, the Mississippi PSC issued the In-Service Asset Rate Order adopting in full a stipulation (2015 Stipulation) entered into between Mississippi Power and the MPUS regarding the In-Service Asset Proposal. The In-Service Asset Rate Order provided for retail rate recovery of an annual revenue requirement of approximately $126 million, based on Mississippi Power's actual average capital structure, with a maximum common equity percentage of 49.733%, a 9.225% return on common equity, and actual embedded interest costs. The In-Service Asset Rate Order also included a prudence finding of all costs in the stipulated revenue requirement calculation for the in-service assets. The stipulated revenue requirement excluded the costs of the Kemper IGCC related to the 15% undivided interest that was previously projected to be purchased by SMEPA but reserved Mississippi Power's right to seek recovery in a future proceeding. See "~~Termination of Proposed Sale of Undivided Interest~~" herein for additional information. With implementation of the new rates on December 17, 2015, the interim rates were terminated and, in March 2016, Mississippi Power completed customer refunds of approximately $11 million for the difference between the interim rates collected and the permanent rates.

~~2013 MPSC Rate Order~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Agreement). Under the 2013 Settlement Agreement, Mississippi Power agreed to limit the portion of prudently-incurred Kemper IGCC costs to be included in retail rate base to the $2.4 billion certificated cost estimate, plus the Cost Cap Exceptions, but excluding AFUDC, and any other costs permitted or determined to be excluded from the $2.88 billion cost cap by the Mississippi PSC. In March 2013, the Mississippi PSC issued a rate order approving retail rate increases of 15% effective March 19, 2013 and 3% effective January 1, 2014, which collectively were designed to collect $156 million annually beginning in 2014 (2013 MPSC Rate Order) to be used to mitigate customer rate impacts after the Kemper IGCC was placed in service, based on a mirror CWIP methodology (Mirror CWIP rate).

~~Mississippi Power expects the Mississippi PSC to address this matter in connection with the Kemper IGCC Settlement Docket.~~

~~Lignite Mine and CO~~₂ ~~Pipeline Facilities~~

~~In 2010, Mississippi Power executed a 40-year management fee contract with~~ Liberty Fuels Company, LLC (Liberty Fuels), a wholly-owned subsidiary of The North American Coal Corporation, which developed, constructed, and is responsible for the mining operations through the end of the mine reclamation. As the mining permit holder, Liberty Fuels has a legal obligation to perform mine reclamation, and Mississippi Power has a contractual obligation to fund all reclamation activities. ~~In addition to~~Mine reclamation began in the ~~obligation to fund the reclamation activities, Mississippi Power provides working capital support to Liberty Fuels through cash advances for capital purchases, payroll, and other operating expenses.~~first quarter 2018. See Note 1 to the financial statements of Southern Company and Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and of Mississippi Power under "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.

During the first quarter 2018, Mississippi Power recorded charges to income of $44 million ($33 million after tax), primarily resulting from the abandonment and related closure activities for the mine and gasifier-related assets at the Kemper County energy facility. Additional closure costs for the mine and gasifier-related assets, including ash disposal, currently estimated to cost up to $50 million pre-tax (excluding salvage), are expected to be incurred during the remainder of 2018 and 2019. In addition, ~~Mississippi Power constructed the CO~~₂ ~~pipeline~~period costs, including, but not limited to, costs for compliance and safety, ARO accretion, and property taxes for the ~~planned transport~~mine and gasifier-related assets, are estimated at $4 million for the remainder of ~~captured CO~~₂ ~~for use~~2018, $4 million in ~~enhanced oil recovery. Mississippi Power entered into agreements with Denbury Onshore (Denbury)~~2019, and ~~Treetop Midstream Services, LLC (Treetop), pursuant to which Denbury would purchase 70% of the CO~~₂ ~~captured from the Kemper IGCC and Treetop would purchase 30% of the CO~~₂ captured from the Kemper IGCC. On June 3, 2016, Mississippi Power cancelled its contract with Treetop and amended its contract with Denbury to reflect, among other things, Denbury's agreement to purchase 100% of the CO₂ ~~captured from the Kemper IGCC and an initial contract term of 16 years. Denbury has the right to terminate the contract at any time because Mississippi Power did not place the Kemper IGCC~~$1 million annually beginning in ~~service by July 1, 2017.~~

2020. The ultimate outcome of ~~these matters~~this matter cannot be determined at this time.

~~Termination~~

Other Matters

Investments in Leveraged Leases

See Note 1 to the financial statements of ~~Proposed Sale~~Southern Company under "Leveraged Leases" in Item 8 of ~~Undivided Interest~~the Form 10-K for additional information regarding a Southern Company Holdings Inc. (Southern Holdings) subsidiary's leveraged lease agreements and concerns about the financial and operational performance of one of the lessees and the associated generation assets.

~~In 2010 and as amended in 2012, Mississippi Power and SMEPA entered into an agreement whereby SMEPA agreed~~The ability of the lessees to ~~purchase~~make required payments to the Southern Holdings subsidiary is dependent on the operational performance of the assets. As a ~~15% undivided interest~~result of operational improvements in the ~~Kemper IGCC (15% Undivided Interest). On May 20, 2015, SMEPA notified Mississippi Power of its termination~~first quarter 2018, the June 2018 lease payment is currently expected to be paid in full. However, operational issues and resulting cash liquidity challenges persist and significant concerns continue regarding the lessee's ability to make the remaining semi-annual lease payments, including the lease payment due in December 2018. These operational challenges may also impact the expected residual value of the ~~agreement. Mississippi Power previously received~~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 would 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 had a ~~total~~balance of ~~$275~~approximately $86 million as of ~~deposits from SMEPA that were required to be returned to SMEPA with interest. On June 3, 2015,~~March 31, 2018. Southern Company ~~pursuant~~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 as of March 31, 2018. Southern Company will continue to ~~its guarantee obligation, returned approximately $301 million~~monitor the operational performance of the underlying assets and evaluate the ability of the lessee to ~~SMEPA.~~continue to make the required lease payments. The ultimate outcome of this matter cannot be determined at this time.

Natural Gas Storage

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 March 31, 2018, the

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~Subsequently, Mississippi Power issued~~facility's property, plant, and equipment had a ~~promissory note~~net book value of $111 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 ~~the aggregate principal amount of approximately $301 million to Southern Company,~~service, which ~~was repaid in June 2017.~~

~~Litigation~~

The cavern continues to maintain its pressures and overall structural integrity. Southern Company ~~as a defendant. The individual plaintiff alleges that Mississippi Power~~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 ~~violated~~Gas' 2017 long-lived asset impairment analysis, which determined there was no impairment. Any future changes in results of monitoring activities, rates at which expiring capacity contracts are re-contracted, timing of placing the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedulecavern back in service, or Louisiana DNR requirements could trigger impairment. Further, early retirement of the ~~Kemper IGCC and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company.~~cavern could trigger impairment of other long-lived assets associated with the natural gas storage facility. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper IGCC; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper IGCC in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper IGCC costs from being charged to customers through electric rates. On June 23, 2017, the Circuit Court ruled in favorultimate outcome of ~~motions by Southern Company and Mississippi Power and dismissed the case. On July 7, 2017, the plaintiffs filed notice to appeal to the Court.~~

~~Southern Company and Mississippi Power believe these legal challenges have no merit; however, an adverse outcome in these proceedings~~this matter cannot be determined at this time, but could have a significant impact on Southern Company's financial statements and a material impact on Southern ~~Company's~~Company Gas' financial statements.


(C)	REVENUE FROM CONTRACTS WITH CUSTOMERS

The registrants generate revenues from a variety of sources, some of which are excluded from the scope of ASC 606, such as leases, derivatives, and ~~Mississippi Power's results~~certain cost recovery mechanisms. See Note (A) under "Recently Adopted Accounting Standards – Revenue" for additional information on the adoption of ~~operations, financial condition,~~ASC 606 for revenue from contracts with customers.

The majority of the revenues of the traditional electric operating companies and ~~liquidity.~~ Southern Company Gas are generated from contracts with retail electric and ~~Mississippi Power will vigorously defend themselves in these matters,~~natural gas distribution customers. Revenues from this integrated service to deliver electricity or gas when and ~~the ultimate outcome of these matters cannot be determined at this time.~~

~~Baseload Act~~

~~In 2008, the Baseload Act was signed~~if called upon by the ~~Governor~~customer is recognized as a single performance obligation satisfied over time and is recognized at a tariff rate as electricity or gas is delivered to the customer during the month. The traditional electric operating companies and Southern Company Gas exclude taxes imposed on the customer and collected on behalf of ~~Mississippi.~~ governmental agencies to be remitted to these agencies from the transaction price in determining the revenue related to contracts with a customer.

The ~~Baseload Act authorizes, but does not require,~~traditional electric operating companies and Southern Power also have contracts with multiple performance obligations, such as capacity and energy in a wholesale PPA, where the ~~Mississippi PSC~~contract's total transaction price is allocated to ~~adopt~~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 registrants recognize revenue as the performance obligations are satisfied over time as electricity or natural gas is delivered to the customer or as generation capacity is available to the customer. At Southern Company Gas, the performance obligations related to wholesale gas services are satisfied, and revenue is recognized, at a ~~cost recovery mechanism~~point in time when natural gas is delivered to the customer.

The registrants generally have a right to consideration in an amount that ~~includes in retail base rates, prior~~corresponds directly with the value to ~~and during construction, all or a portion~~the customer of the ~~prudently-incurred pre-construction~~entity's performance completed to date and ~~construction costs incurred by~~may recognize revenue in the amount to which the entity has a ~~utility~~right to invoice and has elected to recognize revenue for its sales of electricity, capacity, and natural gas using the invoice practical expedient. In addition, payment for goods and services rendered is typically due in ~~constructing a base load electric generating plant. Prior to~~ the ~~passage~~subsequent month following satisfaction of the Baseload Act, such costs would traditionally be recovered only after the plant was placed in service. The Baseload Act also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the Baseload Act authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant.

~~Income Tax Matters~~

See Note 3 to the financial statements of Southern Company and Mississippi Power under "Integrated Coal Gasification Combined Cycle – Bonus Depreciation," " – Investment Tax Credits," and " – Section 174 Research and Experimental Deduction" in Item 8 of the Form 10-K and Note (G) under "~~Section 174 Research and~~registrants' performance obligation.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~Experimental Deduction~~"The following tables disaggregate revenue sources for ~~additional information on bonus depreciation, investment tax credits,~~the three months ended March 31, 2018:



	For the Three Months Ended March 31, 2018
	(in millions)
Southern Company
Operating revenues
Retail electric revenues^(a)
Residential	$	1,539
Commercial	1,243
Industrial	756
Other	30
Natural gas distribution revenues	1,224
Alternative revenue programs^(b)	(24		)
Total retail electric and gas distribution revenues	$	4,768
Wholesale energy revenues^(c)(d)	468
Wholesale capacity revenues^(d)	151
Other natural gas revenues^(e)	407
Other revenues^(f)	578
Total operating revenues	$	6,372


(a)	Retail electric revenues include $18 million of leases and a net increase of $117 million from certain cost recovery mechanisms that are not accounted for as revenue under ASC 606. See Note 3 to the financial statements of Southern Company under "Regulatory Matters" in Item 8 of the Form 10-K for additional information on cost recovery mechanisms.


(b)	See Note 1 to the financial statements of Southern Company under "Revenues" in Item 8 of the Form 10-K for additional information on alternative revenue programs at the natural gas distribution utilities. Alternative revenue program revenues are presented net of any previously recognized program amounts billed to customers during the same accounting period.


(c)	Wholesale energy revenues include $93 million of revenues accounted for as derivatives, primarily related to revenues from short-term sales related to physical energy sales from uncovered capacity in the wholesale electricity market. See Note (I) for additional information on energy-related derivative contracts.


(d)	Wholesale energy and wholesale capacity revenues include $69 million and $30 million, respectively, of PPA contracts accounted for as leases.

(e)

Other natural gas revenues related to Southern Company Gas' energy and risk management activities are presented net of the related costs of those activities and include gross third-party revenues of $1.9 billion, of which $1.1 billion relates to contracts that are accounted for as derivatives. See Note (L) under "Southern Company Gas" for additional information on the components of wholesale gas services operating revenues.


(f)	Other revenues include $90 million of revenues not accounted for under ASC 606.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	For the Three Months Ended March 31, 2018
	Alabama Power		Georgia Power		Gulf Power		Mississippi Power
	(in millions)
Operating revenues
Retail revenues^(a)(b)
Residential	$	570	$	744	$	165	$	60
Commercial	371		717		92		62
Industrial	338		316		32		70
Other	6		21		1		2
Total retail electric revenues	$	1,285	$	1,798	$	290	$	194
Wholesale energy revenues^(c)	101		40		35		93
Wholesale capacity revenues	24		14		6		4
Other revenues^(b)(d)	63		109		17		11
Total operating revenues	$	1,473	$	1,961	$	348	$	302

(a)

Retail revenues at Alabama Power, Georgia Power, Gulf Power, and Mississippi Power include a net increase or (net reduction) of $47 million, $10 million, $(16) million, and $76 million, respectively, related to certain cost recovery mechanisms that are not accounted for as revenue under ASC 606. See Note 3 to the financial statements of Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information on cost recovery mechanisms.


(b)	Retail revenues and other revenues at Georgia Power include $18 million and $33 million, respectively, of revenues accounted for as leases.


(c)	Wholesale energy revenues at Alabama Power, Georgia Power, Gulf Power, and Mississippi Power include $5 million, $7 million, $1 million, and $1 million, respectively, accounted for as derivatives primarily related to physical energy sales in the forward and spot markets. See Note (I) for additional information on energy-related derivative contracts.


(d)	Other revenues at Alabama Power, Georgia Power, and Gulf Power include $25 million, $26 million, and $2 million, respectively, of revenues not accounted for under ASC 606.



	For the Three Months Ended March 31, 2018
	(in millions)
Southern Power
PPA capacity revenues^(a)	$	138
PPA energy revenues^(a)	254
Non-PPA revenues^(b)	115
Other revenues	2
Total operating revenues	$	509


(a)	PPA capacity revenues and PPA energy revenues include $47 million and $76 million, respectively, related to PPAs accounted for as leases. See Note 1 to the financial statements of Southern Power under "Revenues" in Item 8 of the Form 10-K for additional information on capacity revenues accounted for as leases.


(b)	Non-PPA revenues include $79 million of revenues from short-term sales related to physical energy sales from uncovered capacity in the wholesale electricity market. See Note 1 to the financial statements of Southern Power under "Revenues" in Item 8 of the Form 10-K and Note (I) for additional information on energy-related derivative contracts.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



	For the Three Months Ended March 31, 2018
	(in millions)
Southern Company Gas
Operating revenues
Natural gas distribution revenues
Residential	$	660
Commercial	192
Transportation	277
Industrial	17
Other	78
Alternative revenue programs^(a)	(24		)
Total natural gas distribution revenues	$	1,200
Gas marketing services^(b)	271
Wholesale gas services^(c)	146
Gas midstream operations	22
Total operating revenues	$	1,639


(a)	See Note 1 to the financial statements of Southern Company Gas under "Revenues" in Item 8 of the Form 10-K for additional information on alternative revenue programs at the natural gas distribution utilities. Alternative revenue program revenues are presented net of any previously recognized program amounts billed to customers during the same accounting period.


(b)	Gas marketing services includes $3 million and $1 million of revenues accounted for as derivatives and leases, respectively. See Note (I) for additional information on energy-related derivative contracts.

(c)

Wholesale gas services revenues are presented net of the related costs associated with its energy trading and risk management activities. Operating revenues, as presented, include gross third-party revenues of $1.9 billion, of which $1.1 billion relates to contracts that are accounted for as derivatives. See Note (L) under "Southern Company Gas" for additional information on the components of wholesale gas services operating revenues and Note (I) for additional information on energy-related derivative contracts.

Contract Balances

The following table reflects the closing balances of receivables, contract assets, and contract liabilities related to revenues from contracts with customers as of March 31, 2018:



	Receivables		Contract Assets		Contract Liabilities
	(in millions)
Southern Company	$	2,607	$	60	$	52
Alabama Power	507		—		11
Georgia Power	600		29		5
Gulf Power	129		—		1
Mississippi Power	64		—		—
Southern Power	78		—		4
Southern Company Gas	948		—		15

As of March 31, 2018, Alabama Power had contract liabilities for outstanding performance obligations primarily related to extended service agreements. Georgia Power had contract assets primarily related to fixed retail customer bill programs where the payment is contingent upon Georgia Power's continued performance and the ~~Section 174 research~~customer's continued participation in the program over the one-year contract term, as well as unregulated service agreements where payment is contingent on project completion. Southern Company Gas' contract liability relates to collections from customers received in advance of the satisfaction of related performance obligations, primarily associated with maintenance and ~~experimental deduction.~~warranty contracts for residential and commercial appliances. Southern Company's unregulated

~~Bonus Depreciation~~

~~Approximately $370~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

distributed generation business had $31 million and $20 million of ~~positive cash flows is expected~~contract assets and contract liabilities, respectively, remaining for outstanding performance obligations.

