Income Taxes

12 Months Ended

Dec. 31, 2016

Southern Company files a consolidated federal income tax return and various state income tax returns, some of which are combined or unitary. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. PowerSecure and Southern Company Gas became participants in the income tax allocation agreement as of May 9, 2016 and July 1, 2016, respectively. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016			2015			2014
	(in millions)
Federal —
Current	$	1,184		$	(177	)	$	175
Deferred	(342		)	1,266			695
	842			1,089			870
State —
Current	(108		)	(33		)	93
Deferred	217			138			14
	109			105			107
Total	$	951		$	1,194		$	977

Net cash payments (refunds) for income taxes in 2016, 2015, and 2014 were $(148) million, $(9) million, and $272 million, respectively.

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:



	2016			2015
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	15,392		$	12,767
Property basis differences	2,708			1,603
Leveraged lease basis differences	314			308
Employee benefit obligations	737			579
Premium on reacquired debt	89			95
Regulatory assets associated with employee benefit obligations	1,584			1,378
Regulatory assets associated with AROs	1,781			1,422
Other	907			793
Total	23,512			18,945
Deferred tax assets —
Federal effect of state deferred taxes	597			479
Employee benefit obligations	1,868			1,720
Over recovered fuel clause	66			104
Other property basis differences	401			695
Deferred costs	100			83
ITC carryforward	1,974			770
Federal NOL carryforward	1,084			38
Unbilled revenue	92			111
Other comprehensive losses	152			85
AROs	1,732			1,482
Estimated Loss on Kemper IGCC	484			451
Deferred state tax assets	266			222
Other	679			443
Total	9,495			6,683
Valuation allowance	(23		)	(4		)
Total deferred income taxes	14,040			12,266
Portion included in accumulated deferred tax assets	(52		)	(56		)
Accumulated deferred income taxes	$	14,092		$	12,322

The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation.

At December 31, 2016, the tax-related regulatory assets to be recovered from customers were $1.6 billion. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2016, the tax-related regulatory liabilities to be credited to customers were $219 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs.

In accordance with regulatory requirements, deferred federal ITCs for the traditional electric operating companies are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $22 million in 2016, $21 million in 2015, and $22 million in 2014. Southern Power's deferred federal ITCs are amortized to income tax expense over the life of the asset. Credits amortized in this manner amounted to $37 million in 2016, $19 million in 2015, and $11 million in 2014. Also, Southern Power received cash related to federal ITCs under the renewable energy incentives of $162 million and $74 million for the years ended December 31, 2015 and 2014, respectively. No cash was received related to these incentives in 2016. Furthermore, the tax basis of the asset is reduced by 50% of the ITCs received, resulting in a net deferred tax asset. Southern Power has elected to recognize the tax benefit of this basis difference as a reduction to income tax expense in the year in which the plant reaches commercial operation. The tax benefit of the related basis differences reduced income tax expense by $173 million in 2016, $54 million in 2015, and $48 million in 2014. See "Unrecognized Tax Benefits" below for further information.

Tax Credit Carryforwards

At December 31, 2016, Southern Company had federal ITC and PTC carryforwards (primarily related to Southern Power) which are expected to result in $1.8 billion of federal income tax benefits. The federal ITC carryforwards begin expiring in 2032 but are expected to be fully utilized by 2022. The PTC carryforwards begin expiring in 2036 but are expected to be fully utilized by 2022. The acquisition of additional renewable projects and carrying back the federal NOL, as well as potential tax reform legislation on existing renewable incentives, could further delay existing tax credit carryforwards. The ultimate outcome of these matters cannot be determined at this time.

Additionally, Southern Company had state ITC carryforwards for the state of Georgia totaling $202 million, which begin expiring in 2020 but are expected to be fully utilized.

Net Operating Loss

At December 31, 2016, Southern Company had a consolidated federal NOL carryforward of $3 billion, of which $2.8 billion is projected for the 2016 tax year. The federal NOL will begin expiring in 2033. However, portions of the NOL are expected to be carried back to prior tax years and forward to future tax years. The ultimate outcome of this matter cannot be determined at this time.

