Acquisitions and Dispositions

9 Months Ended

Sep. 30, 2017

Southern Company

Merger with Southern Company Gas

Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas through the natural gas distribution utilities. On July 1, 2016, Southern Company completed the Merger for a total purchase price of approximately $8.0 billion and Southern Company Gas became a wholly-owned, direct subsidiary of Southern Company.

The Merger was accounted for using the acquisition method of accounting with the assets acquired and liabilities assumed recognized at fair value as of the acquisition date. The following table presents the final purchase price allocation:



Southern Company Gas Purchase Price
	(in millions)
Current assets	$	1,557
Property, plant, and equipment	10,108
Goodwill	5,967
Intangible assets	400
Regulatory assets	1,118
Other assets	229
Current liabilities	(2,201		)
Other liabilities	(4,742		)
Long-term debt	(4,261		)
Noncontrolling interest	(174		)
Total purchase price	$	8,001

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed of $6.0 billion is recognized as goodwill, which is primarily attributable to positioning the Southern Company system to provide natural gas infrastructure to meet customers' growing energy needs and to compete for growth across the energy value chain. Southern Company anticipates that much of the value assigned to goodwill will not be deductible for tax purposes.

The valuation of identifiable intangible assets included customer relationships, trade names, and storage and transportation contracts with estimated lives of one to 28 years. The estimated fair value measurements of identifiable intangible assets were primarily based on significant unobservable inputs (Level 3).

The results of operations for Southern Company Gas have been included in Southern Company's consolidated financial statements from the date of acquisition and consist of operating revenues of $565 million and $2.8 billion and net income of $15 million and $303 million for the three and nine months ended September 30, 2017, respectively, and operating revenues and net income of $543 million and $4 million, respectively, for the three months ended September 30, 2016.

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
Operating revenues (in millions)	$	16,609
Net income attributable to Southern Company (in millions)	$	2,394
Basic Earnings Per Share (EPS)	$	2.52
Diluted EPS	$	2.51

These unaudited pro forma results are for comparative purposes only and may not be indicative of the results that would have occurred had this acquisition been completed on January 1, 2015 or the results that would be attained in the future.

Acquisition of PowerSecure

On May 9, 2016, Southern Company acquired all of the outstanding stock of PowerSecure, a provider of products and services in the areas of distributed generation, energy efficiency, and utility infrastructure, for $18.75 per common share in cash, resulting in an aggregate purchase price of $429 million. As a result, PowerSecure became a wholly-owned subsidiary of Southern Company.

The acquisition of PowerSecure was accounted for using the acquisition method of accounting with the assets acquired and liabilities assumed recognized at fair value as of the acquisition date. The following table presents the final purchase price allocation:



PowerSecure Purchase Price
	(in millions)
Current assets	$	172
Property, plant, and equipment	46
Intangible assets	106
Goodwill	284
Other assets	4
Current liabilities	(121		)
Long-term debt, including current portion	(48		)
Deferred credits and other liabilities	(14		)
Total purchase price	$	429

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed of $284 million was recognized as goodwill, which is primarily attributable to expected business expansion opportunities for PowerSecure. Southern Company anticipates that the majority of the value assigned to goodwill will not be deductible for tax purposes.

The valuation of identifiable intangible assets included customer relationships, trade names, patents, backlog, and software with estimated lives of one to 26 years. The estimated fair value measurements of identifiable intangible assets were primarily based on significant unobservable inputs (Level 3).

The results of operations for PowerSecure have been included in Southern Company's consolidated financial statements from the date of acquisition and are immaterial to the consolidated financial results of Southern Company. Pro forma results of operations have not been presented for the acquisition because the effects of the acquisition were immaterial to Southern Company's consolidated financial results for all periods presented.

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.

Acquisitions During the Nine Months Ended September 30, 2017

During the nine months ended September 30, 2017, in accordance with Southern Power's overall growth strategy, one of Southern Power's wholly-owned subsidiaries acquired the project discussed below. Acquisition-related costs were expensed as incurred and were not material.