Remaining Performance Obligations

The traditional electric operating companies and Southern Power have long-term contracts with customers in which revenues are recognized as performance obligations are satisfied over the contract term. These contracts primarily relate to ~~result from bonus depreciation~~PPAs whereby the traditional electric operating companies and Southern Power provide electricity and generation capacity to a customer. The revenue recognized for the ~~2017 tax year, but may not all be realized in 2017 due to net operating loss projections~~delivery of electricity is variable; however, certain PPAs include a fixed payment for fixed generation capacity over the ~~2017 tax year, and is dependent upon placing the remainder~~term of the Kemper IGCC in service by December 31, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount previously estimated as bonus depreciation would be claimed as a deduction under IRC Section 165. As of June 30, 2017, $82 millioncontract. Southern Company's unregulated distributed generation business also has ~~been received through quarterly income tax refunds for bonus depreciation~~partially satisfied performance obligations related to ~~the Kemper IGCC, which may be subject to repayment. See Note (G) for additional information. The ultimate outcome of this matter cannot be determined at this time.~~

~~Section 174 Research and Experimental Deduction~~

~~Southern Company, on behalf of Mississippi Power, has reflected deductions for research and experimental (R&E) expenditures~~certain fixed price contracts. Revenues from contracts with customers related to the Kemper IGCC in its federal income tax calculations since 2013 and filed amended federal income tax returns for 2008 through 2013 to also include such deductions. In December 2016, Southern Company and the IRS reached a proposed settlement, subject to approval of the U.S. Congress Joint Committee on Taxation, resolving a methodology for these deductions. Due to the uncertainty related to this tax position, Southern Company and Mississippi Power had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million as of June 30, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount not allowed under IRC Section 174 would be claimed as a deduction under IRC Section 165, and would result in a reversal of the related unrecognized tax benefits, excluding interest. See Note (G) for additional information. This matter isperformance obligations remaining at March 31, 2018 are expected to be ~~resolved in the next 12 months; however, the ultimate outcome of this matter cannot be determined at this time.~~recognized as follows:



	2018		2019		2020		2021		2022		2023 and Thereafter
	(in millions)
Southern Company	$	458	$	403	$	369	$	358	$	345	$	2,161
Alabama Power	16		21		22		26		22		161
Georgia Power	31		41		38		40		30		113
Gulf Power	16		22		—		—		—		—
Mississippi Power	2		3		3		1		—		—
Southern Power	384		350		330		313		312		2,010

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


~~(C)~~(D)	FAIR VALUE MEASUREMENTS

As of ~~June 30, 2017,~~March 31, 2018, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:


	Fair Value Measurements Using:										Fair Value Measurements Using:
As of June 30, 2017:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
As of March 31, 2018:											Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
	(in millions)										(in millions)
Southern Company
Assets:
Energy-related derivatives^(a)(b)	$	193	$	179	$	—	$	—	$	372	$	360	$	172	$	—	$	—	$	532
Interest rate derivatives	—		11		—		—		11
Foreign currency derivatives	—		56		—		—		56		—		182		—		—		182
Nuclear decommissioning trusts^(c)	728		966		—		25		1,719		776		1,019		—		32		1,827
Cash equivalents	834		—		—		—		834		1,664		—		—		—		1,664
Other investments	9		—		1		—		10		9		—		1		—		10
Total	$	1,764	$	1,212	$	1	$	25	$	3,002	$	2,809	$	1,373	$	1	$	32	$	4,215
Liabilities:
Energy-related derivatives^(a)(b)	$	205	$	161	$	—	$	—	$	366	$	506	$	136	$	—	$	—	$	642
Interest rate derivatives	—		23		—		—		23		—		61		—		—		61
Foreign currency derivatives	—		23		—		—		23		—		22		—		—		22
Contingent consideration	—		—		20		—		20		—		—		22		—		22
Total	$	205	$	207	$	20	$	—	$	432	$	506	$	219	$	22	$	—	$	747

Alabama Power
Assets:
Energy-related derivatives	$	—	$	9	$	—	$	—	$	9	$	—	$	3	$	—	$	—	$	3
Nuclear decommissioning trusts:^(d)
Domestic equity	411		79		—		—		490		437		83		—		—		520
Foreign equity	56		54		—		—		110		63		58		—		—		121
U.S. Treasury and government agency securities	—		29		—		—		29		—		19		—		—		19
Corporate bonds	22		145		—		—		167		21		162		—		—		183
Mortgage and asset backed securities	—		18		—		—		18		—		17		—		—		17
Private Equity	—		—		—		25		25		—		—		—		32		32
Other	—		6		—		—		6		6		—		—		—		6
Cash equivalents	493		—		—		—		493		459		—		—		—		459
Total	$	982	$	340	$	—	$	25	$	1,347	$	986	$	342	$	—	$	32	$	1,360
Liabilities:
Energy-related derivatives	$	—	$	11	$	—	$	—	$	11	$	—	$	8	$	—	$	—	$	8

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


	Fair Value Measurements Using:										Fair Value Measurements Using:
As of June 30, 2017:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
As of March 31, 2018:											Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
	(in millions)										(in millions)
Georgia Power
Assets:
Energy-related derivatives	$	—	$	15	$	—	$	—	$	15	$	—	$	5	$	—	$	—	$	5
Interest rate derivatives	—		1		—		—		1
Nuclear decommissioning trusts:^{(d) (e)}
Domestic equity	225		1		—		—		226		238		1		—		—		239
Foreign equity	—		147		—		—		147		—		141		—		—		141
U.S. Treasury and government agency securities	—		198		—		—		198		—		241		—		—		241
Municipal bonds	—		72		—		—		72		—		76		—		—		76
Corporate bonds	—		169		—		—		169		—		168		—		—		168
Mortgage and asset backed securities	—		41		—		—		41		—		40		—		—		40
Other	14		7		—		—		21		11		14		—		—		25
Cash equivalents	50		—		—		—		50		1,055		—		—		—		1,055
Total	$	289	$	651	$	—	$	—	$	940	$	1,304	$	686	$	—	$	—	$	1,990
Liabilities:
Energy-related derivatives	$	—	$	14	$	—	$	—	$	14	$	—	$	18	$	—	$	—	$	18
Interest rate derivatives	—		3		—		—		3		—		8		—		—		8
Total	$	—	$	17	$	—	$	—	$	17	$	—	$	26	$	—	$	—	$	26

Gulf Power
Assets:
Cash equivalents											$	27	$	—	$	—	$	—	$	27
Liabilities:
Energy-related derivatives											$	—	$	17	$	—	$	—	$	17

Mississippi Power
Assets:
Energy-related derivatives	$	—	$	1	$	—	$	—	$	1	$	—	$	2	$	—	$	—	$	2
Cash equivalents	21		—		—		—		21		103		—		—		—		103
Total	$	21	$	1	$	—	$	—	$	22	$	103	$	2	$	—	$	—	$	105
Liabilities:
Energy-related derivatives	$	—	$	29	$	—	$	—	$	29	$	—	$	8	$	—	$	—	$	8

Mississippi Power
Assets:
Energy-related derivatives	$	—	$	2	$	—	$	—	$	2
Interest rate derivatives	—		3		—		—		3
Cash equivalents	100		—		—		—		100
Total	$	100	$	5	$	—	$	—	$	105
Liabilities:
Energy-related derivatives	$	—	$	10	$	—	$	—	$	10

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


	Fair Value Measurements Using:										Fair Value Measurements Using:
As of June 30, 2017:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
As of March 31, 2018:											Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Asset Value as a Practical Expedient (NAV)		Total
	(in millions)										(in millions)
Southern Power
Assets:
Energy-related derivatives	$	—	$	14	$	—	$	—	$	14	$	—	$	4	$	—	$	—	$	4
Foreign currency derivatives	—		56		—		—		56		—		182		—		—		182
Total	$	—	$	70	$	—	$	—	$	70	$	—	$	186	$	—	$	—	$	186
Liabilities:
Energy-related derivatives	$	—	$	9	$	—	$	—	$	9	$	—	$	3	$	—	$	—	$	3
Foreign currency derivatives	—		23		—		—		23		—		22		—		—		22
Contingent consideration	—		—		20		—		20		—		—		22		—		22
Total	$	—	$	32	$	20	$	—	$	52	$	—	$	25	$	22	$	—	$	47

Southern Company Gas
Assets:
Energy-related derivatives^(a)(b)	$	193	$	138	$	—	$	—	$	331	$	360	$	158	$	—	$	—	$	518
Liabilities:
Energy-related derivatives^(a)(b)	$	205	$	86	$	—	$	—	$	291	$	506	$	82	$	—	$	—	$	588


(a)	Excludes ~~$11~~$4 million associated with premiums and certain weather derivatives accounted for based on intrinsic value rather than fair value.


(b)	Excludes cash collateral of ~~$71~~$223 million.


(c)	For additional detail, see the nuclear decommissioning trusts sections for Alabama Power and Georgia Power in this table.


(d)	Excludes receivables related to investment income, pending investment sales, payables related to pending investment purchases, and currencies.


(e)	Includes the investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of ~~June 30, 2017,~~March 31, 2018, approximately ~~$38~~$76 million of the fair market value of Georgia Power's nuclear decommissioning trust funds' securities were on loan to creditors under the funds' managers' securities lending program.

Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. The fair value of the funds at Southern Company, including reinvested interest and dividends and excluding the funds' expenses, decreased by $11 million and increased by ~~$55~~$63 million ~~and $118 million, respectively,~~ for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and by $47 million and $67 million, respectively, for the three and six months ended June 30, 2016.~~respectively. Alabama Power recorded ~~an increase~~a decrease in fair value of ~~$28~~$5 million and ~~$62~~an increase of $34 million ~~respectively, for the three~~ ~~and~~ ~~six months ended June 30, 2017 and $29 million and $40 million, respectively,~~ for the three ~~and six~~ months ended ~~June 30, 2016~~March 31, 2018 and 2017, respectively, as a change in regulatory liabilities related to its AROs. Georgia Power recorded ~~increases~~a decrease in fair value of ~~$27~~$6 million and ~~$56~~an increase of $29 million ~~respectively,~~ for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and $18 million and $27 million,~~ respectively, ~~for the three and six months ended June 30, 2016~~ as a change in its regulatory asset related to its AROs.

Valuation Methodologies

The energy-related derivatives primarily consist of exchange-traded and over-the-counter financial products for natural gas and physical power products, including, from time to time, basis swaps. These are standard products used within the energy industry and are valued using the market approach. The inputs used are mainly from observable market sources, such as forward natural gas prices, power prices, implied volatility, and overnight index swap interest rates. Interest rate derivatives are also standard over-the-counter products that are valued using

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

observable market data and assumptions commonly used by market participants. The fair value of interest rate

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

derivatives reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future interest rates. Additional inputs to the net present value calculation may include the contract terms, counterparty credit risk, and occasionally, implied volatility of interest rate options. The fair value of cross-currency swaps reflects the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future foreign currency exchange rates. Additional inputs to the net present value calculation may include the contract terms, counterparty credit risk, and discount rates. The interest rate derivatives and cross-currency swaps are categorized as Level 2 under Fair Value Measurements as these inputs are based on observable data and valuations of similar instruments. See Note ~~(H)~~(I) for additional information on how these derivatives are used.

The NRC requires licensees of commissioned nuclear power reactors to establish a plan for providing reasonable assurance of funds for future decommissioning. For fair value measurements of the investments within the nuclear decommissioning trusts, external pricing vendors are designated for each asset class with each security specifically assigned a primary pricing source. For investments held within commingled funds, fair value is determined at the end of each business day through the net asset value, which is established by obtaining the underlying securities' individual prices from the primary pricing source. A market price secured from the primary source vendor is then evaluated by management in its valuation of the assets within the trusts. As a general approach, fixed income market pricing vendors gather market data (including indices and market research reports) and integrate relative credit information, observed market movements, and sector news into proprietary pricing models, pricing systems, and mathematical tools. Dealer quotes and other market information, including live trading levels and pricing analysts' judgments, are also obtained when available. See Note 1 to the financial statements of Southern Company, Alabama Power, and Georgia Power under "Nuclear Decommissioning" in Item 8 of the Form 10-K for additional information.

Southern Power has contingent payment obligations related to certain acquisitions whereby Southern Power is primarily obligated to make generation-based payments to the seller, ~~over a period ranging from 10 to 30 years, beginning~~which commenced at the commercial operation ~~date.~~date of the respective facility and continue through 2026. The obligation is categorized as Level 3 under Fair Value Measurements as the fair value is determined using significant unobservable inputs for the forecasted facility generation in MW-hours, as well as other inputs such as a fixed dollar amount per MW-hour, and a discount ~~rate, and is evaluated periodically.~~rate. The fair value of contingent consideration reflects the net present value of expected payments and any periodic change arising from forecasted generation is expected to be immaterial.

"Other investments" include investments that are not traded in the open market. The fair value of these investments has been determined based on market factors including comparable multiples and the expectations regarding cash flows and business plan executions.

As of ~~June 30, 2017,~~March 31, 2018, the fair value measurements of private equity investments held in the nuclear decommissioning ~~trust~~trusts that are calculated at net asset value per share (or its equivalent) as a practical expedient, as well as the nature and risks of those investments, were as follows:


As of June 30, 2017:	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
As of March 31, 2018:							Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
	(in millions)						(in millions)
Southern Company	$	25	$	22	Not Applicable	Not Applicable	$	32	$	19	Not Applicable	Not Applicable
Alabama Power	$	25	$	22	Not Applicable	Not Applicable	$	32	$	19	Not Applicable	Not Applicable

Private equity funds include a fund-of-funds that invests in high-quality private equity funds across several market sectors, funds that invest in real estate assets, and a fund that acquires companies to create resale value. Private equity funds do not have redemption rights. Distributions from these funds will be received as the underlying investments in the funds are liquidated. Liquidations are expected to occur at various times over the next 10 years.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

As of ~~June 30, 2017,~~March 31, 2018, other financial instruments for which the carrying amount did not equal fair value were as follows:


	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in millions)				(in millions)
Long-term debt, including securities due within one year:
Southern Company	$	46,631	$	48,228	$	47,479	$	48,836
Alabama Power	$	7,440	$	8,041	7,626		8,093
Georgia Power	$	10,888	$	11,585	11,402		11,851
Gulf Power	$	1,292	$	1,336	1,285		1,317
Mississippi Power	$	2,125	$	2,071	1,781		1,790
Southern Power	$	5,725	$	5,878	5,878		6,006
Southern Company Gas	$	5,699	$	6,031	6,036		6,276

The fair values are determined using Level 2 measurements and are based on quoted market prices for the same or similar issues or on the current rates available to Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas.


~~(D)~~(E)	STOCKHOLDERS' EQUITY

Earnings per Share

For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to awards outstanding under the stock option and performance share plans. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for information on the stock option and performance share plans. The effect of both stock options and performance share award units was determined using the treasury stock method. Shares used to compute diluted earnings per share were as follows:


	Three Months Ended June 30, 2017	Three Months Ended June 30, 2016	Six Months Ended June 30, 2017	Six Months Ended June 30, 2016	Three Months Ended March 31, 2018	Three Months Ended March 31, 2017
	(in millions)				(in millions)
As reported shares	998	934	996	925	1,011	993
Effect of options and performance share award units	7	6	7	6	5	7
Diluted shares	1,005	940	1,003	931	1,016	1,000

Stock options and performance share award units that were not included in the diluted earnings per share calculation because they were anti-dilutive were immaterial for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~2016.~~2017.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Changes in Stockholders' Equity

The following table presents year-to-date changes in stockholders' equity of Southern Company:


	Number of Common Shares			Common Stockholders' Equity			Preferred and Preference Stock of Subsidiaries						Total Stockholders' Equity			Number of Common Shares			Common Stockholders' Equity			Preferred and Preference Stock of Subsidiaries					Total Stockholders' Equity
	Issued	Treasury		Common Stockholders' Equity			Preferred and Preference Stock of Subsidiaries			Noncontrolling Interests^(*)			Total Stockholders' Equity			Issued	Treasury		Common Stockholders' Equity			Preferred and Preference Stock of Subsidiaries		Noncontrolling Interests^(*)			Total Stockholders' Equity
	(in thousands)			(in millions)												(in thousands)			(in millions)
Balance at December 31, 2016	991,213	(819	)	$	24,758		$	609		$	1,245		$	26,612
Consolidated net income (loss) attributable to Southern Company	—	—		(723		)	—			—			(723		)
Other comprehensive income (loss)	—	—		(11		)	—			—			(11		)
Balance at December 31, 2017																1,008,532	(929	)	$	24,167		$	—	$	1,361		$	25,528
Consolidated net income attributable to Southern Company																—	—		938			—		—			938
Other comprehensive income																—	—		30			—		—			30
Stock issued	9,129	—		417			—			—			417			4,055	—		113			—		—			113
Stock-based compensation	—	—		72			—			—			72			—	—		36			—		—			36
Cash dividends on common stock	—	—		(1,134		)	—			—			(1,134		)	—	—		(586		)	—		—			(586		)
Preference stock redemption	—	—		—			(150		)	—			(150		)
Contributions from noncontrolling interests	—	—		—						71			71			—	—		—			—		9			9
Distributions to noncontrolling interests	—	—		—			—			(40		)	(40		)	—	—		—			—		(13		)	(13		)
Net income attributable to noncontrolling interests	—	—		—			—			16			16
Reclassification from redeemable noncontrolling interests	—	—		—			—			114			114
Net income (loss) attributable to noncontrolling interests																—	—		—			—		(6		)	(6		)
Other	—	(49	)	(7		)	3			1			(3		)	—	(33	)	(22		)	—		(2		)	(24		)
Balance at June 30, 2017	1,000,342	(868	)	$	23,372		$	462		$	1,407		$	25,241
Balance at March 31, 2018																1,012,587	(962	)	$	24,676		$	—	$	1,349		$	26,025

Balance at December 31, 2015	915,073	(3,352	)	$	20,592		$	609		$	781		$	21,982
Balance at December 31, 2016																991,213	(819	)	$	24,758		$	609	$	1,245		$	26,612
Consolidated net income attributable to Southern Company	—	—		1,112			—			—			1,112			—	—		658			—		—			658
Other comprehensive income (loss)	—	—		(117		)	—			—			(117		)	—	—		(9		)	—		—			(9		)
Stock issued	27,297	2,599		1,383			—			—			1,383			4,240	—		186			—		—			186
Stock-based compensation	—	—		67			—			—			67			—	—		57			—		—			57
Cash dividends on common stock	—	—		(1,023		)	—			—			(1,023		)	—	—		(556		)	—		—			(556		)
Contributions from noncontrolling interests	—	—		—			—			169			169			—	—		—			—		71			71
Distributions to noncontrolling interests	—	—		—			—			(10		)	(10		)	—	—		—			—		(18		)	(18		)
Purchase of membership interests from noncontrolling interests	—	—		—			—			(129		)	(129		)
Net income attributable to noncontrolling interests	—	—		—			—			11			11
Net income (loss) attributable to noncontrolling interests																—	—		—			—		(4		)	(4		)
Other	—	(19	)	1			—			—			1			—	(35	)	—			—		(1		)	(1		)
Balance at June 30, 2016	942,370	(772	)	$	22,015		$	609		$	822		$	23,446
Balance at March 31, 2017																995,453	(854	)	$	25,094		$	609	$	1,293		$	26,996

(*)

~~Related~~Primarily related to Southern Power Company and excludes redeemable noncontrolling interests. In April 2017, approximately $114 million was reclassified from redeemable noncontrolling interests to noncontrolling interests, included in stockholder's equity, due to the expiration of SunPower Corp's option to require Southern Power to purchase its membership interests in one of the solar partnerships. See Note 10 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


~~(E)~~(F)	FINANCING

~~Going Concern~~

As of June 30, 2017, Mississippi Power's current liabilities exceeded current assets by approximately $930 million primarily due to approximately $935 million that will be required through June 30, 2018 to fund maturities of long-term debt and $17 million that will be required to fund maturities of short-term debt. In addition, Mississippi Power has $40 million of tax-exempt variable rate demand obligations that are supported by short-term credit facilities and $50 million of fixed rate pollution control revenue bonds that are required to be remarketed over the next 12 months. Mississippi Power intends to utilize operating cash flows, lines of credit, and bank term loans, as market conditions permit, as well as, under certain circumstances, commercial paper and/or equity contributions and/or loans from Southern Company to fund Mississippi Power's short-term capital needs. Specifically, Mississippi Power has been informed by Southern Company that in the event sufficient funds are not available from external sources, Southern Company intends to provide Mississippi Power with loans and/or equity contributions sufficient to fund the remaining indebtedness scheduled to mature and other cash needs over the next 12 months. Therefore, Mississippi Power's financial statement presentation contemplates continuation of Mississippi Power as a going concern as a result of Southern Company's anticipated ongoing financial support of Mississippi Power. For additional information, see Notes 1 and 6 to the financial statements of Mississippi Power under "Recently Issued Accounting Standards" and "Going Concern," respectively, in Item 8 of the Form 10-K and Note (B) under "~~Integrated Coal Gasification Combined Cycle~~."

