Acquisitions

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

ACQUISITIONS

ACQUISITIONS

Southern Company

Merger with Southern Company Gas

Southern Company Gas, formerly known as AGL Resources Inc., is an energy services holding company whose primary business is the distribution of natural gas through 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 preliminary purchase price allocation:

Southern Company Gas Purchase Price	September 30, 2016
	(in millions)
Current assets	$	1,557
Property, plant, and equipment	10,108
Goodwill	5,937
Intangible assets	400
Regulatory assets	1,118
Other assets	229
Current liabilities	(2,201		)
Other liabilities	(4,712		)
Long-term debt	(4,261		)
Noncontrolling interests	(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 $5.9 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 estimated fair values noted above are preliminary and are subject to change upon finalization of the purchase accounting assessment as additional information related to the fair value of assets and liabilities becomes available. Subsequent adjustments to the preliminary purchase price allocation are not expected to have a material impact on the results of operations and financial position of Southern Company.

The preliminary 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 the consolidated financial statements from the date of acquisition and consist of operating revenues of $543 million and net income of $4 million.

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.

	For the Nine Months Ended September 30,
	2016		2015
Operating revenues (in millions)	$	16,609	$	16,865
Net income attributable to Southern Company (in millions)	$	2,369	$	2,269
Basic EPS	$	2.50	$	2.43
Diluted EPS	$	2.48	$	2.42

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.

During the three and nine months ended September 30, 2016, Southern Company recorded in its statements of income costs associated with the Merger of approximately $40.8 million and $104.1 million, respectively, of which $40.6 million and $73.5 million is included in operating expenses and $0.2 million and $30.6 million is included in other income and (expense), respectively. These costs include external transaction costs for financing, legal, and consulting services, as well as rate credits and additional compensation-related expenses.

See Note 12 to the financial statements of Southern Company under "Southern Company – Proposed Merger with AGL Resources" in Item 8 of the Form 10-K for additional information.

Acquisition of PowerSecure International, Inc.

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 allocation of the purchase price is as follows:

PowerSecure Purchase Price	September 30, 2016
	(in millions)
Current assets	$	172
Property, plant, and equipment	46
Goodwill	284
Intangible assets	101
Other assets	6
Current liabilities	(145		)
Long-term debt, including current portion	(18		)
Deferred credits and other liabilities	(17		)
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 the 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.

Alliance with Bloom Energy Corporation

On October 24, 2016, a subsidiary of Southern Company acquired from an affiliate of Bloom Energy Corporation (Bloom) all of the equity interests of 2016 ESA HoldCo, LLC and its subsidiary, 2016 ESA Project Company, LLC. 2016 ESA Project Company, LLC expects to acquire 50 MWs of Bloom fuel cell systems to serve commercial and industrial customers under long-term PPAs. In connection with this transaction, PowerSecure and Bloom agreed to pursue a strategic alliance to develop technology for behind-the-meter energy solutions.

Investment in Southern Natural Gas

On July 10, 2016, Southern Company and Kinder Morgan, Inc. (Kinder Morgan) entered into a definitive agreement for Southern Company to acquire a 50% equity interest in SNG, which is the owner of a 7,000-mile pipeline system connecting natural gas supply basins in Texas, Louisiana, Mississippi, and Alabama to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. On August 31, 2016, Southern Company assigned its rights and obligations under the definitive agreement to a wholly-owned, indirect subsidiary of Southern Company Gas. On September 1, 2016, Southern Company Gas completed the acquisition for a purchase price of approximately $1.4 billion. The investment in SNG is accounted for using the equity method.

Acquisition of Remaining Interest in SouthStar

SouthStar is a retail natural gas marketer and markets natural gas to residential, commercial, and industrial customers, primarily in Georgia and Illinois. At September 30, 2016, Southern Company Gas had an 85% ownership interest in SouthStar, with Piedmont owning the remaining 15%. Subsequent to September 30, 2016, Southern Company Gas purchased Piedmont's 15% interest in SouthStar for $160 million. Beginning in the fourth quarter 2016, SouthStar will be fully consolidated with Southern Company Gas.

Southern Power

See Note 2 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. During the nine months ended September 30, 2016, the fair values of the assets and liabilities acquired of Desert Stateline, Garland, Garland A, Lost Hills Blackwell, Morelos, North Star, Roserock, and Tranquillity were finalized with no changes to the fair values reported.