At December 31, 2016, the state NOL carryforwards for Southern Company's subsidiaries were as follows:



Jurisdiction	NOL Carryforwards		Net State Income Tax Benefit		Tax Year NOL Begins Expiring
	(in millions)
Mississippi	$	3,448	$	112	2032
Oklahoma	839		31		2036
Georgia	685		25		2019
New York	229		11		2036
New York City	209		12		2036
Florida	198		7		2034
Other states	146		5		Various
Total	$	5,754	$	203

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	2.1		1.9		2.3
Employee stock plans dividend deduction	(1.2	)	(1.2	)	(1.4	)
Non-deductible book depreciation	0.9		1.2		1.4
AFUDC-Equity	(2.0	)	(2.2	)	(2.9	)
ITC basis difference	(5.0	)	(1.5	)	(1.6	)
Federal PTCs	(1.2	)	—		—
Amortization of ITC	(0.9	)	(0.5	)	(0.5	)
Other	(0.4	)	0.2		0.2
Effective income tax rate	27.3	%	32.9	%	32.5	%

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.

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on Southern Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2016			2015			2014
	(in millions)
Unrecognized tax benefits at beginning of year	$	433		$	170		$	7
Tax positions increase from current periods	45			43			64
Tax positions increase from prior periods	21			240			102
Tax positions decrease from prior periods	(15		)	(20		)	(3		)
Balance at end of year	$	484		$	433		$	170

The tax positions increase from current and prior periods for 2016 and 2015 relate primarily to deductions for R&E expenditures associated with the Kemper IGCC and federal income tax benefits from deferred ITCs. See Note 3 under "Integrated Coal Gasification Combined Cycle" and "Section 174 Research and Experimental Deduction" herein for more information. The tax positions decrease from prior periods for 2016 and 2015 relates to federal income tax benefits from deferred ITCs.

The impact on Southern Company's effective tax rate, if recognized, is as follows:



	2016		2015		2014
	(in millions)
Tax positions impacting the effective tax rate	$	20	$	10	$	10
Tax positions not impacting the effective tax rate	464		423		160
Balance of unrecognized tax benefits	$	484	$	433	$	170

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. If these tax positions are not able to be recognized due to a federal audit adjustment in the amount that has been estimated, the amount of tax credit carryforwards discussed above would be reduced by approximately $92 million. The tax positions not impacting the effective tax rate for 2016, 2015, and 2014 relate to deductions for R&E expenditures associated with the Kemper IGCC. See "Section 174 Research and Experimental Deduction" herein for more information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for all tax positions other than the Section 174 R&E deductions was immaterial for all years presented.

Southern Company classifies interest on tax uncertainties as interest expense. Southern Company did not accrue any penalties on uncertain tax positions.

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. 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 believes that a significant portion of the plant costs qualify as deductible R&E expenditures under Internal Revenue Code 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 had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million and associated interest of $28 million as of December 31, 2016. 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. See Note 3 under "Integrated Coal Gasification Combined Cycle" for additional information regarding the Kemper IGCC.

Alabama Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and various combined and separate state income tax returns. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016		2015		2014
	(in millions)
Federal —
Current	$	103	$	110	$	198
Deferred	339		320		225
	442		430		423
State —
Current	20		8		44
Deferred	69		68		45
	89		76		89
Total	$	531	$	506	$	512



	2016		2015
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	4,307	$	3,917
Property basis differences	456		456
Premium on reacquired debt	26		28
Employee benefit obligations	201		200
Regulatory assets associated with employee benefit obligations	393		375
Asset retirement obligations	289		289
Regulatory assets associated with asset retirement obligations	347		312
Other	179		175
Total	6,198		5,752
Deferred tax assets —
Federal effect of state deferred taxes	266		242
Unbilled fuel revenue	36		39
Storm reserve	21		23
Employee benefit obligations	427		407
Other comprehensive losses	19		20
Asset retirement obligations	636		600
Other	139		180
Total	1,544		1,511
Accumulated deferred income taxes, net	$	4,654	$	4,241

The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation in 2016 and 2015.

