INCOME TAXES

Southern Company files a consolidated federal income tax return and the registrants file 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. See Note 15 for additional information on these acquisitions, as well as disposition activity during 2018. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability. Prior to the Merger, Southern Company Gas filed a U.S. federal consolidated income tax return and various state income tax returns.

Federal Tax Reform Legislation

Following the enactment of the Tax Reform Legislation, the SEC staff issued Staff Accounting Bulletin 118 – "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provided for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes and their application under GAAP, the registrants considered all amounts recorded in the financial statements as a result of the Tax Reform Legislation "provisional" as discussed in SAB 118 and subject to revision prior to filing the 2017 tax return in the fourth quarter 2018. As of December 31, 2018, each of the registrants considered the measurement of impacts from the Tax Reform Legislation on deferred income tax assets and liabilities, primarily due to the impact of the reduction of the corporate income tax rate, to be complete.

However, the IRS continues to issue regulations that provide further interpretation and guidance on the law and each respective state's adoption of the provisions contained in the Tax Reform Legislation remains uncertain. In addition, the regulatory treatment of certain impacts of the Tax Reform Legislation is subject to the discretion of the FERC and each state regulatory commission. The ultimate impact of these matters cannot be determined at this time. See Note 2 for additional information.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2018

	Southern Company			Alabama Power		Georgia Power			Mississippi Power			Southern Power
	(in millions)
Federal —
Current	$	167		$	91	$	393		$	(567	)	$	85
Deferred	231			123		(249		)	575			(154		)
	398			214		144			8			(69		)
State —
Current	188			26		81			(10		)	(9		)
Deferred	(137		)	51		(11		)	(100		)	(86		)
	51			77		70			(110		)	(95		)
Total	$	449		$	291	$	214		$	(102	)	$	(164	)



	2017

	Southern Company			Alabama Power		Georgia Power			Mississippi Power			Southern Power
	(in millions)
Federal —
Current	$	(62	)	$	136	$	256		$	194		$	(566	)
Deferred	(6		)	336		504			(753		)	(312		)
	(68		)	472		760			(559		)	(878		)
State —
Current	37			23		116			—			(110		)
Deferred	173			73		(46		)	27			49
	210			96		70			27			(61		)
Total	$	142		$	568	$	830		$	(532	)	$	(939	)



	2016
	Southern Company			Alabama Power		Georgia Power		Mississippi Power			Southern Power
	(in millions)
Federal —
Current	$	1,184		$	103	$	391	$	(31	)	$	928
Deferred	(342		)	339		319		(60		)	(1,098		)
	842			442		710		(91		)	(170		)
State —
Current	(108		)	20		6		(6		)	(60		)
Deferred	217			69		64		(7		)	35
	109			89		70		(13		)	(25		)
Total	$	951		$	531	$	780	$	(104	)	$	(195	)



	Southern Company Gas
	Successor								Predecessor
	Year Ended December 31, 2018			Year Ended December 31, 2017		July 1, 2016 through December 31, 2016			January 1, 2016 through June 30, 2016
	(in millions)								(in millions)
Federal —
Current	$	334		$	103	$	—		$	67
Deferred	33			170		65			8
	367			273		65			75
State —
Current	131			27		(16		)	12
Deferred	(34		)	67		27			—
	97			94		11			12
Total	$	464		$	367	$	76		$	87

Southern Company's and Southern Power's 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 in the tables above. Southern Power's ITCs and PTCs reclassified in this manner include $128 million for 2018, $316 million for 2017, and $1.13 billion for 2016. These ITCs and PTCs for Southern Company and Southern Power are included in "Deferred Tax Assets and Liabilities" herein.

In accordance with regulatory requirements, federal ITCs for the traditional electric operating companies and the natural gas distribution utilities, as well as certain state ITCs for Nicor Gas, are deferred, and, upon utilization, 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. Southern Power's deferred federal ITCs are amortized to income tax expense over the life of the respective asset. ITCs amortized in 2018, 2017, and 2016 were immaterial for Alabama Power, Georgia Power, Mississippi Power, and Southern Company Gas and were as follows for Southern Company and Southern Power:



	Southern Company		Southern Power
	(in millions)
2018	$	87	$	58
2017	79		57
2016	59		37

Southern Power received $5 million of cash related to federal ITCs under renewable energy initiatives in 2018. No cash was received in 2017 or 2016. Southern Power recognized tax credits and reduced the tax basis of the asset 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 $1 million in 2018, $18 million in 2017, and $173 million in 2016. See "Unrecognized Tax Benefits" herein for further information.