During 2016, in accordance with its overall growth strategy, Southern Power or one of its wholly-owned subsidiaries, Southern Renewable Partnerships, LLC and Southern Renewable Energy, Inc., acquired or contracted to acquire the projects discussed below. Acquisition-related costs were expensed as incurred and were not material. The acquisitions do not include any contingent consideration unless specifically noted.

Project Facility

Resource

Seller; Acquisition Date

Approximate Nameplate Capacity (MW)

Location

Southern Power Percentage Ownership

Actual/Expected COD

PPA Counterparties for Plant Output

PPA Contract Period

Acquisitions for the Nine Months Ended September 30, 2016

Calipatria

Solar

Solar Frontier Americas Holding LLC February 11, 2016

20

Imperial County, CA

90

%

February 2016

San Diego Gas & Electric Company

20 years

East Pecos

Solar

First Solar, Inc. March 4, 2016

120

Pecos County, TX

100

%

December 2016

Austin Energy

15 years

Grant Plains

Wind

Apex Clean Energy Holdings, LLC August 26, 2016

147

Grant County, OK

100

%

December 2016

Oklahoma Municipal Power Authority and Steelcase Inc.

20 years and 12 years

(a)

Grant Wind

Wind

Apex Clean Energy Holdings, LLC April 7, 2016

151

Grant County, OK

100

%

April 2016

Western Farmers, East Texas, and Northeast Texas Electric Cooperative

20 years

Henrietta

Solar

SunPower Corp. July 1, 2016

102

Kings County, CA

51

%

(b)

July 2016

Pacific Gas and Electric Company

20 years

Lamesa

Solar

RES America Developments Inc. July 1, 2016

102

Dawson County, TX

100

%

First quarter 2017

City of Garland, Texas

15 years

Passadumkeag

Wind

Quantum Utility Generation, LLC June 30, 2016

42

Penobscot County, ME

100

%

July 2016

Western Massachusetts Electric Company

15 years

Rutherford

Solar

Cypress Creek Renewables, LLC July 1, 2016

74

Rutherford County, NC

90

%

December 2016

Duke Energy Carolinas, LLC

15 years

Acquisitions Subsequent to September 30, 2016

Mankato

Natural Gas

Calpine Corporation October 26, 2016

375

(c)

Mankato, MN

100

%

N/A(c)

Northern States Power Company

10 years

Wake Wind

Wind

Invenergy Wind Global LLC October 26, 2016

257

Floyd and Crosby Counties, TX

90.1

%

October 2016

Equinix Enterprises, Inc. and Owens Corning

12 years

(a) In addition to the 20-year and 12-year PPAs, the facility has a 10-year contract with Allianz Risk Transfer (Bermuda) Ltd.

(b) Southern Power owns 100% of the class A membership interests and a wholly-owned subsidiary of the seller owns 100% of the class B membership interests. Southern Power and the class B member are entitled to 51% and 49%, respectively, of all cash distributions from the project. In addition, Southern Power is entitled to substantially all of the federal tax benefits with respect to the transaction.

(c) The Mankato facility is a fully operational 375-MW natural gas-fired combined-cycle facility with an additional 345-MW expansion under development.

Acquisitions During the Nine Months Ended September 30, 2016

Southern Power's aggregate purchase price for the project facilities acquired during the nine months ended September 30, 2016 was approximately $830 million, which includes $145 million of contingent consideration. Including the minority owner Turner Renewable Energy, LLC's (TRE) 10% ownership interest in Calipatria and Rutherford, SunPower Corp's 49% ownership interest in Henrietta, and the assumption of $217 million in construction debt (non-recourse to Southern Power), the total aggregate purchase price is approximately $923 million for the project facilities acquired during the nine months ended September 30, 2016. The fair values of the assets and liabilities acquired through the business combinations were recorded as follows: $1.0 billion as CWIP, $58 million as property, plant, and equipment, $77 million as an intangible asset, $24 million as other assets, and $5 million as accounts payable; however, the allocations of the purchase price to individual assets have not been finalized. The intangible asset consists of an acquired PPA that will be amortized over its 20-year term. The estimated amortization for future periods is approximately $1 million in 2016 and $4 million per year thereafter. For East Pecos, Grant Plains, Lamesa, and Rutherford, which are currently under construction, total aggregate construction costs, excluding the acquisition costs, are expected to be $708 million to $775 million. The ultimate outcome of these matters cannot be determined at this time.

Acquisitions Subsequent to September 30, 2016

Southern Power's aggregate purchase price for acquisitions subsequent to September 30, 2016 was approximately $873 million. Including the minority owner Invenergy Wind Global LLC's 9.9% ownership interest in Wake Wind, the total aggregate purchase price is approximately $924 million.