At December 31, 2016, the tax-related regulatory assets to be recovered from customers were $526 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2016, the tax-related regulatory liabilities to be credited to customers were $65 million. These liabilities are primarily attributable to unamortized ITCs.

In accordance with regulatory requirements, deferred federal ITCs are amortized over the average life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $8 million annually in 2016, 2015, and 2014. At December 31, 2016, all ITCs available to reduce federal income taxes payable had been utilized.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016	2015	2014
Federal statutory rate	35.0%	35.0%	35.0%
State income tax, net of federal deduction	4.2	3.8	4.4
Non-deductible book depreciation	1.0	1.2	1.1
AFUDC equity	(0.7)	(1.6)	(1.3)
Other	(0.7)	—	(0.2)
Effective income tax rate	38.8%	38.4%	39.0%

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on the Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

The Company has no material unrecognized tax benefits for the periods presented. The Company classifies interest on tax uncertainties as interest expense. Accrued interest for unrecognized tax benefits was immaterial and the Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

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. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.

Georgia Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016		2015			2014
	(in millions)
Federal –
Current	$	391	$	515		$	295
Deferred	319		176			366
	710		691			661
State –
Current	6		81			82
Deferred	64		(3		)	(14		)
	70		78			68
Total	$	780	$	769		$	729



	2016		2015
	(in millions)
Deferred tax liabilities –
Accelerated depreciation	$	5,266	$	4,909
Property basis differences	957		1,003
Employee benefit obligations	428		310
Premium on reacquired debt	56		61
Regulatory assets –
Storm damage reserves	83		37
Employee benefit obligations	546		528
Asset retirement obligations	726		545
Retired assets	55		58
Asset retirement obligations	182		161
Other	83		92
Total	8,382		7,704
Deferred tax assets –
Federal effect of state deferred taxes	173		150
Employee benefit obligations	661		642
Other property basis differences	105		88
Other deferred costs	100		83
State investment tax credit carryforward	201		216
Federal tax credit carryforward	84		3
Unbilled fuel revenue	47		47
Regulatory liabilities associated with asset retirement obligations	33		60
Asset retirement obligations	908		706
Other	70		82
Total	2,382		2,077
Accumulated deferred income taxes	$	6,000	$	5,627

The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation in 2016 and 2015.

At December 31, 2016, tax-related regulatory assets to be recovered from customers were $681 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years and deferred taxes previously recognized at rates lower than the current enacted tax law.

At December 31, 2016, tax-related regulatory liabilities to be credited to customers were $121 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law.

In accordance with regulatory requirements, utilized federal ITCs are deferred and amortized over the average life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $10 million in each of 2016, 2015, and 2014. State investment tax credits are recognized in the period in which the credits are generated and totaled $42 million in 2016, $33 million in 2015, and $34 million in 2014. At December 31, 2016, the Company had $83 million in federal ITC carryforwards that will expire by 2036 and $201 million in state ITC carryforwards that will expire between 2019 and 2027.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	2.1		2.5		2.2
Non-deductible book depreciation	0.8		1.2		1.3
AFUDC equity	(0.8	)	(0.7	)	(0.8	)
Other	(0.4	)	(0.4	)	(0.7	)
Effective income tax rate	36.7	%	37.6	%	37.0	%

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on the Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

The Company had no unrecognized tax benefits as of December 31, 2016 and no material changes in unrecognized tax benefits for any year presented.

The Company classifies interest on tax uncertainties as interest expense; however, the Company did not have any accrued interest or penalties for unrecognized tax benefits for any year presented.

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2012. Southern Company has filed its 2013 through 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. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.

