Introduction

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

INTRODUCTION

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 September 30, 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.

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

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).

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 at Georgia Power and Southern Company's unregulated distributed generation business have been reclassified from unbilled revenue in accordance with the guidance in ASC 606. These reclassifications did not affect the timing or amount of revenues recognized or cash flows. ASC 606 also provided additional guidance on revenue recognized over time, resulting in a change in the timing of revenue recognized from guaranteed and fixed billing arrangements at Southern Company Gas. The changes in natural gas revenues recognized in the third quarter and year-to-date 2018 relate primarily to the seasonal nature of natural gas usage.

The net impact of accounting for revenue under ASC 606 decreased Southern Company's and Southern Company Gas' consolidated net income by $4 million for the three months ended September 30, 2018 and increased Southern Company's and Southern Company Gas' consolidated net income by $1 million for the nine months ended September 30, 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 compared to previously recognized guidance is shown below.

	For the Three Months Ended September 30, 2018							For the Nine Months Ended September 30, 2018
Condensed Statements of Income	As Reported		Balances Without Adoption of ASC 606		Effect of Change			As Reported		Balances Without Adoption of ASC 606		Effect of Change
	(in millions)							(in millions)
Southern Company
Natural gas revenues	$	492	$	497	$	(5	)	$	2,806	$	2,805	$	1
Other revenues	199		198		1			1,007		1,003		4
Other operations and maintenance	1,404		1,387		17			4,217		4,178		39
Operating income	2,174		2,195		(21		)	3,613		3,647		(34		)
Other income (expense), net	57		41		16			195		160		35
Earnings (loss) before income taxes	1,845		1,850		(5		)	2,629		2,628		1
Income taxes (benefit)	623		624		(1		)	598		598		—
Consolidated net income (loss)	1,222		1,226		(4		)	2,031		2,030		1
Consolidated net income (loss) attributable to Southern Company	1,164		1,168		(4		)	1,948		1,947		1
Alabama Power
Other revenues	$	68	$	59	$	9		$	199	$	173	$	26
Other operations and maintenance	401		390		11			1,191		1,159		32
Operating income	561		563		(2		)	1,313		1,319		(6		)
Other income (expense), net	9		7		2			24		18		6
Georgia Power
Other revenues	$	121	$	97	$	24		$	349	$	287	$	62
Other operations and maintenance	460		437		23			1,325		1,268		57
Operating income (loss)	991		990		1			1,032		1,027		5
Other income (expense), net	30		31		(1		)	104		109		(5		)
Southern Company Gas
Natural gas revenues	$	487	$	492	$	(5	)	$	2,829	$	2,828	$	1
Operating income	374		379		(5		)	810		809		1
Earnings before income taxes	362		367		(5		)	769		768		1
Income taxes	316		317		(1		)	475		475		—
Net income (loss)	46		50		(4		)	294		293		1

	For the Nine Months Ended September 30, 2018
Condensed Statements of Cash Flows	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company
Consolidated net income	$	2,031		$	2,030		$	1
Changes in certain current assets and liabilities:
Receivables	37			27			10
Other current assets	(90		)	(80		)	(10		)
Other current liabilities	(67		)	(68		)	1
Georgia Power
Changes in certain current assets and liabilities:
Receivables	$	(205	)	$	(242	)	$	37
Other current assets	(36		)	1			(37		)
Southern Company Gas
Net income	$	294		$	293		$	1
Changes in certain current assets and liabilities:
Other current liabilities	35			34			1

	At September 30, 2018
Condensed Balance Sheets	As Reported			Balances Without Adoption of ASC 606			Effect of Change
	(in millions)
Southern Company
Unbilled revenues	$	738		$	776		$	(38	)
Other accounts and notes receivable	690			691			(1		)
Other current assets	232			193			39
Other current liabilities	763			764			(1		)
Retained earnings	9,048			9,047			1
Georgia Power
Unbilled revenues	$	245		$	310		$	(65	)
Other accounts and notes receivable	96			97			(1		)
Other current assets	91			25			66
Southern Company Gas
Other current liabilities	122			123			(1		)
Accumulated deficit	(273		)	(274		)	1

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 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 and nine months ended September 30, 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.

