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, 2013 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 September 30, 2014 and 2013. 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.

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.

Asset Retirement Obligations

See Note 1 to the financial statements of Southern Company and Alabama Power under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K for additional information.

Asset retirement obligations (ARO) are computed as the present value of the ultimate costs for an asset's future retirement and are recorded in the period in which the liability is incurred. In September 2014, Alabama Power performed a new ARO liability cost study related to Alabama Power's assets, which increased the estimated ARO liability by approximately $52 million.

As of September 30, 2014 and 2013, details of the ARO related to Alabama Power's assets included in Southern Company's and Alabama Power's Condensed Balance Sheets herein are as follows:



	2014			2013
	(in millions)
Balance at beginning of year	$	730		$	589
Liabilities incurred	—			—
Liabilities settled	(2		)	—
Accretion	33			29
Cash flow revisions	52			102
Balance at end of period	$	813		$	720

The increase in cash flow revisions as of September 30, 2014 primarily relates to an increase in Alabama Power's AROs associated with asbestos at its steam generation facilities.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(UNAUDITED)

Depreciation

Beginning in 2014, Southern Power changed the method of depreciation for its property, plant, and equipment from composite depreciation to component depreciation. As a result, certain generation assets are depreciated on a units-of-production basis to better match outage and maintenance costs to the usage of, and revenues from, these assets. The expense will fluctuate quarterly based on unit run time, but this change in methodology is not expected to have a material impact on an annual basis on the financial statements of Southern Company or Southern Power. The book value of plant-in-service as of September 30, 2014 that is depreciated on a units of production basis was approximately $470 million.

Recently Issued Accounting Standards

On May 28, 2014, the Financial Accounting Standards Board issued ASC 606, Revenue from Contracts with Customers. ASC 606 revises the accounting for revenue recognition and is effective for fiscal years beginning after December 15, 2016. The registrants are currently evaluating the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.