Gulf Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016		2015			2014
	(in millions)
Federal -
Current	$	34	$	(3	)	$	23
Deferred	45		80			52
	79		77			75
State -
Current	—		5			—
Deferred	12		10			13
	12		15			13
Total	$	91	$	92		$	88



	2016		2015
	(in millions)
Deferred tax liabilities-
Accelerated depreciation	$	834	$	812
Property basis differences	123		133
Pension and other employee benefits	58		39
Regulatory assets	45		16
Regulatory assets associated with employee benefit obligations	65		59
Regulatory assets associated with asset retirement obligations	55		40
Other	12		10
Total	1,192		1,109
Deferred tax assets-
Federal effect of state deferred taxes	37		33
Postretirement benefits	26		26
Pension and other employee benefits	72		65
Property reserve	17		15
Asset retirement obligations	55		40
Alternative minimum tax carryforward	18		18
Other	19		19
Total	244		216
Accumulated deferred income taxes	$	948	$	893

The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation in 2016 and 2015.

At December 31, 2016, tax-related regulatory assets to be recovered from customers were $58 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2016, the tax-related regulatory liabilities to be credited to customers were $2 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and unamortized ITCs.

In accordance with regulatory requirements, deferred federal ITCs are amortized over the average life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner are not material for the periods presented. At December 31, 2016, all ITCs available to reduce federal income taxes payable had been utilized.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016	2015	2014
Federal statutory rate	35.0%	35.0%	35.0%
State income tax, net of federal deduction	3.4	3.9	3.5
Non-deductible book depreciation	0.6	0.5	0.4
Differences in prior years' deferred and current tax rates	(0.1)	(0.1)	(0.1)
AFUDC equity	—	(1.8)	(1.8)
Other, net	0.6	(0.6)	0.1
Effective income tax rate	39.5%	36.9%	37.1%

The increase in the Company's 2016 effective tax rate is primarily the result of the decrease in nontaxable AFUDC equity.

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on the Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances, but an estimate of the range of reasonably possible outcomes cannot be determined at this time.

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. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.

Mississippi Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016			2015			2014
	(in millions)
Federal —
Current	$	(31	)	$	(768	)	$	(431	)
Deferred	(60		)	704			183
	(91		)	(64		)	(248		)
State —
Current	(6		)	(81		)	1
Deferred	(7		)	73			(38		)
	(13		)	(8		)	(37		)
Total	$	(104	)	$	(72	)	$	(285	)



	2016		2015
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	386	$	1,618
Property basis difference	852		—
Regulatory assets associated with AROs	72		71
Pensions and other benefits	49		30
Regulatory assets associated with employee benefit obligations	70		66
Regulatory assets associated with the Kemper IGCC	82		86
Rate differential	144		115
Other	125		176
Total	1,780		2,162
Deferred tax assets —
Fuel clause over recovered	26		51
Estimated loss on Kemper IGCC	484		451
Pension and other benefits	96		92
Federal NOL	109		17
Property insurance	27		25
Premium on long-term debt	14		18
AROs	72		71
Property basis difference	—		451
Deferred state tax assets	113		152
Deferred federal tax assets	31		31
Federal effect of state deferred taxes	19		8
Other	33		33
Total	1,024		1,400
Total deferred tax liabilities, net	756		762
Accumulated deferred income taxes	$	756	$	762

The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation.

At December 31, 2016, the tax-related regulatory assets were $362 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2016, the tax-related regulatory liabilities were $7 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and unamortized ITCs.

In accordance with regulatory requirements, deferred federal ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of operations. Credits for non-Kemper IGCC related deferred ITCs amortized in this manner amounted to $1 million in each of 2016, 2015, and 2014.