~~DOE Loan Guarantee Borrowings~~

See Note 6 to the financial statements of Southern Company and Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information regarding Georgia Power's ~~loan guarantee agreement (Loan Guarantee Agreement) with the DOE and related multi-advance term loan facility (FFB Credit Facility) with the FFB.~~

~~On July 27, 2017, Georgia Power entered into an amendment to the~~ Loan Guarantee Agreement (LGA Amendment) in connection with the DOE's consent to Georgia Power's entry into the Services Agreement and the related intellectual property licenses (IP Licenses). The purpose of the amendment is to clarify the operation of the Loan Guarantee Agreement pending Georgia Power's completion of its comprehensive schedule, cost-to-complete, and cancellation cost assessments being prepared as a result of the bankruptcy of the EPC Contractor (Cost Assessments).Agreement.

Under the terms of the Loan Guarantee Agreement, upon termination of the Vogtle 3 and 4 Agreement, further advances are conditioned upon the DOE's approval of any agreements entered into in replacement of the Vogtle 3 and 4 Agreement. Under the terms of the LGA Amendment, Georgia Power will not request any advances unless and until such time as Georgia Power has (i) completed the Cost Assessments and made a determination to continue construction of Plant Vogtle Units 3 and 4, (ii) delivered to the DOE an updated project schedule, construction budget, and other information, (iii) entered into one or more agreements with a construction contractor or contractors that will be primarily responsible for construction of Plant Vogtle Units 3 and 4 and such agreements have been approved by the DOE (together with the Services Agreement and the IP Licenses, the Replacement EPC Arrangements), and (iv) entered into a further amendment to the Loan Guarantee Agreement with the DOE to reflect the Replacement EPC Arrangements.

Upon satisfaction of the conditions described above, advances may be requested under the FFB Credit Facility on a quarterly basis through 2020. The final maturity date for each advance under the FFB Credit Facility is February 20, 2044. Interest is payable quarterly and principal payments will begin on February 20, 2020. Borrowings under the FFB Credit Facility will bear interest at the applicable U.S. Treasury rate plus a spread equal to 0.375%.

In addition to the conditions described above, future advances are subject to satisfaction of customary conditions, as well as certification of compliance with the requirements of the Title XVII Loan Guarantee Program, accuracy of project-related representations and warranties, delivery of updated project-related information, absence of liens on Georgia Power's ownership interest in Plant Vogtle Units 3 and 4 other than permitted liens, evidence of compliance

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

with the prevailing wage requirements of the Davis-Bacon Act of 1931, as amended, and certification from the DOE's consulting engineer that proceeds of the advances are used to reimburse Eligible Project Costs.

Under the Loan Guarantee Agreement, Georgia Power is subject to customary borrower affirmative and negative covenants and events of default. In addition, Georgia Power is subject to project-related reporting requirements and other project-specific covenants and events of default.

In the event certain mandatory prepayment events occur, the FFB's commitment to make further advances under the FFB Credit Facility will terminate and Georgia Power will be required to prepay the outstanding principal amount of all borrowings under the FFB Credit Facility over a period of five years (with level principal amortization). Among other things, these mandatory prepayment events include (i) the termination of the Services Agreement or rejection of the Services Agreement in bankruptcy if Georgia Power does not maintain access to intellectual property rights under the IP Licenses; (ii) a decision by Georgia Power not to continue construction of Plant Vogtle Units 3 and 4; (iii) a failure by Georgia Power to complete the Cost Assessments or enter into Replacement EPC Arrangements by December 31, 2017; (iv) cancellation of Plant Vogtle Units 3 and 4 by the Georgia PSC, or by Georgia Power if authorized by the Georgia PSC; and (v) cost disallowances by the Georgia PSC that could have a material adverse effect on completion of Plant Vogtle Units 3 and 4 or Georgia Power's ability to repay the outstanding borrowings under the FFB Credit Facility. Under certain circumstances, insurance proceeds and any proceeds from an event of taking must be applied to immediately prepay outstanding borrowings under the FFB Credit Facility. In addition, under certain circumstances Georgia Power may be required to make additional prepayments in connection with its receipt of payments under the Guarantee Settlement Agreement or from the EPC Contractor under the Vogtle 3 and 4 Agreement. Georgia Power also may voluntarily prepay outstanding borrowings under the FFB Credit Facility. Under the FFB Credit Facility, any prepayment (whether mandatory or optional) will be made with a make-whole premium or discount, as applicable.

~~See Note (B) under "Regulatory Matters~~ – ~~Georgia Power~~ – ~~Nuclear Construction" for additional information regarding Plant Vogtle Units 3 and 4.~~

Bank Credit Arrangements

Bank credit arrangements provide liquidity support to the registrants' commercial paper borrowings and the traditional electric operating companies' ~~pollution control~~ revenue bonds. The amount of variable rate ~~pollution control~~ revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of ~~June 30, 2017~~March 31, 2018 was approximately ~~$1.6~~$1.5 billion (comprised of approximately ~~$890~~$854 million at Alabama Power, $550 million at Georgia Power, $82 million at Gulf Power, and $40 million at Mississippi Power). In ~~June 2017, Georgia Power remarketed $318 million of variable rate pollution control bonds in index rate modes, reducing the liquidity support utilized under Georgia Power's bank credit arrangement. In~~ addition, at ~~June 30, 2017,~~March 31, 2018, the traditional electric operating companies had approximately ~~$626~~$437 million (comprised of approximately ~~$436~~$120 million at Alabama Power, $192 million at Georgia Power, ~~$140~~$75 million at Gulf Power, and $50 million at Mississippi Power) of ~~pollution control~~ revenue bonds outstanding that were required to be ~~reoffered~~remarketed within the next 12 months. Subsequent to March 31, 2018, $55 million of these pollution control revenue bonds of Georgia Power were purchased and held by Georgia Power. See Note 6 to the financial statements of each registrant under "Bank Credit Arrangements" in Item 8 of the Form 10-K and "Financing Activities" herein for additional information.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

The following table outlines the committed credit arrangements by company as of ~~June 30, 2017:~~March 31, 2018:


	Expires														Executable Term Loans				Expires Within One Year				Expires												Executable Term Loans				Expires Within One Year
Company	2017		2018		2019		2020		2022		Total		Unused		One Year		Two Years		Term Out		No Term Out		2018		2019		2020		2022		Total		Unused		One Year		Two Years		Term Out		No Term Out
	(in millions)																						(in millions)
Southern Company^(a)	$	—	$	—	$	—	$	—	$	2,000	$	2,000	$	2,000	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	2,000	$	2,000	$	1,999	$	—	$	—	$	—	$	—
Alabama Power	3		532		—		—		800		1,335		1,335		—		—		—		35		35		—		500		800		1,335		1,335		—		—		—		35
Georgia Power	—		—		—		—		1,750		1,750		1,732		—		—		—		—		—		—		—		1,750		1,750		1,736		—		—		—		—
Gulf Power	30		195		25		30		—		280		280		45		—		—		40		20		25		235		—		280		280		45		—		20		—
Mississippi Power	113		—		—		—		—		113		100		—		13		13		100		100		—		—		—		100		100		—		—		—		100
Southern Power Company(b)	—		—		—		—		750		750		675		—		—		—		—		—		—		—		750		750		728		—		—		—		—
Southern Company Gas^(b)(c)	—		—		—		—		1,900		1,900		1,849		—		—		—		—		—		—		—		1,900		1,900		1,890		—		—		—		—
Other	10		30		—		—		—		40		40		20		—		20		20		30		—		—		—		30		30		20		—		20		10
Southern Company Consolidated	$	156	$	757	$	25	$	30	$	7,200	$	8,168	$	8,011	$	65	$	13	$	33	$	195	$	185	$	25	$	735	$	7,200	$	8,145	$	8,098	$	65	$	—	$	40	$	145


(a)	Represents the Southern Company parent entity.


(b)	Does not include Southern Power's $120 million continuing letter of credit facility for standby letters of credit expiring in 2019, of which $21 million remains unused at March 31, 2018.


(c)	Southern Company Gas, as the parent entity, guarantees the obligations of Southern Company Gas Capital, which is the borrower of $~~1.2~~1.4 billion of these arrangements. Southern Company Gas' committed credit arrangements also include $~~700~~500 million for which Nicor Gas is the borrower and which is restricted for working capital needs of Nicor Gas.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Financing Activities

The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first ~~six~~three months of ~~2017:~~2018:

Company Senior Note Issuances
Senior
Note Maturities and Redemptions

Revenue
Bond
Maturities, Redemptions, and
Repurchases

Other
Long-Term
Debt
Issuances

Other
Long-Term Debt Redemptions
and
Maturities^(a)
(in millions)
Southern Company^(b)
$ 300
$ —
$ —
$ 500
$ 400
Alabama Power 550
200
—
—
—
Georgia Power 850
450
27
—
3
Gulf Power 300
85
—
6
—
Mississippi Power —
—
—
40
893
Southern Power —
—
—
3
3
Southern Company Gas^(c)
450
—
—
—
—
Other —
—
—
—
8
Elimination^(d)
—
—
—
(40 ) (591 )
Southern Company Consolidated $ 2,450
$ 735
$ 27
$ 509
$ 716



Company	Senior Note Issuances		Revenue Bond Maturities, Redemptions, and Repurchases		Other Long-Term Debt Redemptions and Maturities^(*)
	(in millions)
Georgia Power	$	—	$	278	$	102
Mississippi Power	600		—		900
Other	—		—		3
Southern Company Consolidated	$	600	$	278	$	1,005


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


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


~~(c)~~	~~The senior notes were issued by Southern Company Gas Capital and guaranteed by the Southern Company Gas parent entity.~~


~~(d)~~	~~Intercompany loans from Southern Company to Mississippi Power eliminated in Southern Company's Consolidated Financial Statements.~~

Southern Company

~~Also in June 2017,~~March 2018, Southern Company entered into ~~two $100~~a $900 million ~~aggregate principal amount~~short-term floating rate bank ~~term~~ loan ~~agreements, which mature on June 21, 2018 and June 29, 2018 and bear~~bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes.

~~Alabama Power~~

In March 2017, Alabama Power issued $550 million aggregate principal amount of Series 2017A 2.45% Senior Notes due March 30, 2022. The proceeds were used to repay Alabama Power's short-term indebtedness and for general corporate purposes, including Alabama Power's continuous construction program.

Georgia Power

In ~~March 2017,~~January 2018, Georgia Power ~~issued $450~~repaid its outstanding $150 million ~~aggregate principal amount of Series 2017A 2.00% Senior Notes~~and $100 million floating rate bank loans due ~~March 30, 2020~~May 31, 2018 and $400 million aggregate principal amount of Series 2017B 3.25% Senior Notes due March 30, 2027. The proceeds were used to repay a portion of Georgia Power's short-term indebtedness and for general corporate purposes, including Georgia Power's continuous construction program.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

October 26, 2018, respectively.

In ~~April 2017,~~March 2018, Georgia Power purchased and held ~~$27~~$104.6 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), ~~Fifth~~First Series ~~1995.~~2013 and $173 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009. Georgia Power may reoffer these bonds to the public at a later date.

Mississippi Power

In ~~June 2017, Georgia~~March 2018, Mississippi Power ~~entered into three floating rate bank loans in~~issued $300 million aggregate principal ~~amounts~~amount of ~~$50 million, $150 million, and $100 million, which mature on December 1, 2017, May 31, 2018, and June 28, 2018, respectively, and bear~~Series 2018A Floating Rate Senior Notes due March 27, 2020 bearing interest based on ~~one-month LIBOR. Also in June 2017, Georgia Power borrowed $500~~three-month LIBOR and $300 million ~~pursuant to an uncommitted bank credit arrangement, which bears interest at a rate agreed upon by Georgia Power and the bank from time to time and is payable on no less than~~aggregate principal amount of Series 2018B 3.95% Senior Notes due March 30, days' demand by the bank. The proceeds from these bank loans were used to repay a portion of Georgia Power's existing indebtedness and for working capital and other general corporate purposes, including Georgia Power's continuous construction program.

~~Gulf Power~~

2028. In March ~~2017, Gulf~~2018, Mississippi Power ~~extended the maturity of~~also entered into a ~~$100~~$300 million short-term floating rate bank loan bearing interest based on one-month LIBOR, of which $125 million was repaid subsequent to March 31, 2018. Mississippi Power used the proceeds from ~~April 2017~~these financings to ~~October 2017 and subsequently~~repay the entire $900 million principal amount of its unsecured term loan.

Southern Company Gas

~~In May 2017, Gulf Power issued $300~~Subsequent to March 31, 2018, Pivotal Utility Holdings caused $20 million aggregate principal amount of ~~Series 2017A 3.30% Senior Notes due~~gas facility revenue bonds to be redeemed and provided notice of its intent to cause, on May ~~30, 2027. The proceeds, together with other funds, were used to repay at maturity $85~~23, 2018, the remaining $180 million aggregate principal amount of ~~Series 2007A 5.90% Senior Notes due June 15, 2017;~~gas facility revenue bonds issued for its benefit to ~~repay outstanding commercial paper borrowings;~~be redeemed. Subsequent to ~~repay~~March 31, 2018, Pivotal Utility Holdings, as borrower, and Southern Company Gas, as guarantor, entered into a ~~$100~~$181 million short-term delayed draw floating rate bank term loan ~~as discussed above; and~~agreement. Pivotal Utility Holdings has the right to ~~redeem 550,000 shares ($55~~borrow up to $181 million ~~aggregate liquidation amount)~~on or before May 31, 2018, upon satisfaction of Gulf Power's 6.00% Series Preference Stock, 450,000 shares ($45 million aggregate liquidation amount) of Gulf Power's Series 2007A 6.45% Preference Stock, and 500,000 shares ($50 million aggregate liquidation amount) of Gulf Power's Series 2013A 5.60% Preference Stock.

~~Mississippi Power~~

~~In March 2017, Mississippi Power issued a $9 million short-term bank note bearing interest at 5% per annum, which was repaid in April 2017.~~

In February 2017, Mississippi Power amended $551 million in promissory notes to Southern Company extending the maturity dates of the notes from December 1, 2017 to July 31, 2018. In the second quarter 2017, Mississippi Power borrowed an additional $40 million under a promissory note issued to Southern Company.

~~In June 2017, Southern Company made equity contributions totaling $1.0 billion to Mississippi Power. Mississippi Power used a portion of~~certain customary conditions. Pivotal Utility Holdings expects the proceeds to (i) prepay $300 million of the outstanding principal amount under its $1.2 billion unsecured term loan, which matures on March 30, 2018; (ii) repay all of the $591 million outstanding principal amount of promissory notes to Southern Company; and (iii) repay a $10 million short-term bank loan.

~~Southern Company Gas~~

~~In May 2017, Southern Company Gas Capital issued $450 million aggregate principal amount of Series 2017A 4.40% Senior Notes due May 30, 2047. The proceeds were~~be used to repay ~~Southern Company Gas' short-term indebtedness and for general corporate purposes.~~the remaining $180 million of gas facility revenue bonds.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


~~(F)~~(G)	RETIREMENT BENEFITS

On January 1, 2018, the qualified defined benefit pension plan of Southern Company Gas was merged into the qualified defined benefit pension plan of Southern Company. Following the plan merger, Southern Company has a qualified defined benefit, trusteed, pension plan covering substantially all employees, with the exception of employees at ~~Southern Company Gas, as discussed below, and~~ PowerSecure. The Southern Company qualified defined benefit pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No mandatory contributions to the Southern Company qualified defined benefit pension plan are anticipated for the year ending December 31, ~~2017.~~2018.

In addition, the Southern Company ~~also provides~~Gas non-qualified retirement plans were merged into the Southern Company non-qualified retirement plan (defined benefit and defined contribution). Following the non-qualified retirement plan mergers, Southern Company continues to provide certain non-qualified defined ~~benefit pension plans~~benefits for a ~~selected~~select group of management and highly compensated ~~employees. Benefits under these non-qualified pension plans~~employees, which are funded on a cash basis. ~~In addition,~~

Furthermore, Southern Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional electric

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

operating companies fund related other postretirement trusts to the extent required by their respective regulatory commissions.

~~In addition,~~ Southern Company Gas has a qualified defined benefit, trusteed, pension plan covering certain eligible employees, which was closed in 2012 to new employees. This qualified pension plan is funded in accordance with requirements of ERISA. No mandatory contributions to the Southern Company Gas qualified pension plan are anticipated for the year ending December 31, 2017. Southern Company Gas also provides certain non-qualified defined benefit and defined contribution pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, Southern Company Gas provides certain medical care and life insurance benefits for eligible retired employees through a postretirement benefit plan. Southern Company Gas ~~also~~ has a separate unfunded supplemental retirement health care plan that provides medical care and life insurance benefits to employees of discontinued businesses.

As indicated in Note (A), the registrants adopted ASU 2017-07 as of January 1, 2018. ASU 2017-07 requires that an employer report the service cost component of net periodic benefit costs in the same line item or items as other compensation costs and requires the other components of net periodic benefit costs to be separately presented in the statements of income outside of income from operations. The presentation requirements of ASU 2017-07 have been applied retrospectively with the service cost component of net periodic benefit costs included in operations and maintenance and all other components of net periodic benefit costs included in other income (expense), net in the statements of income for the three months ended March 31, 2017.

With respect to the presentation requirements, the registrants have used the practical expedient provided by ASU 2017-07, which permits an employer to use the amounts disclosed in its retirement benefits footnote for prior comparative periods as the estimation basis for applying the retrospective presentation requirements to those periods. The amounts of the other components of net periodic benefit costs reclassified for the prior period are presented in the following tables.

See Note 2 to the financial statements of ~~Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Company Gas~~each registrant in Item 8 of the Form 10-K for additional information.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Components of the net periodic benefit costs for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ are presented in the following tables.