As part of Southern Power's acquisition of Mankato, which has a fully operational 375-MW natural gas-fired combined-cycle facility, Southern Power has commenced construction of an additional 345-MW expansion which is covered with a 20-year PPA. Total aggregate construction costs, excluding the acquisition costs allocated to CWIP, are expected to be $170 million to $190 million. The ultimate outcome of this matter cannot be determined at this time.

Acquisition Agreements Executed but Not Yet Closed

During the nine months ended September 30, 2016 and subsequent to that date, Southern Power entered into agreements to acquire the following projects for an aggregate purchase price of approximately $1.2 billion:

• 51% ownership interest (through 100% ownership of the class A membership interests entitling Southern Power to 51% of all cash distributions and most of the federal tax benefits) in a 100-MW solar facility in Nevada covered with a 20-year PPA, which is expected to close in November 2016;

• 100% ownership interests in two wind facilities in Texas totaling 299 MWs, the majority of which is contracted under PPAs for the first 12 to 14 years of operation and are expected to close before the end of 2016; and

• 100% ownership interest in a 275-MW wind facility in Texas, the majority of which is contracted under a 12-year PPA and is expected to close in January 2017.

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

The aggregate amount of revenue recognized by Southern Power related to the project facilities acquired during the nine months ended September 30, 2016 included in the condensed consolidated statements of income for year-to-date 2016 is $14 million. The aggregate amount of net income, excluding impacts of ITCs and PTCs, attributable to Southern Power related to the project facilities acquired during the nine months ended September 30, 2016 included in the condensed consolidated statements of income is immaterial. These businesses did not have operating revenues or activities prior to completion of construction and their assets being placed in service; therefore, supplemental pro forma information as though the acquisitions occurred as of the beginning of 2016, and for the comparable 2015 period, is not meaningful and has been omitted.

Construction Projects

During the nine months ended September 30, 2016, in accordance with its overall growth strategy, Southern Power completed construction of and placed in service, or continued construction of, the projects set forth in the following table. Through September 30, 2016, total costs of construction incurred for the following projects were $3.0 billion, of which $1.2 billion remains in CWIP. Including the total construction costs incurred through September 30, 2016 and the acquisition prices allocated to CWIP, total aggregate construction costs for the following projects are estimated to be $3.1 billion to $3.2 billion. The ultimate outcome of these matters cannot be determined at this time.

Solar Facility	Seller	Approximate Nameplate Capacity (MW)	Location	Actual/Expected COD	PPA Counterparties for Plant Output	PPA Contract Period
Projects Completed During the Nine Months Ended September 30, 2016
Butler Solar Farm	Strata Solar Development, LLC	22	Taylor County, GA	February 2016	Georgia Power(a)	20 years
Desert Stateline(b)	First Solar Development, LLC	299(c)	San Bernardino County, CA	Through July 2016	Southern California Edison Company (SCE)	20 years
Garland A	Recurrent Energy, LLC	20	Kern County, CA	August 2016	SCE	20 years
Pawpaw	Longview Solar, LLC	30	Taylor County, GA	March 2016	Georgia Power(a)	30 years
Tranquillity	Recurrent Energy, LLC	205	Fresno County, CA	July 2016	Shell Energy North America (US), LP/SCE	18 years
Projects Under Construction as of September 30, 2016
Butler	CERSM, LLC and Community Energy, Inc.	103	Taylor County, GA	December 2016	Georgia Power(a)	30 years
Garland	Recurrent Energy, LLC	185	Kern County, CA	October 2016	SCE	15 years
Roserock	Recurrent Energy, LLC	160	Pecos County, TX	November 2016	Austin Energy	20 years
Sandhills	N/A	146	Taylor County, GA	October 2016	Cobb, Flint, Irwin, Middle Georgia and Sawnee Electric Membership Corporations	25 years

(a) Affiliate PPA approved by the FERC.

(b) On March 29, 2016, Southern Power acquired an additional 15% interest in Desert Stateline. As a result, Southern Power and the class B member are entitled to 66% and 34%, respectively, of all cash distributions from Desert Stateline. In addition, Southern Power will continue to be entitled to substantially all of the federal tax benefits with respect to the transaction.

(c) The facility has a total of 299 MWs, of which 110 MWs were placed in service in the fourth quarter 2015 and 189 MWs were placed in service during the nine months ended September 30, 2016.