At December 31, 2016, the Company had state of Mississippi NOL carryforwards totaling approximately $3 billion, resulting in deferred tax assets of approximately $112 million. The NOLs will expire between 2032 and 2037.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016		2015		2014
Federal statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State income tax, net of federal deduction	(5.7	)	(6.3	)	(4.0	)
Non-deductible book depreciation	0.7		1.3		0.1
AFUDC-equity	(28.5	)	(49.6	)	(7.8	)
Other	—		(2.9	)	0.1
Effective income tax rate (benefit rate)	(68.5	)%	(92.5	)%	(46.6	)%

The decrease in the Company's 2016 effective tax rate (benefit rate), as compared to 2015, is primarily due to an increase in estimated losses associated with the Kemper IGCC and an increase in non-taxable AFUDC equity. The increase in the Company's 2015 effective tax rate (benefit rate), as compared to 2014, is primarily due to a decrease in estimated losses associated with the Kemper IGCC, partially offset by a decrease in non-taxable AFUDC equity.

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on the Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2016		2015		2014
	(in millions)
Unrecognized tax benefits at beginning of year	$	421	$	165	$	4
Tax positions increase from current periods	26		32		58
Tax positions increase from prior periods	18		224		103
Balance at end of year	$	465	$	421	$	165

The tax positions increases from current periods and prior periods for 2016, 2015 and 2014 relate to deductions for R&E expenditures associated with the Kemper IGCC. See "Section 174 Research and Experimental Deduction" herein for additional information.

The impact on the Company's effective tax rate, if recognized, is as follows:



	2016		2015			2014
	(in millions)
Tax positions impacting the effective tax rate	$	1	$	(2	)	$	4
Tax positions not impacting the effective tax rate	464		423			161
Balance of unrecognized tax benefits	$	465	$	421		$	165

The tax positions not impacting the effective tax rate relate to deductions for R&E expenditures associated with the Kemper IGCC. See "Section 174 Research and Experimental Deduction" herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:



	2016		2015		2014
	(in millions)
Interest accrued at beginning of year	$	13	$	3	$	1
Interest accrued during the year	15		10		2
Balance at end of year	$	28	$	13	$	3

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

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 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 additional 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. The audits for the 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, on behalf of the 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 the Company believe that a significant portion of the plant costs qualify as deductible R&E expenditures under Internal Revenue Code 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, the Company had unrecognized tax benefits associated with these R&E deductions totaling approximately $464 million and associated interest of $28 million as of December 31, 2016. 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. See Note 3 under "Integrated Coal Gasification Combined Cycle" for additional information regarding the Kemper IGCC.

Southern Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and various state income tax returns, some of which are combined, unitary, or consolidated. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2016			2015			2014
	(in millions)
Federal —
Current ^(*)	$	928		$	12		$	179
Deferred ^(*)	(1,098		)	10			(166		)
	(170		)	22			13
State —
Current	(60		)	(32		)	(14		)
Deferred	35			31			(2		)
	(25		)	(1		)	(16		)
Total	$	(195	)	$	21		$	(3	)

(*)

ITCs and PTCs generated in the current tax year and carried forward from prior tax years that cannot be utilized in the current tax year are reclassified from current to deferred taxes in federal income tax expense above. ITCs and PTCs reclassified in this manner include $1.13 billion for 2016, $246 million for 2015, and $305 million for 2014. These ITCs and PTCs are included in the following table of temporary differences as unrealized tax credits.



	2016			2015

Deferred tax liabilities —
Accelerated depreciation and other property basis differences	$	2,440		$	1,364
Levelized capacity revenues	28			22
Other	27			7
Total deferred income tax liabilities	2,495			1,393
Deferred tax assets —
Federal effect of state deferred taxes	53			40
Basis difference on ITCs	292			149
Alternative minimum tax carryforward	15			15
Unrealized tax credits	1,685			551
Federal net operating loss (NOL)	808			9
Deferred state tax assets	60			13
Other partnership basis differences	16			3
Other	8			14
Total deferred income tax assets	2,937			794
Valuation Allowance	—			(2		)
Net deferred income tax assets	2,937			792
Total deferred income tax asset (liability)	$	442		$	(601	)

Recognized in the consolidated balance sheets:
Accumulated deferred income taxes – assets	$	594		$	—
Accumulated deferred income taxes – liability	$	(152	)	$	(601	)

Deferred tax liabilities are primarily the result of property-related timing differences. The application of bonus depreciation provisions in current tax law significantly increased deferred tax liabilities related to accelerated depreciation.