Three Months Ended March 31, 2018																Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Power			Southern Company Gas
																(in millions)
Pension Plans	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Pension Plans
	(in millions)
Three Months Ended June 30, 2017
Service cost	$	74		$	16		$	18		$	4		$	3		$	90		$	19		$	22		$	4		$	4		$	2		$	8
Interest cost	113			24			35			5			5			116			25			35			5			5			1			10
Expected return on plan assets	(225		)	(49		)	(70		)	(9		)	(10		)	(236		)	(51		)	(74		)	(10		)	(10		)	(3		)	(18		)
Amortization:
Prior service costs	3			—			1			—			1			1			—			—			—			—			—			(1		)
Regulatory asset																—			—			—			—			—			—			3
Net (gain)/loss	41			11			14			1			2			53			14			17			2			3			1			3
Net periodic pension cost (income)	$	6		$	2		$	(2	)	$	1		$	1		$	24		$	7		$	—		$	1		$	2		$	1		$	5
Six Months Ended June 30, 2017
Postretirement Benefits																Postretirement Benefits
Service cost	$	147		$	32		$	37		$	7		$	7		$	6		$	1		$	2		$	—		$	—		$	—		$	1
Interest cost	227			48			69			10			10			19			4			7			1			1			—			2
Expected return on plan assets	(449		)	(98		)	(141		)	(19		)	(20		)	(17		)	(6		)	(6		)	—			—			—			(2		)
Amortization:
Prior service costs	6			1			2			—			1			2			1			—			—			—			—			—
Regulatory asset																—			—			—			—			—			—			1
Net (gain)/loss	81			21			28			3			4			3			—			2			—			—			—			—
Net periodic pension cost (income)	$	12		$	4		$	(5	)	$	1		$	2
Three Months Ended June 30, 2016
Service cost	$	62		$	15		$	18		$	3		$	3
Interest cost	101			24			34			4			5
Expected return on plan assets	(187		)	(46		)	(65		)	(8		)	(8		)
Amortization:
Prior service costs	3			—			2			1			—
Net (gain)/loss	37			10			13			1			1
Net periodic pension cost	$	16		$	3		$	2		$	1		$	1
Six Months Ended June 30, 2016
Service cost	$	124		$	29		$	35		$	6		$	6
Interest cost	201			48			68			9			10
Expected return on plan assets	(374		)	(92		)	(129		)	(17		)	(17		)
Amortization:
Prior service costs	7			1			3			1			—
Net (gain)/loss	75			20			27			3			3
Net periodic pension cost	$	33		$	6		$	4		$	2		$	2
Net periodic postretirement benefit cost																$	13		$	—		$	5		$	1		$	1		$	—		$	2

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


Three Months Ended March 31, 2017^(*)				Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Company Gas
				(in millions)
Pension Plans	Southern Company Gas			Pension Plans
	(in millions)
Successor – Three Months Ended June 30, 2017
Service cost	$	5		$	73		$	16		$	19		$	3		$	4		$	6
Interest cost	10			114			24			34			5			5			10
Expected return on plan assets	(17		)	(224		)	(49		)	(71		)	(10		)	(10		)	(18		)
Amortization:
Prior service costs	(1		)	3			1			1			—			—			—
Net (gain)/loss	5			40			10			14			2			2			5
Net periodic pension cost	$	2
Successor – Six Months Ended June 30, 2017
Net periodic pension cost (income)				$	6		$	2		$	(3	)	$	—		$	1		$	3
Postretirement Benefits				Postretirement Benefits
Service cost	$	11		$	6		$	1		$	2		$	—		$	—		$	1
Interest cost	20			20			5			7			1			1			3
Expected return on plan assets	(35		)	(16		)	(6		)	(6		)	—			—			(2		)
Amortization:
Prior service costs	(1		)	2			1			—			—			—			(1		)
Net (gain)/loss	10			2			—			2			—			—			1
Net periodic pension cost	$	5


Predecessor – Three Months Ended June 30, 2016
Service cost	$	7
Interest cost	11
Expected return on plan assets	(17		)
Amortization:
Prior service costs	(1		)
Net (gain)/loss	7
Net periodic pension cost	$	7
Predecessor – Six Months Ended June 30, 2016
Service cost	$	13
Interest cost	21
Expected return on plan assets	(33		)
Amortization:
Prior service costs	(1		)
Net (gain)/loss	13
Net periodic pension cost	$	13
Net periodic postretirement benefit cost				$	14		$	1		$	5		$	1		$	1		$	2

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Postretirement Benefits
Southern
Company

Alabama
Power

Georgia
Power

Gulf
Power

Mississippi
Power
(in millions)
Three Months Ended June 30, 2017
Service cost $ 6
$ 2
$ 1
$ 1
$ 1
Interest cost 20
4
8
—
1
Expected return on plan assets (17 ) (8 ) (6 ) (1 ) (1 )
Amortization:
Prior service costs 1
1
1
—
—
Net (gain)/loss 5
1
1
—
—
Net periodic postretirement benefit cost $ 15
$ —
$ 5
$ —
$ 1
Six Months Ended June 30, 2017
Service cost $ 12
$ 3
$ 3
$ 1
$ 1
Interest cost 40
9
15
1
2
Expected return on plan assets (33 ) (14 ) (12 ) (1 ) (1 )
Amortization:
Prior service costs 3
2
1
—
—
Net (gain)/loss 7
1
3
—
—
Net periodic postretirement benefit cost $ 29
$ 1
$ 10
$ 1
$ 2
Three Months Ended June 30, 2016
Service cost $ 6
$ 2
$ 1
$ 1
$ 1
Interest cost 17
4
7
—
1
Expected return on plan assets (14 ) (7 ) (5 ) (1 ) (1 )
Amortization:
Prior service costs 1
1
1
—
—
Net (gain)/loss 4
1
2
—
—
Net periodic postretirement benefit cost $ 14
$ 1
$ 6
$ —
$ 1
Six Months Ended June 30, 2016
Service cost $ 11
$ 3
$ 3
$ 1
$ 1
Interest cost 35
9
15
1
2
Expected return on plan assets (28 ) (13 ) (11 ) (1 ) (1 )
Amortization:
Prior service costs 3
2
1
—
—
Net (gain)/loss 7
1
4
—
—
Net periodic postretirement benefit cost $ 28
$ 2
$ 12
$ 1
$ 2

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Postretirement Benefits
Southern
Company
Gas
(in millions)
Successor – Three Months Ended June 30, 2017
Service cost $ —
Interest cost 2
Expected return on plan assets (1 )
Amortization:
Prior service costs —
Net (gain)/loss 1
Net periodic postretirement benefit cost $ 2
Successor – Six Months Ended June 30, 2017
Service cost $ 1
Interest cost 5
Expected return on plan assets (3 )
Amortization:
Prior service costs (1 )
Net (gain)/loss 2
Net periodic postretirement benefit cost $ 4

Predecessor – Three Months Ended June 30, 2016
Service cost $ —
Interest cost 2
Expected return on plan assets (1 )
Amortization:
Prior service costs —
Net (gain)/loss 1
Net periodic postretirement benefit cost $ 2
Predecessor – Six Months Ended June 30, 2016
Service cost $ 1
Interest cost 5
Expected return on plan assets (3 )
Amortization:
Prior service costs (1 )
Net (gain)/loss 2
Net periodic postretirement benefit cost $ 4


(*)	Excludes Southern Power since Southern Power did not participate in the qualified pension and postretirement benefit plans until December 2017.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


~~(G)~~(H)	INCOME TAXES

See Note 5 to the financial statements of each registrant in Item 8 of the Form 10-K for additional tax information.

Federal Tax Reform Legislation

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 provides 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, the registrants consider all amounts recorded in the financial statements as a result of the Tax Reform Legislation to be "provisional" as discussed in SAB 118 and subject to revision. Each of the registrants are awaiting additional guidance from industry and income tax authorities in order to finalize its accounting. The ultimate impact of the Tax Reform Legislation on deferred income tax assets and liabilities and the related regulatory assets and liabilities cannot be determined at this time. See Note (B) under "Regulatory Matters" for additional information.

Current and Deferred Income Taxes

Tax Credit Carryforwards

Southern Company had federal ITC and PTC carryforwards (primarily related to Southern Power) totaling ~~$1.9~~$2.3 billion as of ~~June 30, 2017~~March 31, 2018 compared to ~~$1.8~~$2.1 billion as of December 31, ~~2016.~~2017.

The federal ITC carryforwards begin expiring in 2034 but are expected to be fully utilized by 2027. The PTC carryforwards begin expiring in 2032 but are expected to be ~~fully~~ utilized by ~~2022.~~2027. The ~~PTC carryforwards begin expiring in 2036 but are expected~~estimated tax credit utilization reflects a 2018 abandonment loss related to ~~be utilized by 2022.~~certain Kemper County energy facility expenditures. The expected utilization of tax credit carryforwards could be further delayed by numerous ~~factors. These~~ factors, ~~include~~including the acquisition of additional renewable projects and increased generation at existing wind ~~facilities, carrying back the federal net operating loss, and potential tax reform legislation, as well as additional deductions in the event of an asset abandonment.~~facilities. The ultimate outcome of these matters cannot be determined at this time.

~~Valuation Allowances~~Effective Tax Rate

~~At June 30, 2017, valuation allowances were~~Each registrant's effective tax rate for the three months ended March 31, 2018 varied significantly as ~~follows:~~

Mississippi Power
Southern Company
Gas
Southern Company
(in millions)
Federal $ —
$ 18
$ 18
State (net of federal benefit) 46
1
63
Balance at June 30, 2017 $ 46
$ 19
$ 81

~~Southern Company had valuation allowances, net of the federal benefit, of $81 million at June 30, 2017~~ compared to ~~$21 million at December 31, 2016. The increase was primarily~~the corresponding period in 2017 due to ~~Mississippi Power's projected inability to utilize~~ the ~~State of Mississippi net operating loss.~~

~~Effective~~14% lower 2018 federal tax rate resulting from the Tax ~~Rate~~Reform Legislation.

Southern Company

Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity, and federal income tax benefits from ITCs and PTCs.

Southern Company's effective tax ~~(benefit)~~ rate was ~~(28.6)%~~10.8% for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 compared to ~~29.4%~~32.1% for the corresponding period in ~~2016.~~2017. The effective tax rate decrease was primarily due to the ~~estimated probable losses on the Kemper IGCC, net~~lower federal tax rate in 2018 as a result of the ~~non-deductible AFUDC equity portion. Other factors include an increase in~~Tax Reform Legislation, as well as net state income tax benefits ~~from wind PTCs and~~related to changes in state apportionment ~~rate changes, partially offset by a decrease in tax benefits~~rates arising from ~~ITCs and an increase in state valuation allowances.~~the reorganization of Southern Power's legal entities as discussed further herein.

Southern Company recognizes PTCs when wind energy is generated and sold (using the prescribed KWH rate in applicable federal and state statutes), which may differ significantly from amounts computed on a quarterly basis using an overall estimated annual effective income tax rate. Southern Company uses this method of recognition since the amount of PTCs can be significantly impacted by wind generation. This method can significantly affect the effective income tax rate for the period depending on the amount of pretax income.

Mississippi Power

Mississippi Power's effective tax (benefit) rate was ~~(30.5)~~(34.7)% for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 compared to ~~(208.1)~~(58.7)% for the corresponding period in ~~2016. The~~2017. In addition to the reduction in the federal corporate income tax rate as a result of the Tax Reform Legislation, the effective tax rate increase was primarily due to ~~the~~lower estimated losses

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~probable losses~~ on the Kemper IGCC ~~net of~~for the three months ended March 31, 2018 compared to the corresponding period in 2017, partially offset by non-deductible AFUDC equity ~~portion and the related state valuation allowances.~~in 2017.

Southern Power

Southern Power's effective tax (benefit) rate was ~~(114.7)~~(647.0)% for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 compared to ~~(74.0)~~(385.9)% for the corresponding period in ~~2016. The~~2017. In addition to the reduction in the federal corporate income tax rate as a result of the Tax Reform Legislation, the effective tax rate decrease was primarily due to ~~additional PTCs~~net state income tax benefits related to certain changes in apportionment rates arising from the reorganization of Southern Power's ~~wind facility acquisitions, state apportionment rate changes, and lower pre-tax earnings, partially offset by a decrease in tax benefits from ITCs.~~legal entities as described below.

Southern Power recognizes PTCs when wind energy is generated and sold (using the prescribed KWH rate in applicable federal and state statutes), which may differ significantly from amounts computed on a quarterly basis using an overall estimated annual effective income tax rate. Southern Power uses this method of recognition since the amount of PTCs can be significantly impacted by wind generation. This method can significantly affect the effective income tax rate for the period depending on the amount of pretax income.

Legal Entity Reorganization

Unrecognized Tax Benefits

See Note 5 to the financial statements of each registrant under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K for additional information.

~~Changes during the six months ended June 30, 2017 for~~The registrants had no unrecognized tax benefits ~~were~~ as ~~follows:~~

Mississippi Power Southern Power Southern Company
(in millions)
Unrecognized tax benefits as of December 31, 2016 $ 465
$ 17
$ 484
Tax positions from current periods 3
1
10
Tax positions from prior periods —
1
7
Balance as of June 30, 2017 $ 468
$ 19
$ 501

~~The tax positions from current and prior periods primarily relate to state tax benefits and charitable contribution carryforwards that will be impacted as a result~~ of ~~the proposed settlement of R&E expenditures associated with the Kemper IGCC. See "Section 174 Research and Experimental Deduction" herein for additional information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.~~

~~The impact on the effective tax rate, if recognized, is as follows:~~

As of June 30, 2017 As of December 31, 2016
Mississippi Power Southern Power Southern Company Southern Company
(in millions)
Tax positions impacting the effective tax rate $ 4
$ 19
$ 37
$ 20
Tax positions not impacting the effective tax rate 464
—
464
464
Balance of unrecognized tax benefits $ 468
$ 19
$ 501
$ 484

The tax positions impacting the effective tax rate primarily relate to federal deferred income tax credits and Southern Company's estimate of the uncertainty related to the amount of those benefits, and state tax benefits and charitable contribution carryforwards that will be impacted as a result of the proposed settlement of R&E expenditures associated with the Kemper IGCC. See "~~Section 174 Research and Experimental Deduction" herein for additional information. If these tax positions are not able to be recognized due to a federal audit adjustment in~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~the amount that has been estimated, the amount of tax credit carryforwards discussed above would be reduced by approximately $98 million.~~

~~Accrued interest for all tax positions other than the Section 174 R&E deductions was immaterial for all periods presented.~~

~~All of the registrants classify interest on tax uncertainties as interest expense. None of the registrants accrued any penalties on uncertain tax positions.~~

March 31, 2018. It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits ~~and the U.S. Congress Joint Committee on Taxation approval of the R&E expenditures associated with the Kemper IGCC~~ could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined. ~~See "Section 174 Research and Experimental Deduction" herein for more information.~~

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2012. Southern Company has filed its 2013, 2014, and 2015 federal income tax returns and has received partial acceptance letters from the IRS; however, the IRS has not finalized its audits. Southern Company is a participant in the Compliance Assurance Process of the IRS. In addition, the pre-Merger Southern Company Gas 2014 federal tax return is currently under audit. The audits for Southern Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.

~~Section 174 Research and Experimental Deduction~~

Southern Company reflected deductions for R&E expenditures related to the Kemper IGCC in its federal income tax calculations since 2013 and filed amended federal income tax returns for 2008 through 2013 to also include such deductions.

The Kemper IGCC is based on first-of-a-kind technology, and Southern Company and Mississippi Power believe that a significant portion of the plant costs qualify as deductible R&E expenditures under IRC Section 174. In December 2016, Southern Company and the IRS reached a proposed settlement, subject to approval of the U.S. Congress Joint Committee on Taxation, resolving a methodology for these deductions. Due to the uncertainty related to this tax position, Southern Company and Mississippi Power had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million and associated interest of $36 million as of June 30, 2017. If the suspension of the Kemper IGCC start-up activities results in an abandonment, any amount not allowed under IRC Section 174 would be claimed as a deduction under IRC Section 165, and would result in a reversal of the related unrecognized tax benefits, excluding interest. The ultimate outcome of this matter cannot be determined at this time.


~~(H)~~(I)	DERIVATIVES

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company's policies in areas such as counterparty exposure and risk management practices. Southern Company Gas' wholesale gas operations use various contracts in its commercial activities that generally meet the definition of derivatives. For the traditional electric operating companies, Southern Power, and Southern Company Gas' other businesses, each company's policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities and are presented on a net basis. See Note ~~(C)~~(D) for additional information. In the statements of cash flows, the cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. The cash

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with classification of the hedged interest or principal, respectively.

The registrants adopted ASU 2017-12 as of January 1, 2018. See Note (A) under "Recently Adopted Accounting Standards – Other" for additional information.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Energy-Related Derivatives

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas enter into energy-related derivatives to hedge exposures to electricity, natural gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities have limited exposure to market volatility in energy-related commodity prices. Each of the traditional electric operating companies and certain of the natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. The Florida PSC extended the moratorium on Gulf Power's fuel-hedging program ~~through~~until January 1, 2021 in connection with the 2017 Gulf Power Rate Case Settlement Agreement. The moratorium does not have an impact on the recovery of existing hedges entered into under the previously-approved hedging program. The traditional electric operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in energy-related commodity prices because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional electric operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity. Southern Company Gas retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.

Southern Company Gas also enters into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in the statements of income.

Energy-related derivative contracts are accounted for under one of three methods:

Regulatory Hedges — Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the traditional electric operating companies' and the natural gas distribution utilities' fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.

Cash Flow Hedges — Gains and losses on energy-related derivatives designated as cash flow hedges (which are mainly used to hedge anticipated purchases and sales) are initially deferred in OCI before being recognized in the statements of income in the same period and in the same income statement line item as the earnings effect of the hedged ~~transactions are reflected in earnings.~~transactions.

Not Designated — Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Some energy-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the electric and natural gas industries. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual price of the underlying goods being delivered.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

At ~~June 30, 2017,~~March 31, 2018, the net volume of energy-related derivative contracts for natural gas positions for the Southern Company system, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:


	Net Purchased mmBtu	Longest Hedge Date	Longest Non-Hedge Date	Net Purchased mmBtu	Longest Hedge Date	Longest Non-Hedge Date
	(in millions)			(in millions)
Southern Company^(*)	472	2021	2024	670	2021	2026
Alabama Power	70	2020	—	74	2021	—
Georgia Power	160	2020	—	167	2021	—
Gulf Power	35	2020	—	17	2020	—
Mississippi Power	41	2021	—	59	2021	—
Southern Power	25	2017	—	14	2020	2018
Southern Company Gas^(*)	141	2019	2024	339	2020	2026

(*)

Southern Company's and Southern Company Gas' derivative instruments include both long and short natural gas positions. A long position is a contract to purchase natural gas and a short position is a contract to sell natural gas. Southern Company Gas' volume represents the net of long natural gas positions of ~~3.5~~3.6 billion mmBtu and short natural gas positions of ~~3.4~~3.3 billion mmBtu as of ~~June 30, 2017,~~March 31, 2018, which is also included in Southern Company's total volume.