Project Facility	Resource	Seller; Acquisition Date	Approximate Nameplate Capacity (MW)	Location	Southern Power Percentage Ownership		Actual COD	PPA Contract Period
Bethel	Wind	Invenergy, January 6, 2017	276	Castro County, TX	100	%	January 2017	12 years

The aggregate amounts of revenue and net income recognized by Southern Power related to the Bethel facility included in Southern Power's condensed consolidated statements of income for year-to-date 2017 were immaterial. The Bethel facility did not have operating revenues or activities prior to completion of construction and the assets being placed in service; therefore, supplemental pro forma information as though the acquisition occurred as of the beginning of 2017 and for the comparable 2016 period is not meaningful and has been omitted.

In connection with Southern Power's 2016 acquisitions, allocations of the purchase price to individual assets were finalized during the nine months ended September 30, 2017 with no changes to amounts originally reported for Boulder 1, Grant Plains, Grant Wind, Henrietta, Mankato, Passadumkeag, Salt Fork, Tyler Bluff, and Wake Wind.

Subsequent to September 30, 2017, Southern Power purchased all of the redeemable noncontrolling interests, representing 10% of the membership interests, in Southern Turner Renewable Energy, LLC and repaid $14 million of notes payable to Turner Renewable Energy, LLC.

Construction Projects Completed and in Progress

During the nine months ended September 30, 2017, 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, 2017, total costs of construction incurred for these projects were $494 million, of which $122 million remained in CWIP. Total aggregate construction costs, excluding the acquisition costs, are expected to be between $360 million and $415 million for the Mankato and Cactus Flats facilities. The ultimate outcome of these matters cannot be determined at this time.



Project Facility	Resource	Approximate Nameplate Capacity (MW)	Location	Actual/Expected COD	PPA Contract Period
Projects Completed During the Nine Months Ended September 30, 2017
East Pecos	Solar	120	Pecos County, TX	March 2017	15 years
Lamesa	Solar	102	Dawson County, TX	April 2017	15 years

Projects Under Construction as of September 30, 2017
Cactus Flats^(*)	Wind	148	Concho County, TX	Third quarter 2018	12-15 years
Mankato	Natural Gas	345	Mankato, MN	Second quarter 2019	20 years


(*)	On July 31, 2017, Southern Power acquired a 100% ownership interest in the Cactus Flats facility, which is in the early stages of construction, from RES America Developments, Inc.

Development Projects

In December 2016, as part of Southern Power's renewable development strategy, one of Southern Power's wholly-owned subsidiaries entered into a joint development agreement with Renewable Energy Systems Americas, Inc. to develop and construct approximately 3,000 MWs of wind projects. Also in December 2016, Southern Power signed agreements and made payments to purchase wind turbine equipment from Siemens Wind Power, Inc. and Vestas-American Wind Technology, Inc. to be used for construction of the facilities. All of the wind turbine equipment was delivered by April 2017, which allows the projects to qualify for 100% PTCs for 10 years following their expected commercial operation dates between 2018 and 2020. The ultimate outcome of these matters cannot be determined at this time.

Southern Company Gas

On October 15, 2017, Southern Company Gas subsidiary, Pivotal Utility Holdings, entered into agreements for the sale of the assets of two of its natural gas distribution utilities, Elizabethtown Gas and Elkton Gas, to South Jersey Industries, Inc. for a total cash purchase price of $1.7 billion. The completion of each sale is subject to the satisfaction or waiver of certain closing conditions, including, among others, (i) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act; (ii) the receipt of required regulatory approvals, including the FERC, the Federal Communications Commission, the New Jersey BPU, and, with respect to the sale of Elkton Gas, the Maryland PSC; and (iii) other customary closing conditions. The sales are expected to be completed by the end of the third quarter 2018.

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