Deferred tax assets consist primarily of timing differences related to the carryforward of unrealized federal ITCs, PTCs, net operating loss, and net basis differences on federal ITCs.

Tax Credit Carryforwards

At December 31, 2016, the Company had federal ITC and PTC carryforwards, which are expected to result in $1.7 billion of federal income tax benefits. The federal ITC carryforwards begin expiring in 2032 but are expected to be fully utilized by 2022. The PTC carryforwards begin expiring in 2036 but are expected to be fully utilized by 2022. The acquisition of additional renewable projects and carrying back the federal NOL, as well as potential tax reform legislation, could further delay the utilization of existing tax credit carryforwards. The ultimate outcome of these matters cannot be determined at this time.

Net Operating Loss

Southern Company is expecting a consolidated federal net operating loss of approximately $2.8 billion for income tax purposes for the 2016 tax year. Portions of the NOL are expected to be carried back to prior tax years and forward to future tax years. The ultimate outcome of this matter cannot be determined at this time.

The Company had state NOL carryforwards of $1.0 billion and $225 million at December 31, 2016 and December 31, 2015, respectively, which will expire from 2029 to 2035. These carryforwards resulted in deferred tax assets of $40 million as of December 31, 2016 and $8 million as of December 31, 2015. The state NOL carryforwards by jurisdiction were as follows:



Jurisdiction	NOL Carryforwards		Net State Income Tax Benefit		Tax Year NOL Expires
	(in millions)
Oklahoma	$	838	$	32	2035
Florida	185		7		2033
Other states	7		1		2029 through 2035
Balance at year end	$	1,030	$	40

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	(9.1	)	(0.3	)	(6.0	)
Amortization of ITC	(20.6	)	(5.0	)	(4.3	)
ITC basis difference	(89.0	)	(21.5	)	(27.7	)
Production tax credits	(23.3	)	(0.6	)	—
Noncontrolling interests	(6.2	)	(1.7	)	(0.3	)
Other	4.6		2.5		1.4
Effective income tax rate (benefit)	(108.6	)%	8.4	%	(1.9	)%

The Company's effective tax rate decreased in 2016 and increased in 2015 primarily due to changes in federal ITCs.

The Company's deferred federal ITCs are amortized to income tax expense over the life of the respective asset. ITCs amortized in this manner amounted to $37 million in 2016, $19 million in 2015, and $11 million in 2014. Also, the Company received cash related to federal ITCs under the renewable energy incentives of $162 million and $74 million for the years ended December 31, 2015 and 2014, respectively. No cash was received related to these incentives in 2016. Furthermore, the tax basis of the asset is reduced by 50% of the ITCs received, resulting in a net deferred tax asset. The Company has elected to recognize the tax benefit of this basis difference as a reduction to income tax expense in the year in which the plant reaches commercial operation. The tax benefit of the related basis differences reduced income tax expense by $173 million in 2016, $54 million in 2015, and $48 million in 2014. The tax benefit of PTCs reduced income tax expense by $42 million in 2016 and $1 million in 2015. See "Unrecognized Tax Benefits" below for further information.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2016			2015			2014
	(in millions)
Balance at beginning of year	$	8		$	5		$	2
Tax positions increase from current periods	17			9			5
Tax positions decrease from prior periods	(8		)	(6		)	(2		)
Balance at end of year	$	17		$	8		$	5

The increase in unrecognized tax benefits from current periods for 2016, 2015, and 2014, and the decrease from prior periods in 2016 and 2015, primarily relate to federal income tax benefits from deferred ITCs and would all impact the Company's effective tax rate, if recognized. The impact on the effective tax rate is determined based on the amount of ITCs which are uncertain. If these tax positions are not able to be recognized due to a federal audit adjustment in the amount that has been estimated, the amount of tax credit carryforwards discussed above would be reduced by approximately $92 million.