In addition to the volumes discussed above, the traditional electric operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 31 million mmBtu for Southern Company, 105 million ~~mmbtu~~mmBtu for Alabama Power, 9 million mmBtu for Georgia Power, ~~and Southern Power, 5 million mmbtu for Alabama Power, and~~ 3 million mmBtu for Gulf Power, 4 million mmBtu for Mississippi Power, and ~~Mississippi~~10 million mmBtu for Southern Power.

For cash flow hedges of energy-related derivatives, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending ~~June 30, 2018~~March 31, 2019 are ~~$6 million for Southern Power and~~ immaterial for all ~~other~~ registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the ~~effective portion of the~~ derivatives' fair value gains or losses isare recorded in OCI and isare reclassified into earnings at the same time and presented on the same income statement line item as the earnings effect of the hedged ~~transactions affect earnings, with any ineffectiveness recorded directly to earnings.~~transactions. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings ~~providing an offset, with any difference representing ineffectiveness.~~on the same income statement line item. Fair value gains or losses on derivatives that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

At ~~June 30, 2017,~~March 31, 2018, the following interest rate derivatives were outstanding:


	Notional Amount		Interest Rate Received	Weighted Average Interest Rate Paid	Hedge Maturity Date	Fair Value Gain (Loss) at June 30, 2017			Notional Amount		Interest Rate Received	Weighted Average Interest Rate Paid	Hedge Maturity Date	Fair Value Gain (Loss) at March 31, 2018
	(in millions)					(in millions)			(in millions)					(in millions)
Cash Flow Hedges of Existing Debt
Mississippi Power	$	900	1-month LIBOR	0.79%	March 2018	$	3
Fair Value Hedges of Existing Debt	Fair Value Hedges of Existing Debt								Fair Value Hedges of Existing Debt
Southern Company^(*)	250		1.30%	3-month LIBOR + 0.17%	August 2017	—
Southern Company^(*)	300		2.75%	3-month LIBOR + 0.92%	June 2020	1			$	300	2.75%	3-month LIBOR + 0.92%	June 2020	$	(5	)
Southern Company^(*)	1,500		2.35%	1-month LIBOR + 0.87%	July 2021	(14		)	1,500		2.35%	1-month LIBOR + 0.87%	July 2021	(50		)
Georgia Power	250		5.40%	3-month LIBOR + 4.02%	June 2018	—			250		5.40%	3-month LIBOR + 4.02%	June 2018	(1		)
Georgia Power	500		1.95%	3-month LIBOR + 0.76%	December 2018	(2		)	500		1.95%	3-month LIBOR + 0.76%	December 2018	(4		)
Georgia Power	200		4.25%	3-month LIBOR + 2.46%	December 2019	1			200		4.25%	3-month LIBOR + 2.46%	December 2019	(2		)
Southern Company Consolidated	$	3,900				$	(11	)	$	2,750				$	(62	)


(*)	Represents the Southern Company parent entity.

The estimated pre-tax gains (losses) related to interest rate derivatives expected to be reclassified from accumulated OCI to interest expense for the next 12-month period ending ~~June 30, 2018~~March 31, 2019 are ~~$(21)~~$(20) million for Southern Company and immaterial for all other registrants. Southern Company and certain subsidiaries have deferred gains and losses expected to be amortized into earnings through 2046.

Foreign Currency Derivatives

Southern Company and certain subsidiaries may also enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates, such as that arising from the issuance of debt denominated in a currency other than U.S. dollars. Derivatives related to forecasted transactions are accounted for as cash flow hedges where the ~~effective portion of the~~ derivatives' fair value gains or losses isare recorded in OCI and isare reclassified into earnings at the same time ~~that~~and on the same income statement line as the earnings effect of the hedged transactions, ~~affect earnings,~~ including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. ~~Any ineffectiveness is recorded directly to earnings.~~ The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At March 31, 2018, the following foreign currency derivatives were outstanding:



	Pay Notional		Pay Rate	Receive Notional		Receive Rate	Hedge Maturity Date	Fair Value Gain (Loss) at March 31, 2018
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
Southern Power	$	677	2.95%	€	600	1.00%	June 2022	$	83
Southern Power	564		3.78%	500		1.85%	June 2026	77
Total	$	1,241		€	1,100			$	160

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~At June 30, 2017, the following foreign currency derivatives were outstanding:~~

Pay Notional Pay Rate Receive Notional Receive Rate Hedge
Maturity Date Fair Value
Gain (Loss) at June 30, 2017

(in millions) (in millions) (in millions)
Cash Flow Hedges of Existing Debt
Southern Power $ 677
2.95% € 600
1.00% June 2022 $ 18
Southern Power 564
3.78% 500
1.85% June 2026 15
Total $ 1,241
€ 1,100
$ 33

The estimated pre-tax gains (losses) related to foreign currency derivatives that will be reclassified from accumulated OCI to earnings for the next 12-month period ending ~~June 30, 2018~~March 31, 2019 are ~~$(23)~~$(22) million for Southern Company and Southern Power.

Derivative Financial Statement Presentation and Amounts

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas enter into derivative contracts that may contain certain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. Southern Company and certain subsidiaries also utilize master netting agreements to mitigate exposure to counterparty credit risk. These agreements may contain provisions that permit netting across product lines and against cash collateral. The fair value amounts of derivative assets and liabilities on the balance sheet are presented net to the extent that there are netting arrangements or similar agreements with the counterparties.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

The fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:


	As of June 30, 2017						As of December 31, 2016						As of March 31, 2018						As of December 31, 2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities			Assets			Liabilities			Assets			Liabilities
	(in millions)												(in millions)
Southern Company
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	23		$	35		$	73		$	27
Other current assets/Other current liabilities													$	7		$	28		$	10		$	43
Other deferred charges and assets/Other deferred credits and liabilities	8			31			25			33			4			27			7			24
Total derivatives designated as hedging instruments for regulatory purposes	$	31		$	66		$	98		$	60		$	11		$	55		$	17		$	67
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	13		$	10		$	23		$	7
Other current assets/Other current liabilities													$	3		$	3		$	3		$	14
Other deferred charges and assets/Other deferred credits and liabilities													1			1			—			—
Interest rate derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	11			1			12			1
Other current assets/Other current liabilities													—			14			1			4
Other deferred charges and assets/Other deferred credits and liabilities	—			22			1			28			—			47			—			34
Foreign currency derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	—			23			—			25
Other current assets/Other current liabilities													—			22			—			23
Other deferred charges and assets/Other deferred credits and liabilities	56			—			—			33			182			—			129			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	80		$	56		$	36		$	94		$	186		$	87		$	133		$	75
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	237		$	202		$	489		$	483
Other current assets/Other current liabilities													$	283		$	299		$	380		$	437
Other deferred charges and assets/Other deferred credits and liabilities	102			86			66			81			234			284			170			215
Interest rate derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	—			—			1			—
Total derivatives not designated as hedging instruments	$	339		$	288		$	556		$	564		$	517		$	583		$	550		$	652
Gross amounts recognized	$	450		$	410		$	690		$	718		$	714		$	725		$	700		$	794
Gross amounts offset^(*)	$	(219	)	$	(290	)	$	(462	)	$	(524	)
Net amounts recognized in the Balance Sheets	$	231		$	120		$	228		$	194
Gross amounts offset^(a)													$	(336	)	$	(559	)	$	(405	)	$	(598	)
Net amounts recognized in the Balance Sheets^(b)													$	378		$	166		$	295		$	196

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


	As of June 30, 2017						As of December 31, 2016						As of March 31, 2018						As of December 31, 2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities			Assets			Liabilities			Assets			Liabilities
	(in millions)												(in millions)

Alabama Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities	$	7		$	7		$	13		$	5
Other current assets/Other current liabilities													$	2		$	3		$	2		$	6
Other deferred charges and assets/Other deferred credits and liabilities	2			4			7			4			1			5			2			4
Total derivatives designated as hedging instruments for regulatory purposes	$	9		$	11		$	20		$	9		$	3		$	8		$	4		$	10
Gross amounts recognized	$	9		$	11		$	20		$	9		$	3		$	8		$	4		$	10
Gross amounts offset	$	(6	)	$	(6	)	$	(8	)	$	(8	)	$	(2	)	$	(2	)	$	(4	)	$	(4	)
Net amounts recognized in the Balance Sheets	$	3		$	5		$	12		$	1		$	1		$	6		$	—		$	6

Georgia Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	10		$	4		$	30		$	1		$	3		$	6		$	2		$	9
Other deferred charges and assets/Other deferred credits and liabilities	5			10			14			7			2			12			4			10
Total derivatives designated as hedging instruments for regulatory purposes	$	15		$	14		$	44		$	8		$	5		$	18		$	6		$	19
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	1		$	1		$	2		$	—		$	—		$	6		$	—		$	4
Other deferred charges and assets/Other deferred credits and liabilities	—			2			—			3			—			2			—			1
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	1		$	3		$	2		$	3		$	—		$	8		$	—		$	5
Gross amounts recognized	$	16		$	17		$	46		$	11		$	5		$	26		$	6		$	24
Gross amounts offset	$	(9	)	$	(9	)	$	(8	)	$	(8	)	$	(5	)	$	(5	)	$	(6	)	$	(6	)
Net amounts recognized in the Balance Sheets	$	7		$	8		$	38		$	3		$	—		$	21		$	—		$	18

Gulf Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities	$	1		$	16		$	4		$	12
Other current assets/Other current liabilities													$	—		$	11		$	—		$	14
Other deferred charges and assets/Other deferred credits and liabilities	—			13			1			17			—			6			—			7
Total derivatives designated as hedging instruments for regulatory purposes	$	1		$	29		$	5		$	29		$	—		$	17		$	—		$	21
Gross amounts recognized	$	1		$	29		$	5		$	29		$	—		$	17		$	—		$	21
Gross amounts offset	$	(1	)	$	(1	)	$	(4	)	$	(4	)	$	—		$	—		$	—		$	—
Net amounts recognized in the Balance Sheets	$	—		$	28		$	1		$	25		$	—		$	17		$	—		$	21

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


	As of June 30, 2017						As of December 31, 2016						As of March 31, 2018						As of December 31, 2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities			Assets			Liabilities			Assets			Liabilities
	(in millions)												(in millions)

Mississippi Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	1		$	6		$	2		$	6		$	1		$	4		$	1		$	6
Other deferred charges and assets/Other deferred credits and liabilities	1			4			2			5			1			4			1			3
Total derivatives designated as hedging instruments for regulatory purposes	$	2		$	10		$	4		$	11		$	2		$	8		$	2		$	9
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	3		$	—		$	2		$	—		$	—		$	—		$	1		$	—
Other deferred charges and assets/Other deferred credits and liabilities	—			—			1			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	3		$	—		$	3		$	—		$	—		$	—		$	1		$	—
Gross amounts recognized	$	5		$	10		$	7		$	11		$	2		$	8		$	3		$	9
Gross amounts offset	$	(2	)	$	(2	)	$	(3	)	$	(3	)	$	(2	)	$	(2	)	$	(2	)	$	(2	)
Net amounts recognized in the Balance Sheets	$	3		$	8		$	4		$	8		$	—		$	6		$	1		$	7

Southern Power
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	13		$	8		$	18		$	4		$	3		$	2		$	3		$	11
Other deferred charges and assets/Other deferred credits and liabilities													1			1			—			—
Foreign currency derivatives:
Other current assets/Other current liabilities	—			23			—			25			—			22			—			23
Other deferred charges and assets/Other deferred credits and liabilities	56			—			—			33			182			—			129			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	69		$	31		$	18		$	62		$	186		$	25		$	132		$	34
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	1		$	1		$	3		$	1		$	—		$	—		$	—		$	2
Interest rate derivatives:
Other current assets/Other current liabilities	—			—			1			—
Total derivatives not designated as hedging instruments	$	1		$	1		$	4		$	1
Gross amounts recognized	$	70		$	32		$	22		$	63		$	186		$	25		$	132		$	36
Gross amounts offset	$	(2	)	$	(2	)	$	(5	)	$	(5	)	$	(1	)	$	(1	)	$	(3	)	$	(3	)
Net amounts recognized in the Balance Sheets	$	68		$	30		$	17		$	58		$	185		$	24		$	129		$	33

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


	As of June 30, 2017						As of December 31, 2016						As of March 31, 2018						As of December 31, 2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities			Assets			Liabilities			Assets			Liabilities
	(in millions)												(in millions)

Southern Company Gas
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	4		$	2		$	24		$	3		$	1		$	4		$	5		$	8
Other deferred charges and assets/Other deferred credits and liabilities	—			—			1			—
Total derivatives designated as hedging instruments for regulatory purposes	$	4		$	2		$	25		$	3
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	—		$	2		$	4		$	3		$	—		$	1		$	—		$	3
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	236		$	201		$	486		$	482		$	283		$	299		$	379		$	434
Other deferred charges and assets/Other deferred credits and liabilities	102			86			66			81			234			284			170			215
Total derivatives not designated as hedging instruments	$	338		$	287		$	552		$	563		$	517		$	583		$	549		$	649
Gross amounts of recognized	$	342		$	291		$	581		$	569		$	518		$	588		$	554		$	660
Gross amounts offset^(*)	$	(196	)	$	(267	)	$	(435	)	$	(497	)
Net amounts recognized in the Balance Sheets	$	146		$	24		$	146		$	72
Gross amounts offset^(a)													$	(325	)	$	(548	)	$	(390	)	$	(583	)
Net amounts recognized in the Balance Sheets^(b)													$	193		$	40		$	164		$	77


~~(*)~~(a)	Gross amounts offset include cash collateral held on deposit in broker margin accounts of ~~$71~~$223 million and ~~$62~~$193 million as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.


(b)	Net amounts of derivative instruments outstanding exclude premium and intrinsic value associated with weather derivatives of $4 million and $11 million as of March 31, 2018 and December 31, 2017, respectively.

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:


Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at June 30, 2017
Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2018																			Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at March 31, 2018
Derivative Category and Balance Sheet Location	Southern Company^(b)			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Company Gas^(b)			Southern Company^(*)			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Company Gas^(*)
	(in millions)																		(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(24	)	$	(3	)	$	—		$	(15	)	$	(5	)	$	(1	)	$	(20	)	$	(1	)	$	(3	)	$	(11	)	$	(3	)	$	(2	)
Other regulatory assets, deferred	(23		)	(2		)	(5		)	(13		)	(3		)	—			(23		)	(4		)	(10		)	(6		)	(3		)	—
Other regulatory liabilities, current^(a)	13			3			6			—			—			4			7			—			—			—			—			7
Total energy-related derivative gains (losses)	$	(34	)	$	(2	)	$	1		$	(28	)	$	(8	)	$	3		$	(36	)	$	(5	)	$	(13	)	$	(17	)	$	(6	)	$	5


~~(a)~~	~~Georgia Power includes other regulatory liabilities, current in other current liabilities.~~


~~(b)~~	~~Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $1 million at June 30, 2017.~~

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2016
Derivative Category and Balance Sheet
Location
Southern
Company^(c)
Alabama
Power
Georgia
Power
Gulf
Power
Mississippi
Power
Southern Company Gas^(c)
(in millions)
Energy-related derivatives:
Other regulatory assets, current $ (16 ) $ (1 ) $ —
$ (9 ) $ (5 ) $ (1 )
Other regulatory assets, deferred (19 ) —
—
(16 ) (3 ) —
Other regulatory liabilities, current^(a)
56
8
29
1
1
17
Other regulatory liabilities, deferred^(b)
12
4
7
—
—
1
Total energy-related derivative gains (losses) $ 33
$ 11
$ 36
$ (24 ) $ (7 ) $ 17


~~(a)~~	~~Georgia Power includes other regulatory liabilities, current in other current liabilities.~~


~~(b)~~	~~Georgia Power includes other regulatory liabilities, deferred in other deferred credits and liabilities.~~


~~(c)~~(*)	Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $8 million at March 31, 2018.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)



Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2017
Derivative Category and Balance Sheet Location	Southern Company^(*)			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Company Gas^(*)
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(34	)	$	(4	)	$	(7	)	$	(14	)	$	(5	)	$	(4	)
Other regulatory assets, deferred	(18		)	(3		)	(6		)	(7		)	(2		)	—
Other regulatory liabilities, current	7			—			—			—			—			7
Other regulatory liabilities, deferred	1			1			—			—			—			—
Total energy-related derivative gains (losses)	$	(44	)	$	(6	)	$	(13	)	$	(21	)	$	(7	)	$	3


(*)	Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $6 million at December 31, ~~2016.~~2017.

For the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the pre-tax effects of ~~energy-related derivatives, interest rate derivatives, and foreign currency derivatives designated as~~ cash flow ~~hedging instruments~~hedge accounting on accumulated OCI were as follows:


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)							Gain (Loss) Recognized in OCI on Derivative						Gain (Loss) Reclassified from Accumulated OCI into Income
Derivatives in Cash Flow Hedging Relationships							Statements of Income Location	Amount						Gain (Loss) Recognized in OCI on Derivative						Statements of Income Location	Amount
	2017			2016				2017			2016			2018			2017				2018			2017
	(in millions)							(in millions)						(in millions)							(in millions)
Southern Company
Energy-related derivatives	$	(9	)	$	—		Depreciation and amortization	$	(2	)	$	—		$	12		$	(11	)	Depreciation and amortization	$	1		$	(4	)
																				Cost of natural gas	(2		)	—
Interest rate derivatives	(1		)	6			Interest expense, net of amounts capitalized	(5		)	(4		)	(2		)	1			Interest expense, net of amounts capitalized	(5		)	(5		)
Foreign currency derivatives	71			(39		)	Interest expense, net of amounts capitalized	(5		)	(1		)	53			(4		)	Interest expense, net of amounts capitalized	(5		)	(6		)
							Other income (expense), net^(*)	79			(20		)							Other income (expense), net^(*)	36			17
Total	$	61		$	(33	)		$	67		$	(25	)	$	63		$	(14	)		$	25		$	2
Alabama Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(2	)	$	(2	)
Georgia Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Gulf Power
Interest rate derivatives	$	(1	)	$	(2	)	Interest expense, net of amounts capitalized	$	—		$	—
Southern Power
Energy-related derivatives	$	(7	)	$	—		Depreciation and amortization	$	(2	)	$	—		$	11		$	(8	)	Depreciation and amortization	$	1		$	(4	)
Foreign currency derivatives	71			(39		)	Interest expense, net of amounts capitalized	(5		)	(1		)	53			(4		)	Interest expense, net of amounts capitalized	(5		)	(6		)
							Other income (expense), net^(*)	79			(20		)							Other income (expense), net^(*)	36			17
Total	$	64		$	(39	)		$	72		$	(21	)	$	64		$	(12	)		$	32		$	7


(*)	The reclassification from accumulated OCI into other income (expense), net completely offsets currency gains and losses arising from changes in the U.S. currency exchange rates used to record the euro-denominated notes.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

For ~~Southern Company Gas,~~the three months ended March 31, 2018 and 2017, the pre-tax ~~effect~~effects of ~~energy related~~energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments ~~recognized in OCI and those reclassified from~~on accumulated OCI ~~into earnings~~were immaterial for the ~~successor~~other registrants.