Asset Retirement Obligations

See Note 1 to the financial statements of Southern Company and the traditional electric operating companies under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K for additional information regarding each company's AROs and the EPA's Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule).

As of September 30, 2018, details of the AROs, including those related to the CCR Rule, included in the condensed balance sheets of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power were as follows:

	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power
	(in millions)
Balance at December 31, 2017	$	4,824		$	1,709		$	2,638		$	142		$	174
Liabilities incurred	2			—			—			—			—
Liabilities settled	(160		)	(31		)	(82		)	(23		)	(22		)
Accretion	153			72			70			3			4
Cash flow revisions	1,510			1,451			(32		)	42			21
Reclassification to held for sale	(164		)	—			—			—			—
Balance at September 30, 2018	$	6,165		$	3,201		$	2,594		$	164		$	177

In June 2018, Alabama Power recorded an increase of approximately $1.2 billion to its AROs related to the CCR Rule. Mississippi Power also recorded an increase of approximately $11 million to its AROs related to an ash pond at Plant Greene County, which is jointly-owned with Alabama Power. The revised cost estimates were based on information from feasibility studies performed on ash ponds in use at plants operated by Alabama Power, including Plant Greene County. During the second quarter 2018, Alabama Power's management completed its analysis of these studies which indicated that additional closure costs, primarily related to increases in estimated ash volume, water management requirements, and design revisions, will be required to close these ash ponds under the planned closure-in-place methodology. As the level of work becomes more defined in the next 12 months, it is likely that these cost estimates will change and the change could be material.

Georgia Power continues to perform engineering studies related to its plans to close the ash ponds at all of its generating plants, including Plant Scherer Unit 3, which is jointly owned with Gulf Power, in compliance with federal and state CCR rules. Georgia Power also continues to refine its closure strategy and cost estimates for each ash pond and is preparing permit applications as required by the State of Georgia CCR rule. While Georgia Power and Gulf Power believe their recorded liabilities for ash pond closures appropriately reflect their obligations under the current closure strategies they have elected, changes to such strategies and cost estimates would likely result in additional closure costs which would increase their ARO liabilities. It is not currently possible to quantify the impacts of any increase related to a change in closure strategies and/or ongoing engineering studies for the current closure strategies, and the timing of future cash outflows is indeterminable at this time; however, the impact on Georgia Power's and Gulf Power's ARO liabilities is expected to be material. As permit applications advance, engineering studies continue, and the timing of individual ash pond closures develops further during the fourth quarter 2018, Georgia Power and Gulf Power will record any necessary changes to their ARO liabilities.

The traditional electric operating companies expect to continue to periodically update their ARO cost estimates, which could increase further, as additional information becomes available. Absent continued recovery of ARO costs through regulated rates, Southern Company's and the traditional electric operating companies' results of operations, cash flows, and financial condition could be materially impacted. The ultimate outcome of this matter cannot be determined at this time.

In June 2018, Alabama Power completed an updated decommissioning cost site study for Plant Farley. The estimated cost of decommissioning based on the study resulted in an increase in Southern Company's and Alabama Power's ARO liability of approximately $300 million. See "Nuclear Decommissioning" below for additional information.

Georgia Power expects to complete updated decommissioning cost site studies for Plant Hatch and Plant Vogtle Units 1 and 2 in the fourth quarter 2018, which could result in additional changes to Southern Company's and Georgia Power's ARO liability. The ultimate outcome of these studies cannot be determined at this time.

The reclassification of a portion of the ARO liability to liabilities held for sale by Southern Company represents the AROs related to Gulf Power. See Note (J) under "Southern Company's Sale of Gulf Power" and "Assets Held for Sale" for additional information.

Nuclear Decommissioning

See Note 1 to the financial statements of Southern Company and Alabama Power under "Nuclear Decommissioning" in Item 8 of the Form 10-K for additional information.

In June 2018, Alabama Power completed an updated decommissioning cost site study for Plant Farley. The estimated costs of decommissioning based on the 2018 site study are as follows:

Decommissioning periods:
Beginning year	2037
Completion year	2076
	(in millions)
Site study costs:
Radiated structures	$	1,621
Non-radiated structures	99
Total site study costs	$	1,720

The decommissioning cost estimates are based on prompt dismantlement and removal of the plant from service. The actual decommissioning costs may vary from the above estimates because of changes in the assumed date of decommissioning, changes in NRC requirements, or changes in the assumptions used in making these estimates.