The Company classifies interest on tax uncertainties as interest expense. Accrued interest for unrecognized tax benefits was immaterial for all periods presented. The Company did not accrue any penalties on uncertain tax positions.

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. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.

Southern Company Gas [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

Subsequent to the Merger, Southern Company will file a consolidated federal income tax return and various combined and separate state income tax returns on behalf of the Company. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability. Prior to the Merger, the Company filed a U.S. federal consolidated income tax return and various state income tax returns.

Current and Deferred Income Taxes

Details of income tax provisions for the successor period of July 1, 2016 through December 31, 2016 and the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014 are as follows:



	Successor			Predecessor
	July 1, 2016 through December 31,			January 1, 2016 through June 30,		Years Ended December 31,
	2016			2016		2015			2014
	(in millions)			(in millions)
Federal —
Current	$	—		$	67	$	(13	)	$	111
Deferred	65			8		198			184
	65			75		185			295
State —
Current	(16		)	12		10			38
Deferred	27			—		18			17
	11			12		28			55
Total	$	76		$	87	$	213		$	350

Net cash payments (refunds) for income taxes for the successor period of July 1, 2016 through December 31, 2016 and the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014 were $23 million, $(100) million, $(26) million, and $422 million, respectively.



	Successor			Predecessor
	2016			2015
	(in millions)			(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	1,954		$	1,820
Property basis differences	311			283
Regulatory assets associated with employee benefit obligations	125			44
Other	164			215
Total	2,554			2,362
Deferred tax assets —
Federal net operating loss	59			—
Federal effect of state deferred taxes	42			62
Employee benefit obligations	165			164
Other	332			212
Total	598			438
Less valuation allowances	(19		)	(19		)
Total, net of valuation allowances	579			419
Accumulated deferred income taxes, net	$	1,975		$	1,943

In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred income taxes. See Note 1 under "Recently Issued Accounting Standards" for additional information.

At December 31, 2016, the tax-related regulatory liabilities to be credited to customers were $22 million. These liabilities are primarily attributable to unamortized ITCs.

Deferred federal and state ITCs are amortized over the average life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $1 million for the successor period of July 1, 2016 through December 31, 2016 and, for the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, were $1 million, $2 million, and $2 million, respectively. At December 31, 2016, all ITCs available to reduce federal income taxes payable had been utilized.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	Successor	Predecessor
	July 1, 2016 through December 31,	January 1, 2016 through June 30,	Years Ended December 31,
	2016	2016	2015	2014
Federal statutory rate	35.0%	35.0%	35.0%	35.0%
State income tax, net of federal deduction	4.0	3.5	3.4	3.8
Other	1.0	(0.9)	(2.0)	(1.2)
Effective income tax rate	40.0%	37.6%	36.4%	37.6%

The Company's effective tax rates for the successor period of July 1, 2016 through December 31, 2016 and the predecessor period of January 1, 2016 through June 30, 2016 were impacted by certain nondeductible Merger-related expenses. The effective tax rate for the successor period of July 1, 2016 through December 31, 2016 was also impacted by certain nondeductible expenses associated with change-in-control compensation charges.

On March 30, 2016, the FASB issued ASU 2016-09, which changes the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on the Company's overall effective tax rates. See Note 1 under "Recently Issued Accounting Standards" for additional information.

Unrecognized Tax Benefits

The Company has no unrecognized tax benefits for any period presented. The Company classifies interest on tax uncertainties as interest expense; however, the Company had no accrued interest or penalties for unrecognized tax benefits for any period presented.

On July 1, 2016, the Company became a wholly-owned subsidiary of Southern Company, which is a participant in the Compliance Assurance Process of the IRS. The audits for the Company by the IRS or any state have either concluded, or the statute of limitations has expired with respect to income tax examinations, for years prior to 2012.