For the three months ended ~~June 30,~~March 31, 2017, there was no material ineffectiveness recorded in earnings for any registrant. Upon the adoption of ASU 2017-12, beginning in 2018, ineffectiveness was no longer separately measured and ~~the predecessor three months ended June 30, 2016 were as follows:~~

Gain (Loss) Recognized in OCI on Derivative (Effective Portion)

Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

Successor

Predecessor

Successor

Predecessor
Derivatives in Cash Flow Hedging Relationships Three Months Ended June 30, 2017

Three Months Ended June 30, 2016
Statements of Income Location Three Months Ended June 30, 2017

Three Months Ended June 30, 2016

(in millions)

(in millions)

(in millions)

(in millions)
Energy-related derivatives $ (2 )

$ —

Cost of natural gas $ —

$ (1 )
Interest rate derivatives —

(19 )
Interest expense, net of amounts capitalized —

(1 )
Total $ (2 )

$ (19 )

$ —

$ (2 )
recorded in earnings. See Note (A) for additional information.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

For the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the pre-tax effects of ~~energy-related derivatives, interest rate derivatives, and foreign currency derivatives designated as~~ cash flow ~~hedging instruments~~and fair value hedge accounting on income were as follows:

Derivatives in Cash Flow
Hedging Relationships Gain (Loss)
Recognized in OCI
on Derivative
(Effective Portion) Gain (Loss) Reclassified from Accumulated OCI into
Income (Effective Portion)
Statements of Income Location Amount
2017 2016 2017 2016
(in millions) (in millions)
Southern Company
Energy-related derivatives $ (20 ) $ —
Depreciation and amortization $ (6 ) $ —
Interest rate derivatives (1 ) (184 ) Interest expense, net of amounts capitalized (10 ) (7 )
Foreign currency derivatives 67
(39 ) Interest expense, net of amounts capitalized (12 ) (1 )

Other income (expense), net^(*)
96
(20 )
Total $ 46
$ (223 ) $ 68
$ (28 )
Alabama Power
Interest rate derivatives $ —
$ (4 ) Interest expense, net of amounts capitalized $ (3 ) $ (3 )
Georgia Power
Interest rate derivatives $ —
$ —
Interest expense, net of amounts capitalized $ (3 ) $ (2 )
Gulf Power
Energy-related derivatives $ (1 ) $ —
Depreciation and amortization $ —
$ —
Interest rate derivatives (1 ) (7 ) Interest expense, net of amounts capitalized —
—
Total $ (2 ) $ (7 ) $ —
$ —
Mississippi Power
Interest rate derivatives $ —
$ —
Interest expense, net of amounts capitalized $ (1 ) $ (1 )
Southern Power
Energy-related derivatives $ (15 ) $ —
Depreciation and amortization $ (6 ) $ —
Interest rate derivatives —
—
Interest expense, net of amounts capitalized —
(1 )
Foreign currency derivatives 67
(39 ) Interest expense, net of amounts capitalized (12 ) (1 )

Other income (expense), net^(*)
96
(20 )
Total $ 52
$ (39 ) $ 78
$ (22 )



Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships	For the Three Months Ended March 31,
	For the Three Months Ended March 31,
	2018			2017
	(in millions)
Southern Company
Depreciation and amortization	$	769		$	716
Gain (loss) on cash flow hedges
Energy-related derivatives	1			(4		)
Interest expense, net of amounts capitalized	(458		)	(416		)
Gain (loss) on cash flow hedges	��
Interest rate derivatives	(5		)	(5		)
Foreign currency derivatives	(5		)	(6		)
Gain (loss) on fair value hedges^(a)
Interest rate derivatives	(24		)	(8		)
Other income (expense), net	60			48
Gain (loss) on cash flow hedges^(b)
Foreign currency derivatives	36			17
Southern Power
Depreciation and amortization	$	114		$	119
Gain (loss) on cash flow hedges
Energy-related derivatives	1			(4		)
Interest expense, net of amounts capitalized	(47		)	(50		)
Gain (loss) on cash flow hedges
Foreign currency derivatives	(5		)	(6		)
Other income (expense), net	3			(1		)
Gain (loss) on cash flow hedges^(b)
Foreign currency derivatives	36			17


~~(*)~~(a)	For fair value hedges presented above, changes in the fair value of the derivative contracts are equal to changes in the fair value of the underlying debt and have no impact on income.


(b)	The reclassification from accumulated OCI into other income (expense), net completely offsets currency gains and losses arising from changes in the U.S. currency exchange rates used to record the euro-denominated notes.

For the three months ended March 31, 2018 and 2017, the pre-tax effects of cash flow and fair value hedge accounting on income for energy-related derivatives and interest rate derivatives were immaterial for the traditional electric operating companies and Southern Company Gas.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~For Southern Company Gas,~~As of March 31, 2018 and December 31, 2017, the ~~pre-tax effect of energy~~following amounts were recorded on the balance sheets related ~~derivatives and interest rate derivatives designated as cash flow hedging instruments recognized in OCI and those reclassified from accumulated OCI into earnings~~to cumulative basis adjustments for ~~the successor six months ended June 30, 2017 and the predecessor six months ended June 30, 2016 were as follows:~~fair value hedges:

Gain (Loss) Recognized in OCI on Derivative (Effective Portion) Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Successor Predecessor Successor Predecessor
Derivatives in Cash Flow Hedging Relationships Six Months Ended June 30, 2017 Six Months Ended June 30, 2016 Statements of Income Location Six Months Ended June 30, 2017 Six Months Ended June 30, 2016
(in millions) (in millions) (in millions) (in millions)
Energy-related derivatives $ (4 ) $ —
Cost of natural gas $ —
$ (1 )
Interest rate derivatives —
(64 ) Interest expense, net of amounts capitalized —
—
Total $ (4 ) $ (64 ) $ —
$ (1 )



	Carrying Amount of the Hedged Item						Cumulative Amount of Fair Value Hedging Adjustment included in Carrying Amount of the Hedged Item
Balance Sheet Location of Hedged Items	As of March 31, 2018			As of December 31, 2017			As of March 31, 2018		As of December 31, 2017
	(in millions)						(in millions)
Southern Company
Securities due within one year	$	(745	)	$	(746	)	$	4	$	3
Long-term Debt	(2,533		)	(2,553		)	57		35

Georgia Power
Securities due within one year	$	(745	)	$	(746	)	$	4	$	3
Long-term Debt	(497		)	(498		)	2		1

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the pre-tax effects of energy-related ~~derivatives and interest rate derivatives designated as cash flow hedging instruments were immaterial for the other registrants.~~

~~For the three and six months ended June 30, 2017 and 2016, the pre-tax effects of energy-related derivatives and interest rate~~ derivatives not designated as hedging instruments on the statements of income were as follows:


		Gain (Loss)											Gain (Loss)
		Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended March 31,
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	2017			2016		2017			2016		Statements of Income Location	2018			2017
		(in millions)					(in millions)						(in millions)
Southern Company
Energy Related derivatives:	Natural gas revenues^(*)	$	16		$	—	$	65		$	—
Energy-related derivatives:												Natural gas revenues^(*)	$	(15	)	$	50
	Cost of natural gas	(2		)	—		(4		)	—		Cost of natural gas	2			(3		)
Total derivatives in non-designated hedging relationships	Total derivatives in non-designated hedging relationships	$	14		$	—	$	61		$	—	Total derivatives in non-designated hedging relationships	$	(13	)	$	47
Southern Company Gas
Energy-related derivatives:												Natural gas revenues^(*)	$	(15	)	$	50
												Cost of natural gas	2			(3		)
Total derivatives in non-designated hedging relationships												Total derivatives in non-designated hedging relationships	$	(13	)	$	47


(*)	Excludes gains (losses) recorded in ~~cost of~~ natural gas revenues associated with weather derivatives of ~~$1 million~~an immaterial amount and ~~$15~~$14 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, respectively.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Gain (Loss)
Successor

Predecessor Successor Predecessor
Derivatives in Non-Designated Hedging Relationships Statements of Income Location Three Months Ended
June 30, 2017 Three Months Ended
June 30, 2016 Six Months Ended June 30, 2017
Six
Months Ended
June 30, 2016
(in millions) (in millions) (in millions) (in millions)
Southern Company Gas
Energy Related derivatives:
Natural gas revenues^(*)
$ 16
$ (21 ) $ 65
$ (1 )
Cost of natural gas (2 ) (61 ) (4 ) (62 )
Total derivatives in non-designated hedging relationships $ 14
$ (82 ) $ 61
$ (63 )


~~(*)~~	Excludes gains recorded in cost of natural gas associated with weather derivatives of $15 million for the successor six months ended June 30, 2017 and immaterial amounts for all other periods presented.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were ~~immaterial~~immaterial for the traditional electric operating companies and Southern Power.

~~For the three and six months ended June 30, 2017 and 2016, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were as follows:~~

Derivatives in Fair Value Hedging Relationships
Gain (Loss)

Three Months Ended
June 30,
Six Months Ended
June 30,
Derivative Category Statements of Income Location 2017 2016 2017 2016
(in millions) (in millions)
Southern Company
Interest rate derivatives: Interest expense, net of amounts capitalized $ 7
$ 4
$ (1 ) $ 24
Georgia Power
Interest rate derivatives: Interest expense, net of amounts capitalized $ —
$ —
$ (1 ) $ 15

For the three and six months ended June 30, 2017 and 2016, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were offset by changes to the carrying value of long-term debt.

~~There was no material ineffectiveness recorded in earnings for any registrant for any period presented.~~

Contingent Features

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. At ~~June 30, 2017,~~March 31, 2018, the registrants had no collateral posted with derivative counterparties to satisfy these arrangements.

~~At June 30, 2017,~~For the registrants with interest rate derivatives at March 31, 2018, the fair value of interest rate derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, was ~~immaterial for all registrants. The~~immaterial. At March 31, 2018, the fair value of

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were ~~$11 million~~immaterial for ~~Southern Company, $10 million for the traditional electric operating companies and Southern Power, and $1 million for Southern Company Gas.~~all registrants. The maximum potential collateral

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

requirements arising from the credit-risk-related contingent features for the traditional electric operating companies and Southern Power include certain agreements that could require collateral in the event that one or more Southern Company power pool participants has a credit rating change to below investment grade.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. If collateral is required, fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivatives executed with the same counterparty.

Alabama Power and Southern Power maintain accounts with certain regional transmission organizations to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Alabama Power and Southern Power may be required to post collateral. At ~~June 30, 2017,~~March 31, 2018, cash collateral posted in these accounts was immaterial. Southern Company Gas maintains accounts with brokers or the clearing houses of certain exchanges to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Southern Company Gas may be required to deposit cash into these accounts. At ~~June 30, 2017,~~March 31, 2018, cash collateral held on deposit in broker margin accounts was ~~$71~~$223 million.

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's, the traditional electric operating companies', Southern Power's, and Southern Company Gas' exposure to counterparty credit risk. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.

In addition, Southern Company Gasconducts credit evaluations and obtains appropriate internal approvals for the counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.

Southern Company Gas also utilizes master netting agreements whenever possible to mitigate exposure to counterparty credit risk. When Southern Company Gas is engaged in more than one outstanding derivative transaction with the same counterparty and it also has a legally enforceable netting agreement with that counterparty, the "net" mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty and a reasonable measure of Southern Company Gas' credit risk. Southern Company Gas also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Master netting agreements enable Southern Company Gas to net certain assets and liabilities by counterparty. Southern Company Gas also nets across product lines and against cash collateral provided the master netting and cash collateral agreements include such provisions. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas do not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)


~~(I)~~(J)	ACQUISITIONS AND DISPOSITIONS

~~Southern Company~~

~~Merger with Southern Company Gas~~

Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas through the natural gas distribution utilities. On July 1, 2016, Southern Company completed the Merger for a total purchase price of approximately $8.0 billion and Southern Company Gas became a wholly-owned, direct subsidiary of Southern Company.

The Merger was accounted for using the acquisition method of accounting with the assets acquired and liabilities assumed recognized at fair value as of the acquisition date. The following table presents the final purchase price allocation:

Southern Company Gas Purchase Price
(in millions)
Current assets $ 1,557
Property, plant, and equipment 10,108
Goodwill 5,967
Intangible assets 400
Regulatory assets 1,118
Other assets 229
Current liabilities (2,201 )
Other liabilities (4,742 )
Long-term debt (4,261 )
Noncontrolling interest (174 )
Total purchase price $ 8,001

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed of $6.0 billion is recognized as goodwill, which is primarily attributable to positioning the Southern Company system to provide natural gas infrastructure to meet customers' growing energy needs and to compete for growth across the energy value chain. Southern Company anticipates that much of the value assigned to goodwill will not be deductible for tax purposes.

The valuation of identifiable intangible assets included customer relationships, trade names, and storage and transportation contracts with estimated lives of one to 28 years. The estimated fair value measurements of identifiable intangible assets were primarily based on significant unobservable inputs (Level 3).

The results of operations for Southern Company Gas have been included in Southern Company's consolidated financial statements from the date of acquisition and consist of operating revenues of $716 million and $2.3 billion and net income of $49 million and $288 million for the three and six months ended June 30, 2017, respectively.

The following summarized unaudited pro forma consolidated statement of earnings information assumes that the acquisition of Southern Company Gas was completed on January 1, 2015. The summarized unaudited pro forma consolidated statement of earnings information includes adjustments for (i) intercompany sales, (ii) amortization of intangible assets, (iii) adjustments to interest expense to reflect current interest rates on Southern Company Gas debt and additional interest expense associated with borrowings by Southern Company to fund the Merger, and (iv) the elimination of nonrecurring expenses associated with the Merger.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

For the Six Months Ended June 30,
2016
Operating revenues (in millions)
$ 10,346
Net income attributable to Southern Company (in millions)
$ 1,255
Basic Earnings Per Share (EPS) $ 1.34
Diluted EPS $ 1.33

These unaudited pro forma results are for comparative purposes only and may not be indicative of the results that would have occurred had this acquisition been completed on January 1, 2015 or the results that would be attained in the future.

~~Acquisition of PowerSecure~~

On May 9, 2016, Southern Company acquired all of the outstanding stock of PowerSecure, a provider of products and services in the areas of distributed generation, energy efficiency, and utility infrastructure, for $18.75 per common share in cash, resulting in an aggregate purchase price of $429 million. As a result, PowerSecure became a wholly-owned subsidiary of Southern Company.

The acquisition of PowerSecure was accounted for using the acquisition method of accounting with the assets acquired and liabilities assumed recognized at fair value as of the acquisition date. The following table presents the final purchase price allocation:

PowerSecure Purchase Price
(in millions)
Current assets $ 172
Property, plant, and equipment 46
Intangible assets 106
Goodwill 284
Other assets 4
Current liabilities (121 )
Long-term debt, including current portion (48 )
Deferred credits and other liabilities (14 )
Total purchase price $ 429

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed of $284 million was recognized as goodwill, which is primarily attributable to expected business expansion opportunities for PowerSecure. Southern Company anticipates that the majority of the value assigned to goodwill will not be deductible for tax purposes.

The valuation of identifiable intangible assets included customer relationships, trade names, patents, backlog, and software with estimated lives of one to 26 years. The estimated fair value measurements of identifiable intangible assets were primarily based on significant unobservable inputs (Level 3).

The results of operations for PowerSecure have been included in Southern Company's consolidated financial statements from the date of acquisition and are immaterial to the consolidated financial results of Southern Company. Pro forma results of operations have not been presented for the acquisition because the effects of the acquisition were immaterial to Southern Company's consolidated financial results for all periods presented.

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Southern Power

See Note 211 to the financial statements of Southern Power and Note 12 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K for additional information.

Acquisitions During the ~~Six~~Three Months Ended ~~June 30, 2017~~March 31, 2018

Project Facility Resource Seller; Acquisition Date
Approximate Nameplate Capacity (MW)
Location Southern Power Percentage Ownership Actual COD PPA Contract Period
Bethel Wind Invenergy,
January 6, 2017 276 Castro County, TX 100 % January 2017 12 years



Project Facility	Resource	Seller; Acquisition Date	Approximate Nameplate Capacity (MW)	Location	Southern Power Percentage Ownership		Actual COD	PPA Contract Period
Gaskell West 1	Solar	Recurrent Energy Development Holdings, LLC January 26, 2018	20	Kern County, CA	100% of Class B	(*)	March 2018	20 years


(*)	Southern Power owns 100% of the class B membership interests under a tax equity partnership agreement.

The aggregate amounts of revenue and net income, excluding impacts from PTCs, recognized by Southern Power related to the Bethel facility included in Southern Power's condensed consolidated statements of income for year-to-date 2017 were immaterial. The BethelGaskell West 1 facility did not have operating revenues or activities prior to completion of construction and the assets being placed in ~~service; therefore, supplemental pro forma information for the comparable 2016 period is not meaningful and has been omitted.~~

~~In connection with Southern Power's 2016 acquisitions, allocations of the purchase price to individual assets were finalized~~service during ~~the six months ended June 30, 2017 with no changes to amounts originally reported for Boulder 1, Grant Plains, Grant Wind, Henrietta, Mankato, Passadumkeag, Salt Fork, Tyler Bluff, and Wake Wind.~~

~~Acquisitions Subsequent to June 30, 2017~~

Subsequent to June 30, 2017, Southern Power acquired a 100% ownership interest in and commenced construction of the Cactus Flats 148-MW wind facility, the majority of which is covered by two PPAs, which expire in 2030 and 2033. The facility is expected to be placed in service in mid-2018. The ultimate outcome of this matter cannot be determined at this time.March 2018.