For ratemaking purposes, Alabama Power's decommissioning costs are based on the site study. Significant assumptions used to determine these costs for ratemaking were an inflation rate of 4.5% and a trust earnings rate of 7.0%. The next site study is expected to be completed in 2023.

Amounts previously contributed to the external trust funds are currently projected to be adequate to meet the updated decommissioning obligations. Alabama Power will continue to provide site specific estimates of the decommissioning costs and related projections of funds in the external trust to the Alabama PSC and, if necessary, would seek the Alabama PSC's approval to address any changes in a manner consistent with the NRC and other applicable requirements.

Goodwill and Other Intangible Assets

The following table presents year-to-date changes in goodwill balances for Southern Company and Southern Company Gas:

	Goodwill
	Southern Company				Southern Company Gas
					Gas Distribution Operations			Gas Marketing Services			Total
	(in millions)
Balance at December 31, 2017	$	6,268			$	4,702		$	1,265		$	5,967
Impairment(a)	(42		)		—			(42		)	(42		)
Dispositions(b)	(910		)		(668		)	(242		)	(910		)
Balance at September 30, 2018	$	5,315		(c)	$	4,034		$	981		$	5,015

(a) 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 in the first quarter 2018. See Note (J) under "Southern Company Gas" for additional information.

(b) Gas distribution operations reflects goodwill allocated to Elizabethtown Gas, Elkton Gas, and Florida City Gas, which were sold during the third quarter 2018. Gas marketing services reflects goodwill associated with Pivotal Home Solutions, which was sold on June 4, 2018. See Note (J) under "Southern Company Gas" for additional information.

(c) Total does not add due to rounding.

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.

Other intangible assets were as follows:

	At September 30, 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(*)	$	223	$	(87	)	$	136	$	288	$	(83	)	$	205
Trade names(*)	70		(18		)	52		159		(17		)	142
Storage and transportation contracts	64		(49		)	15		64		(34		)	30
PPA fair value adjustments	456		(66		)	390		456		(47		)	409
Other	11		(5		)	6		17		(5		)	12
Total other intangible assets subject to amortization	$	824	$	(225	)	$	599	$	984	$	(186	)	$	798
Other intangible assets not subject to amortization:
Federal Communications Commission licenses	75		—			75		75		—			75
Total other intangible assets	$	899	$	(225	)	$	674	$	1,059	$	(186	)	$	873
Southern Power
Other intangible assets subject to amortization:
PPA fair value adjustments	$	456	$	(66	)	$	390	$	456	$	(47	)	$	409
Southern Company Gas
Other intangible assets subject to amortization:
Gas marketing services(*)
Customer relationships	$	156	$	(78	)	$	78	$	221	$	(77	)	$	144
Trade names	26		(6		)	20		115		(9		)	106
Wholesale gas services
Storage and transportation contracts	64		(49		)	15		64		(34		)	30
Total other intangible assets subject to amortization	$	246	$	(133	)	$	113	$	400	$	(120	)	$	280

(*) Balances as of September 30, 2018 reflect Southern Company Gas' sale of Pivotal Home Solutions. See Note (J) under "Southern Company Gas – Sale of Pivotal Home Solutions" for additional information.

Amortization associated with other intangible assets was as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2018
	(in millions)
Southern Company	$	21	$	70
Southern Power	$	6	$	19
Southern Company Gas	$	12	$	42

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 September 30, 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 September 30, 2018 and/or December 31, 2017:

	Southern Company			Southern Company Gas
	(in millions)
At September 30, 2018
Cash and cash equivalents	$	1,847		$	56
Cash and cash equivalents classified as assets held for sale	37			—
Restricted cash:
Other accounts and notes receivable	6			6
Total cash, cash equivalents, and restricted cash	$	1,891	(*)	$	62

(*) Total does not add due to rounding.

	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 had no inventory decrement at September 30, 2018. 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

Southern Power has consolidated renewable generation projects that are partially funded 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.