Construction Projects Completed and in Progress



Project Facility	Resource	Approximate Nameplate Capacity (MW)	Location	Actual/Expected COD	PPA Contract Period
Projects ~~Completed During the Six Months Ended June 30, 2017~~
~~East Pecos~~	~~Solar~~	~~120~~	~~Pecos County, TX~~	~~March 2017~~	~~15 years~~
~~Lamesa~~	~~Solar~~	~~102~~	~~Dawson County, TX~~	~~April 2017~~	~~15 years~~

~~Project~~ Under Construction as of ~~June 30, 2017~~March 31, 2018
Cactus Flats^(*)	Wind	148	Concho County, TX	Third quarter 2018	12-15 years
Mankato	Natural Gas	345	Mankato, MN	Second quarter 2019	20 years

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~


(*)	In July 2017, Southern Power purchased 100% of the Cactus Flats facility and commenced construction. Upon placing the facility in service, Southern Power expects to close on a tax equity partnership agreement, subject to various customary conditions at closing, and will then own 100% of the class B membership interests.

Development Projects

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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Southern Company Gas

Proposed Sale of Elizabethtown Gas and Elkton Gas

In October 2017, a Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements for the sale 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. The completion of each asset sale is subject to the satisfaction or waiver of certain conditions, including, among other customary closing conditions, the receipt of required regulatory approvals, including the FERC, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC. Southern Company Gas and South Jersey Industries, Inc. made joint filings in December 2017 and on January 16, 2018 with the New Jersey BPU and the Maryland PSC, respectively, requesting regulatory approval. The asset sales are expected to be completed by the end of the third quarter 2018. The ultimate outcome of these matters cannot be determined at this time.

Proposed Sale of Pivotal Home Solutions


~~(J)~~(K)	JOINT OWNERSHIP AGREEMENTS

Southern Company Gas

See Note 4 to the financial statements of Southern Company Gas in Item 8 of the Form 10-K for additional information.

Equity Method Investments

The carrying amounts of Southern Company Gas' equity method investments as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 and related income from those investments for the ~~successor three and six month~~three-month periods ended ~~June 30,~~March 31, 2018 and March 31, 2017 ~~and the predecessor three and six month periods ended June 30, 2016~~ were as follows:

Balance Sheet Information June 30, 2017 December 31, 2016
(in millions)
SNG $ 1,405
$ 1,394
Atlantic Coast Pipeline 53
33
PennEast Pipeline 45
22
Triton 43
44
Pivotal JAX LNG, LLC 32
16
Horizon Pipeline 31
30
Other 1
2
Total $ 1,610
$ 1,541

Successor Predecessor Successor Predecessor
Income Statement Information Three Months Ended June 30, 2017 Three Months Ended June 30, 2016 Six Months Ended June 30, 2017 Six Months Ended June 30, 2016
(in millions) (in millions) (in millions) (in millions)
SNG $ 24
$ —
$ 58
$ —
Triton 2
1
2
1
PennEast Pipeline 1
—
4
—
Atlantic Coast Pipeline 2
—
3
—
Horizon Pipeline —
—
1
1
Total $ 29
$ 1
$ 68
$ 2

~~Southern Natural Gas~~

In September 2016, Southern Company Gas, through a wholly-owned, indirect subsidiary, acquired a 50% equity interest in SNG, which is accounted for as an equity method investment. On March 31, 2017, Southern Company



Balance Sheet Information	March 31, 2018		December 31, 2017
	(in millions)
SNG	$	1,274	$	1,262
Atlantic Coast Pipeline	49		41
PennEast Pipeline	62		57
Triton	42		42
Pivotal JAX LNG, LLC	45		44
Horizon Pipeline	31		30
Other	1		1
Total	$	1,504	$	1,477

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

~~Gas made an additional $50 million contribution to maintain its 50% equity interest in SNG. See Note 11 to the financial statements of~~



Income Statement Information	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
	(in millions)
SNG	$	39	$	34
PennEast Pipeline	1		3
Atlantic Coast Pipeline	1		1
Triton	1		—
Horizon Pipeline	—		1
Total	$	42	$	39

Southern ~~Company~~Natural Gas ~~under "Investment in SNG" in Item 8 of the Form 10-K for additional information on this investment.~~

Selected financial information of SNG for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and March 31, 2017 is as follows:


Income Statement Information	Three Months Ended June 30, 2017		Six Months Ended June 30, 2017		Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
	(in millions)				(in millions)
Revenues	$	143	$	298	$	160	$	155
Operating income	$	63	$	147	$	99	$	84
Net income	$	48	$	114	$	78	$	66

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

~~(K)~~(L) SEGMENT AND RELATED INFORMATION

Southern Company

The primary businesses of the Southern Company system are electricity sales by the traditional electric operating companies and Southern Power and the distribution of natural gas by Southern Company Gas. The four traditional electric operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – are vertically integrated utilities providing electric service in four Southeastern states. Southern Power develops, constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas distributes natural gas through the seven natural gas distribution utilities in seven states and is involved in several other complementary businesses including gas marketing services, wholesale gas services, and gas midstream operations.

Southern Company's reportable business segments are the sale of electricity by the four traditional electric operating companies, the sale of electricity in the competitive wholesale market by Southern Power, and the sale of natural gas and other complementary products and services by Southern Company Gas. Revenues from sales by Southern Power to the traditional electric operating companies were ~~$90~~$83 million and ~~$190~~$100 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~respectively, and $107~~respectively. Revenues from sales of natural gas from Southern Company Gas to Southern Power were $36 million and ~~$204~~$23 million for the three ~~and six~~ months ended ~~June 30, 2016,~~March 31, 2018 and 2017, respectively. The "All Other" column includes the Southern Company parent entity, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include providing energy technologies and services to electric utilities and large industrial, commercial, institutional, and municipal customers; as well as investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Financial data for business segments and products and services for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was as follows:

Electric Utilities

Traditional
Electric Operating
Companies
Southern
Power
Eliminations Total Southern Company Gas
All
Other
Eliminations Consolidated
(in millions)
Three Months Ended
June 30, 2017:
Operating revenues $ 4,157
$ 529
$ (101 ) $ 4,585
$ 716
$ 166
$ (37 ) $ 5,430
Segment net income (loss)^(a)(b)
(1,442 ) 82
—
(1,360 ) 49
(68 ) (2 ) (1,381 )
Six Months Ended
June 30, 2017:
Operating revenues $ 7,943
$ 979
$ (206 ) $ 8,716
$ 2,276
$ 289
$ (79 ) $ 11,202
Segment net income (loss)^(a)(b)(c)
(1,010 ) 151
—
(859 ) 288
(152 ) —
(723 )
Total assets at June 30, 2017 $ 71,503
$ 14,703
$ (317 ) $ 85,889
$ 21,809
$ 2,348
$ (1,362 ) $ 108,684
Three Months Ended
June 30, 2016:
Operating revenues $ 4,115
$ 373
$ (109 ) $ 4,379
$ —
$ 125
$ (45 ) $ 4,459
Segment net income (loss)^(a)(b)
599
89
—
688
—
(61 ) (4 ) 623
Six Months Ended
June 30, 2016:
Operating revenues $ 7,884
$ 688
$ (212 ) $ 8,360
$ —
$ 172
$ (81 ) $ 8,451
Segment net income (loss)^(a)(b)
1,064
139
—
1,203
—
(84 ) (7 ) 1,112
Total assets at December 31, 2016 $ 72,141
$ 15,169
$ (316 ) $ 86,994
$ 21,853
$ 2,474
$ (1,624 ) $ 109,697



	Electric Utilities
	Traditional Electric Operating Companies		Southern Power		Eliminations			Total		Southern Company Gas		All Other			Eliminations			Consolidated
	(in millions)
Three Months Ended March 31, 2018:
Operating revenues	$	3,979	$	509	$	(106	)	$	4,382	$	1,639	$	401		$	(50	)	$	6,372
Segment net income (loss)^(a)(b)(c)	612		121		—			733		279		(74		)	—			938
Total assets at March 31, 2018	$	72,893	$	15,182	$	(262	)	$	87,813	$	22,568	$	2,733		$	(1,547	)	$	111,567
Three Months Ended March 31, 2017:
Operating revenues	$	3,786	$	450	$	(105	)	$	4,131	$	1,560	$	123		$	(43	)	$	5,771
Segment net income (loss)^(a)(b)(d)	432		70		—			502		239		(84		)	1			658
Total assets at December 31, 2017	$	72,204	$	15,206	$	(325	)	$	87,085	$	22,987	$	2,552		$	(1,619	)	$	111,005


(a)	Attributable to Southern Company.

(b)

Segment net income (loss) for the traditional electric operating companies includes pre-tax charges for estimated ~~probable~~ losses on the Kemper IGCC of ~~$3.0 billion~~$44 million ($~~2.1 billion~~33 million after tax) and ~~$81~~$108 million ($5067 million after tax) for the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $3.1 billion ($2.2 billion after tax) and $134 million ($83 million after tax) for the six months ended June 30, 2017 and 2016,~~ respectively. See Note 3 to the financial statements of Southern Company under "Kemper County Energy Facility" in Item 8 of the Form 10-K and Note (B) under "~~Integrated Coal Gasification Combined Cycle~~ – ~~Kemper IGCC Schedule and Cost Estimate~~""Kemper County Energy Facility" for additional information.


(c)	Segment net income (loss) for Southern Company Gas includes a goodwill impairment charge of $42 million for the three months ended March 31, 2018 in contemplation of the sale of Pivotal Home Solutions. See Note (J) under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" for additional information.

(d)

Segment net income (loss) for the traditional electric operating companies also includes a pre-tax charge for the write-down of Gulf Power's ownership of Plant Scherer Unit 3 of $33 million ($20 million after tax) for the ~~six~~three months ended ~~June 30,~~March 31, 2017. See Note ~~(B)~~3 to the financial statements of Southern Company under "~~Regulatory~~"Regulatory Matters – Gulf Power – Retail Base Rate ~~Cases~~"Cases" in Item 8 of the Form 10-K for additional information.

Products and Services

Electric Utilities' Revenues
Period Retail Wholesale Other Total
(in millions)
Three Months Ended June 30, 2017 $ 3,777
$ 618
$ 190
$ 4,585
Three Months Ended June 30, 2016 3,748
446
185
4,379

Six Months Ended June 30, 2017 $ 7,171
$ 1,149
$ 396
$ 8,716
Six Months Ended June 30, 2016 7,124
842
394
8,360

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~



	Electric Utilities' Revenues
Period	Retail		Wholesale		Other		Total
	(in millions)
Three Months Ended March 31, 2018	$	3,568	$	619	$	195	$	4,382
Three Months Ended March 31, 2017	3,394		531		206		4,131

Southern Company Gas' Revenues
Period Gas
Distribution
Operations Gas
Marketing
Services Other Total
(in millions)
Three Months Ended June 30, 2017 $ 557
$ 166
$ (7 ) $ 716
Six Months Ended June 30, 2017 $ 1,689
$ 454
$ 133
$ 2,276



	Southern Company Gas' Revenues
Period	Gas Distribution Operations		Gas Marketing Services		Other		Total
	(in millions)
Three Months Ended March 31, 2018	$	1,200	$	271	$	168	$	1,639
Three Months Ended March 31, 2017	1,132		288		140		1,560

Southern Company Gas

Southern Company Gas manages its business through four reportable segments – gas distribution operations, gas marketing services, wholesale gas services, and gas midstream operations. The non-reportable segments are combined and presented as all other.

Gas distribution operations is the largest component of Southern Company Gas' business and includes natural gas local distribution utilities that construct, manage, and maintain intrastate natural gas pipelines and gas distribution

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

facilities in seven states. Gas marketing services includes natural gas marketing to end-use customers primarily in Georgia and Illinois. Additionally, gas marketing services provides home equipment protection products and services. Wholesale gas services provides natural gas asset management and/or related logistics services for each of Southern Company Gas' utilities except Nicor Gas as well as for non-affiliated companies. Additionally, wholesale gas services engages in natural gas storage and gas pipeline arbitrage and related activities. Gas midstream operations primarily consists of Southern Company Gas' pipeline investments, with storage and fuel operations also aggregated into this segment. The all other column includes segments below the quantitative threshold for separate disclosure, including the subsidiaries that fall below the quantitative threshold for separate disclosure.

After the Merger, Southern Company Gas changed its segment performance measure to net income. In order to properly assess net income by segment, Southern Company Gas executed various intercompany note agreements to revise interest charges to its segments. Since such agreements did not exist in the predecessor period, Southern Company Gas is unable to provide the comparable net income.

Business segment financial data for the ~~successor~~ three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017~~and the predecessor three and six months ended June 30, 2016~~ was as follows:

Gas Distribution Operations Gas Marketing Services
Wholesale Gas Services^(*)
Gas Midstream Operations Total All Other Eliminations Consolidated
(in millions)
Successor – Three Months Ended June 30, 2017:
Operating revenues $ 603
$ 166
$ (12 ) $ 12
$ 769
$ 3
$ (56 ) $ 716
Segment net income 54
4
(17 ) 9
50
(1 ) —
49
Successor – Six Months Ended June 30, 2017:
Operating revenues $ 1,783
$ 454
$ 119
$ 37
$ 2,393
$ 5
$ (122 ) $ 2,276
Segment net income 171
35
51
25
282
6
—
288
Successor – Total assets at
June 30, 2017 $ 18,257
$ 2,093
$ 989
$ 2,381
$ 23,720
$ 11,182
$ (13,093 ) $ 21,809

~~NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)~~

~~(UNAUDITED)~~

Gas Distribution Operations Gas Marketing Services
Wholesale Gas Services^(*)
Gas Midstream Operations Total All Other Eliminations Consolidated
(in millions)
Predecessor – Three Months Ended June 30, 2016:
Operating revenues $ 547
$ 149
$ (95 ) $ 10
$ 611
$ 2
$ (42 ) $ 571
Segment EBIT 118
29
(112 ) (5 ) 30
(55 ) 1
(24 )
Predecessor – Six Months Ended June 30, 2016:
Operating revenues $ 1,575
$ 435
$ (32 ) $ 25
$ 2,003
$ 4
$ (102 ) $ 1,905
Segment EBIT 353
109
(68 ) (6 ) 388
(60 ) —
328
Successor – Total assets at
December 31, 2016 $ 19,453
$ 2,084
$ 1,127
$ 2,211
$ 24,875
$ 11,145
$ (14,167 ) $ 21,853



	Gas Distribution Operations		Gas Marketing Services^(a)		Wholesale Gas Services^(b)		Gas Midstream Operations		Total		All Other			Eliminations			Consolidated
	(in millions)
Three Months Ended March 31, 2018:
Operating revenues	$	1,212	$	271	$	166	$	22	$	1,671	$	1		$	(33	)	$	1,639
Segment net income	149		13		104		23		289		(10		)	—			279
Total assets at March 31, 2018:	18,332		2,144		903		2,263		23,642		11,839			(12,913		)	22,568
Three Months Ended March 31, 2017:
Operating revenues	$	1,180	$	288	$	131	$	25	$	1,624	$	2		$	(66	)	$	1,560
Segment net income	117		31		68		15		231		8			—			239
Total assets at December 31, 2017:	19,358		2,147		1,096		2,241		24,842		12,184			(14,039		)	22,987


~~(*)~~(a)	Segment net income for gas marketing services includes a goodwill impairment charge of $42 million for the three months ended March 31, 2018 in contemplation of the sale of Pivotal Home Solutions. See Note (J) under "Southern Company Gas – Proposed Sale of Pivotal Home Solutions" for additional information.


(b)	The revenues for wholesale gas services are netted with costs associated with its energy and risk management activities. A reconciliation of operating revenues and intercompany revenues is shown in the following table.

Third Party Gross Revenues Intercompany Revenues Total Gross Revenues Less Gross Gas Costs Operating Revenues
(in millions)
Successor – Three Months Ended June 30, 2017 $ 1,531
$ 123
$ 1,654
$ 1,666
$ (12 )
Successor – Six Months Ended June 30, 2017 3,370
259
3,629
3,510
119
Predecessor – Three Months Ended June 30, 2016 $ 1,061
$ 58
$ 1,119
$ 1,214
$ (95 )
Predecessor – Six Months Ended June 30, 2016 2,500
143
2,643
2,675
(32 )



	Third Party Gross Revenues		Intercompany Revenues		Total Gross Revenues		Less Gross Gas Costs		Operating Revenues
	(in millions)
Three Months Ended March 31, 2018	$	1,938	$	167	$	2,105	$	1,939	$	166
Three Months Ended March 31, 2017	$	1,839	$	136	$	1,975	$	1,844	$	131

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which the registrants are involved.

I~~tem~~Item 1A. Risk Factors.

See RISK FACTORS in Item 1A of the Form 10-K for a discussion of the risk factors of the registrants. ~~Except as described below, there~~There have been no material changes to these risk factors from those previously disclosed in the Form 10-K.

The bankruptcy filing of the EPC Contractor is expected to have a material impact on the construction cost and schedule of, as well as the cost recovery for, Plant Vogtle Units 3 and 4 and could have a material impact on the financial statements of Southern Company and Georgia Power, and any inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4, and therefore on the financial statements of Southern Company and Georgia Power.

See "Construction Risk" in Item 1A – Risk Factors of Southern Company and Georgia Power in the Form 10-K for a discussion of risks relating to major construction projects, including Plant Vogtle Units 3 and 4 and see Note (B) to the Condensed Financial Statements under "Regulatory Matters – Georgia Power – Nuclear Construction" herein and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information.

~~$400 million, of which $354 million had been paid or accrued as of June 30, 2017. Georgia Power's proportionate share of this aggregate liability totaled approximately $183 million.~~

The Vogtle 3 and 4 Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million (approximately $420 million based on Georgia Power's ownership interest). Under the Toshiba Guarantee, Toshiba guaranteed certain payment obligations of the EPC Contractor, including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Vogtle Owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under the Vogtle 3 and 4 Agreement. The Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020 and require 60 days' written notice to Georgia Power in the event the Westinghouse Letters of Credit will not be renewed.

Under the terms of the Vogtle 3 and 4 Agreement, the EPC Contractor did not have the right to terminate the Vogtle 3 and 4 Agreement for convenience. In the event of an abandonment of work by the EPC Contractor, the maximum liability of the EPC Contractor under the Vogtle 3 and 4 Agreement was 40% of the contract price (approximately $1.7 billion based on Georgia Power's ownership interest). In addition, the Vogtle Owners could terminate the Vogtle 3 and 4 Agreement for certain breaches by the EPC Contractor, including abandonment of work by the EPC Contractor.

Vogtle Owners as counterparties to certain assumed project-related contracts, and (iv) reject the Vogtle 3 and 4 Agreement. The Services Agreement, and the EPC Contractor's rejection of the Vogtle 3 and 4 Agreement, became effective upon approval by the DOE on July 27, 2017. The Services Agreement will continue until the start-up and testing of Plant Vogtle Units 3 and 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Vogtle Owners upon 30 days' written notice.

Preliminary Cancellation Cost Estimate
(in billions)
CWIP as of June 30, 2017 $ 4.5
Financing costs collected, net of tax 1.4
Cancellation costs^(*)
0.4
Total $ 6.3


~~(*)~~	The estimate for cancellation costs includes, but is not limited to, costs to terminate contracts for construction and other services, as well as costs to secure the Plant Vogtle Units 3 and 4 construction site.

The Guarantee Obligations continue to exist in the event of cancellation. In addition, under Georgia law, prudently incurred costs related to certificated projects cancelled by the Georgia PSC are allowed recovery, including carrying costs, in future retail rates. Georgia Power will continue working with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4, including, but not limited to, the status of construction and rate recovery, and currently expects to include its recommendation in its seventeenth Vogtle Construction Monitoring report to be filed with the Georgia PSC in late August 2017.

~~The ultimate outcome of these matters is dependent on the completion of the assessments described above, as well as the related regulatory treatment, and cannot be determined at this time.~~

Item 6. Exhibits.

The exhibits below with an asterisk (*) preceding the exhibit number are filed herewith. The remaining exhibits have previously been filed with the SEC and are incorporated herein by reference. The exhibits marked with a pound sign (#) are management contracts or compensatory plans or arrangements.



	(4) Instruments Describing Rights of Security Holders, Including Indentures

	~~Southern Company~~

*	~~(a)1~~	-	~~Fourth Supplemental Indenture to Junior Subordinated Note Indenture, dated as of June 21, 2017, providing for the issuance of the Series 2017A 5.325% Junior Subordinated Notes due June 21, 2057.~~

*	~~(a)2~~	-	~~Nineteenth Supplemental Indenture to Senior Note Indenture, dated as of June 21, 2017, providing for the issuance of the Series 2017A Floating Rate Senior Notes due September 30, 2020.~~

	~~Georgia~~Mississippi Power

	~~(c)~~(e)1	-	~~Amendment No. 3,~~ Fourteenth Supplemental Indenture to Senior Note Indenture, dated ~~July~~as of March 27, ~~2017 to Loan Guarantee Agreement dated February 20, 2014, between Georgia Power and~~2018, providing for the ~~DOE.~~issuance of the Series 2018A Floating Rate Senior Notes due March 27, 2020. (Designated in Form 8-K dated ~~July 27, 2017,~~March 22, 2018, File No. ~~1-6468,~~001-11229, as Exhibit ~~4.1.~~4.2(a).)

	~~Gulf Power~~

	~~(d)~~(e)2	-	~~Twenty-Second~~ Fifteenth Supplemental Indenture to Senior Note Indenture, dated as of ~~May 18, 2017,~~March 27, 2018, providing for the issuance of the Series ~~2017A 3.30%~~2018B 3.95% Senior Notes due ~~May~~March 30, ~~2027.~~2028. (Designated in Form 8-K dated ~~May 15, 2017,~~March 22, 2018, File No. ~~001-31737,~~001-11229, as Exhibit ~~4.2.~~4.2(b).)

	~~Southern Company Gas~~

	~~(g)1~~	-	~~Form of Southern Company Gas Capital Corporation's Series 2017A 4.400% Senior Notes due May 30, 2047. (Designated in Form 8-K dated May 4, 2017, File No. 1-14174, as Exhibit 4.1.)~~

	~~(g)2~~	-	~~Form of Southern Company Gas' Guarantee related to the Series 2017A 4.400% Senior Notes due May 30, 2047. (Designated in Form 8-K dated May 4, 2017, File No. 1-14174, as Exhibit 4.3.)~~

	(10) Material Contracts

	~~Georgia~~Southern Company

*	(a)1	-	Third Amendment to The Southern Company Supplemental Executive Retirement Plan effective April 1, 2018.

*	(a)2	-	Third Amendment to The Southern Company Supplemental Benefit Plan effective April 1, 2018.

*	(a)3	-	First Amendment to Amended and Restated Southern Company Change in Control Benefits Protection Plan, effective March 1, 2018.

	Alabama Power

	~~(c)~~(b)1	-	Third Amendment ~~No. 2~~ to ~~Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and~~ The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated May 12, 2017, File No. 1-6468, asSouthern Company Supplemental Executive Retirement Plan effective April 1, 2018. See Exhibit ~~10.1.)~~10(a)1 herein.
	~~(c)~~
	(b)2	-	Third Amendment ~~No.~~ to The Southern Company Supplemental Benefit Plan effective April 1, 2018. See Exhibit 10(a)2 herein.

	(b)3	-	First Amendment to Amended and Restated Southern Company Change in Control Benefits Protection Plan, effective March 1, 2018. See Exhibit 10(a)3 herein.

	Mississippi Power

	(e)1	-	Third Amendment to ~~Interim Assessment Agreement dated as of~~The Southern Company Supplemental Executive Retirement Plan effective April 1, 2018. See Exhibit 10(a)1 herein.

	(e)2	-	Third Amendment to The Southern Company Supplemental Benefit Plan effective April 1, 2018. See Exhibit 10(a)2 herein.

	(e)3	-	First Amendment to Amended and Restated Southern Company Change in Control Benefits Protection Plan, effective March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated June 1, 2018. See Exhibit 10(a)3 ~~2017, File No. 1-6468, as Exhibit 10.1.)~~herein.



	~~(c)3~~	-	Amendment No. 4 to Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated June 5, 2017, File No. 1-6468, as Exhibit 10.1.)
	~~(c)4~~	-	Amendment No. 5 to Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated June 16, 2017, File No. 1-6468, as Exhibit 10.2.)
	~~(c)5~~	-	Amendment No. 6 to Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated June 22, 2017, File No. 1-6468, as Exhibit 10.1.)
	~~(c)6~~	-	Amendment No. 7 to Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated June 28, 2017, File No. 1-6468, as Exhibit 10.1.)
	~~(c)7~~	-	Amendment No. 8 to Interim Assessment Agreement dated as of March 29, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, and The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse, WECTEC Staffing Services LLC, and WECTEC. (Designated in Form 8-K dated July 20, 2017, File No. 1-6468, as Exhibit 10.1.)
	~~(c)8~~	-	Settlement Agreement dated as of June 9, 2017, by and among Georgia Power, Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, The City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Toshiba Corporation. (Designated in Form 8-K dated June 16, 2017, File No. 1-6468, as Exhibit 10.1.)
*	~~(c)9~~	-	Amended and Restated Services Agreement dated as of June 20, 2017, by and among Georgia Power, for itself and as agent for Oglethorpe Power Corporation, Municipal Electric Authority of Georgia, MEAG Power SPVJ, LLC, MEAG Power SPVM, LLC, MEAG Power SPVP, LLC, and The City of Dalton, acting by and through its Board of Water, Light and Sinking Fund Commissioners, and Westinghouse and WECTEC. (Georgia Power has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Georgia Power omitted such portions from the filing and filed them separately with the SEC.)

	(24) Power of Attorney and Resolutions

	Southern Company

	(a)	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 1-3526 as Exhibit 24(a).)

	Alabama Power

	(b)	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 1-3164 as Exhibit 24(b).)



	Georgia Power

	(c)1	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 1-6468 as Exhibit 24(c).)

	Gulf Power

	(d)1	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 001-31737 as Exhibit 24(d).)

	Mississippi Power

	(e)	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 001-11229 as Exhibit 24(e).)

	Southern Power

	(f)1	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 001-37803 as Exhibit 24(f).)

*	(f)2	-	Power of Attorney for Mark S. Lantrip.

	Southern Company Gas

	(g)	-	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, ~~2016,~~2017, File No. 1-14174 as Exhibit 24(g).)

	(31) Section 302 Certifications

	Southern Company

*	(a)1	-	Certificate of Southern Company's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(a)2	-	Certificate of Southern Company's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	Alabama Power

*	(b)1	-	Certificate of Alabama Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(b)2	-	Certificate of Alabama Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	Georgia Power

*	(c)1	-	Certificate of Georgia Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(c)2	-	Certificate of Georgia Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.




	Gulf Power

*	(d)1	-	Certificate of Gulf Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(d)2	-	Certificate of Gulf Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	Mississippi Power

*	(e)1	-	Certificate of Mississippi Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.



*	(e)2	-	Certificate of Mississippi Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	Southern Power

*	(f)1	-	Certificate of Southern Power Company's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(f)2	-	Certificate of Southern Power Company's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	Southern Company Gas

*	(g)1	-	Certificate of Southern Company Gas' Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

*	(g)2	-	Certificate of Southern Company Gas' Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

	(32) Section 906 Certifications

	Southern Company

*	(a)	-	Certificate of Southern Company's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

	Alabama Power

*	(b)	-	Certificate of Alabama Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

	Georgia Power

*	(c)	-	Certificate of Georgia Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

	Gulf Power

*	(d)	-	Certificate of Gulf Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

	Mississippi Power

*	(e)	-	Certificate of Mississippi Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

	Southern Power

*	(f)	-	Certificate of Southern Power Company's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.



	Southern Company Gas

*	(g)	-	Certificate of Southern Company Gas' Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.



	(101) Interactive Data Files

*	INS	-	XBRL Instance Document
*	SCH	-	XBRL Taxonomy Extension Schema Document
*	CAL	-	XBRL Taxonomy Calculation Linkbase Document
*	DEF	-	XBRL Definition Linkbase Document
*	LAB	-	XBRL Taxonomy Label Linkbase Document
*	PRE	-	XBRL Taxonomy Presentation Linkbase Document

THE SOUTHERN COMPANY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.



		THE SOUTHERN COMPANY

By		Thomas A. Fanning
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		Art P. Beattie
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

ALABAMA POWER COMPANY

SIGNATURES



		ALABAMA POWER COMPANY

By		Mark A. Crosswhite
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		Philip C. Raymond
		Executive Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

GEORGIA POWER COMPANY

SIGNATURES



		GEORGIA POWER COMPANY

By		W. Paul Bowers
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		~~W. Ron Hinson~~Xia Liu
		Executive Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

GULF POWER COMPANY

SIGNATURES



		GULF POWER COMPANY

By		S. W. Connally, Jr.
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

By		~~Xia Liu~~Robin B. Boren
		Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

MISSISSIPPI POWER COMPANY

SIGNATURES



		MISSISSIPPI POWER COMPANY

By		Anthony L. Wilson
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		Moses H. Feagin
		Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

SOUTHERN POWER COMPANY

SIGNATURES



		SOUTHERN POWER COMPANY

By		~~Joseph A. Miller~~Mark S. Lantrip
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		William C. Grantham
		Senior Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

SOUTHERN COMPANY GAS

SIGNATURES



		SOUTHERN COMPANY GAS

By		Andrew W. Evans
		Chairman, President, and Chief Executive Officer
		(Principal Executive Officer)

By		Elizabeth W. Reese
		Executive Vice President, Chief Financial Officer, and Treasurer
		(Principal Financial Officer)

By		/s/ Melissa K. Caen
		(Melissa K. Caen, Attorney-in-fact)

Date: ~~August~~May 1, ~~2017~~2018

~~272~~223



Preliminary in-service dates
Unit 3	February 2021			–	March 2022
Unit 4	February 2022			–	March 2023
	(in billions)
Preliminary estimated cost to complete	$	3.9		–	$	4.6
CWIP as of June 30, 2017	4.5				4.5
Guarantee Obligations	(1.7		)		(1.7		)
Estimated capital costs	$	6.7		–	$	7.4
Vogtle Cost Settlement Agreement Revised Forecast	(5.7		)		(5.7		)
Estimated net additional capital costs	$	1.0		–	$	1.7



	Preliminary Cancellation Cost Estimate
	(in billions)
CWIP as of June 30, 2017	$	4.5
Financing costs collected, net of tax	1.4
Cancellation costs^(*)	0.4
Total	$	6.3



Company	Senior Note Issuances		Senior Note Maturities and Redemptions		Revenue Bond Maturities, Redemptions, and Repurchases		Other Long-Term Debt Issuances			Other Long-Term Debt Redemptions and Maturities^(a)
	(in millions)
Southern Company^(b)	$	300	$	—	$	—	$	500		$	400
Alabama Power	550		200		—		—			—
Georgia Power	850		450		27		—			3
Gulf Power	300		85		—		6			—
Mississippi Power	—		—		—		40			893
Southern Power	—		—		—		3			3
Southern Company Gas^(c)	450		—		—		—			—
Other	—		—		—		—			8
Elimination^(d)	—		—		—		(40		)	(591		)
Southern Company Consolidated	$	2,450	$	735	$	27	$	509		$	716



	Short-term Debt During the Period^(*)
	Average Amount Outstanding		Weighted Average Interest Rate		Maximum Amount Outstanding
	(in millions)				(in millions)
Commercial paper	$	28	1.1	%	$	200



Cost Category	2010 Project Estimate^(a)		Cost Estimate at Suspension^(b)			June 30, 2017 Actual Costs
	(in billions)
Plant Subject to Cost Cap^(c)(e)	$	2.40	$	5.95		$	5.68
Lignite Mine and Equipment	0.21		0.23			0.23
CO₂ Pipeline Facilities	0.14		0.11			0.11
AFUDC^(d)	0.17		0.85			0.85
Combined Cycle and Related Assets Placed in Service – Incremental^(e)	—		0.05			0.05
General Exceptions	0.05		0.10			0.08
Deferred Costs^(e)	—		0.23			0.23
Additional DOE Grants	—		(0.14		)	(0.14		)
Total Kemper IGCC	$	2.97	$	7.38		$	7.09



	June 30,
	2017		2016		2017 vs. 2016
	(in thousands, except market share %)				(% change)
Gas distribution operations	4,573		4,544		0.6	%
Gas marketing services
Energy customers^(*)	768		630		21.9	%
Market share of energy customers in Georgia	29.1	%	29.3	%
Service contracts	1,188		1,197		(0.8	)%



	Storage withdrawal schedule
	Total storage (WACOG $2.75)	Expected net operating gains^(a)		Physical transportation transactions – expected net operating losses^(b)
	(in mmBtu in millions)	(in millions)		(in millions)
2017	36.5	$	5	$	(10	)
2018 and thereafter	30.9	12		(27		)
Total at June 30, 2017	67.4	$	17	$	(37	)



Note		Page Number
A	Introduction	~~189~~156
B	Contingencies and Regulatory Matters	~~194~~163
C	Revenue from Contracts with Customers	178
D	Fair Value Measurements	~~216~~183
DE	Stockholders' Equity	~~220~~187
EF	Financing	~~222~~189
FG	Retirement Benefits	~~226~~191
GH	Income Taxes	~~232~~194
HI	Derivatives	~~234~~
I	~~Acquisitions~~	~~249~~195
J	Acquisitions and Dispositions	208
K	Joint Ownership Agreements	~~252~~209
KL	Segment and Related Information	~~254~~210



Company	Senior Note Issuances		Senior Note Maturities and Redemptions		Revenue Bond Maturities, Redemptions, and Repurchases		Other Long-Term Debt Issuances			Other Long-Term Debt Redemptions and Maturities^(a)
	(in millions)
Southern Company^(b)	$	300	$	—	$	—	$	500		$	400
Alabama Power	550		200		—		—			—
Georgia Power	850		450		27		—			3
Gulf Power	300		85		—		6			—
Mississippi Power	—		—		—		40			893
Southern Power	—		—		—		3			3
Southern Company Gas^(c)	450		—		—		—			—
Other	—		—		—		—			8
Elimination^(d)	—		—		—		(40		)	(591		)
Southern Company Consolidated	$	2,450	$	735	$	27	$	509		$	716



	Mississippi Power		Southern Company Gas		Southern Company
	(in millions)
Federal	$	—	$	18	$	18
State (net of federal benefit)	46		1		63
Balance at June 30, 2017	$	46	$	19	$	81



Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2016
Derivative Category and Balance Sheet Location	Southern Company^(c)			Alabama Power			Georgia Power		Gulf Power			Mississippi Power			Southern Company Gas^(c)
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(16	)	$	(1	)	$	—	$	(9	)	$	(5	)	$	(1	)
Other regulatory assets, deferred	(19		)	—			—		(16		)	(3		)	—
Other regulatory liabilities, current^(a)	56			8			29		1			1			17
Other regulatory liabilities, deferred^(b)	12			4			7		—			—			1
Total energy-related derivative gains (losses)	$	33		$	11		$	36	$	(24	)	$	(7	)	$	17



Southern Company Gas Purchase Price
	(in millions)
Current assets	$	1,557
Property, plant, and equipment	10,108
Goodwill	5,967
Intangible assets	400
Regulatory assets	1,118
Other assets	229
Current liabilities	(2,201		)
Other liabilities	(4,742		)
Long-term debt	(4,261		)
Noncontrolling interest	(174		)
Total purchase price	$	8,001



	For the Six Months Ended June 30,
	2016
Operating revenues (in millions)	$	10,346
Net income attributable to Southern Company (in millions)	$	1,255
Basic Earnings Per Share (EPS)	$	1.34
Diluted EPS	$	1.33



PowerSecure Purchase Price
	(in millions)
Current assets	$	172
Property, plant, and equipment	46
Intangible assets	106
Goodwill	284
Other assets	4
Current liabilities	(121		)
Long-term debt, including current portion	(48		)
Deferred credits and other liabilities	(14		)
Total purchase price	$	429




Balance Sheet Information	June 30, 2017		December 31, 2016
	(in millions)
SNG	$	1,405	$	1,394
Atlantic Coast Pipeline	53		33
PennEast Pipeline	45		22
Triton	43		44
Pivotal JAX LNG, LLC	32		16
Horizon Pipeline	31		30
Other	1		2
Total	$	1,610	$	1,541



	Gas Distribution Operations		Gas Marketing Services		Wholesale Gas Services^(*)			Gas Midstream Operations		Total		All Other			Eliminations			Consolidated
	(in millions)
Successor – Three Months Ended June 30, 2017:
Operating revenues	$	603	$	166	$	(12	)	$	12	$	769	$	3		$	(56	)	$	716
Segment net income	54		4		(17		)	9		50		(1		)	—			49
Successor – Six Months Ended June 30, 2017:
Operating revenues	$	1,783	$	454	$	119		$	37	$	2,393	$	5		$	(122	)	$	2,276
Segment net income	171		35		51			25		282		6			—			288
Successor – Total assets at June 30, 2017	$	18,257	$	2,093	$	989		$	2,381	$	23,720	$	11,182		$	(13,093	)	$	21,809