State ITCs and other state credits, which are recognized in the period in which the credits are generated, reduced Georgia Power's income tax expense by $21 million in 2018, $37 million in 2017, and $31 million in 2016 and reduced Southern Power's income tax expense by $32 million in 2017 and $7 million in 2016.

Southern Power's federal and state PTCs, which are recognized in the period in which the credits are generated, reduced Southern Power's income tax expense by $141 million in 2018, $139 million in 2017, and $50 million in 2016.

Legal Entity Reorganizations

In April 2018, Southern Power completed the final stage of a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of its solar facilities, including certain subsidiaries owned in partnership with various third parties. In September 2018, Southern Power also completed a legal entity reorganization of eight operating wind facilities under a new holding company, SP Wind. The reorganizations resulted in net state tax benefits related to certain changes in apportionment rates totaling approximately $65 million, which were recorded in 2018.

Effective Tax Rate

Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity at the traditional electric operating companies, flowback of excess deferred income taxes at the regulated utilities, and federal income tax benefits from ITCs and PTCs primarily at Southern Power. Each registrant's effective tax rate for 2018 varied significantly as compared to 2017 due to the 14% lower 2018 federal tax rate resulting from the Tax Reform Legislation.

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



	2018
	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Power
Federal statutory rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
State income tax, net of federal deduction	1.8		5.0		5.5		(65.1	)	(90.8	)
Employee stock plans' dividend deduction	(1.0	)	—		—		—		—
Non-deductible book depreciation	0.8		0.6		1.2		0.7		—
Flowback of excess deferred income taxes	(4.0	)	(1.8	)	—		(4.1	)	—
AFUDC-Equity	(1.0	)	(1.0	)	(1.4	)	—		—
ITC basis difference	(0.6	)	—		—		—		(0.2	)
Federal PTCs	(4.7	)	—		—		—		(156.6	)
Amortization of ITC	(2.0	)	(0.1	)	(0.2	)	(0.2	)	(55.4	)
Tax impact from sale of subsidiaries	8.6		—		—		—		—
Tax Reform Legislation	(1.4	)	—		(4.9	)	(26.3	)	96.1
Noncontrolling interests	(0.4	)	—		—		—		(14.9	)
Other	(0.8	)	(0.1	)	0.1		(1.4	)	2.0
Effective income tax (benefit) rate	16.3	%	23.6	%	21.3	%	(75.4	)%	(198.8	)%



	2017
	Southern Company		Alabama Power		Georgia Power		Mississippi Power^(*)		Southern Power
Federal statutory rate	35.0	%	35.0	%	35.0	%	(35.0	)%	35.0	%
State income tax, net of federal deduction	12.5		4.5		2.0		0.6		(22.2	)
Employee stock plans' dividend deduction	(4.0	)	—		—		—		—
Non-deductible book depreciation	3.1		0.9		0.7		0.1		—
Flowback of excess deferred income taxes	(0.3	)	—		(0.1	)	—		—
AFUDC-Equity	(2.6	)	(1.0	)	(0.6	)	—		—
AFUDC-Equity portion of Kemper IGCC charge	15.7		—		—		5.3		—
ITC basis difference	(1.7	)	—		—		—		(10.0	)
Federal PTCs	(12.1	)	—		—		—		(72.5	)
Amortization of ITC	(4.2	)	(0.2	)	(0.1	)	—		(20.6	)
Tax Reform Legislation	(25.6	)	0.3		(0.4	)	11.9		(416.1	)
Noncontrolling interests	(1.4	)	—		—		—		(8.6	)
Other	(1.1	)	0.1		0.2		—		(10.7	)
Effective income tax (benefit) rate	13.3	%	39.6	%	36.7	%	(17.1	)%	(525.7	)%


(*)	Represents effective income tax benefit rate for Mississippi Power due to a loss before income taxes in 2017.



	2016
	Southern Company		Alabama Power		Georgia Power		Mississippi Power^(*)		Southern Power
Federal statutory rate	35.0	%	35.0	%	35.0	%	(35.0	)%	35.0	%
State income tax, net of federal deduction	2.0		4.2		2.1		(5.7	)	(9.1	)
Employee stock plans' dividend deduction	(1.2	)	—		—		—		—
Non-deductible book depreciation	0.9		1.0		0.8		0.7		—
Flowback of excess deferred income taxes	(0.1	)	—		(0.1	)	(0.3	)	—
AFUDC-Equity	(2.0	)	(0.7	)	(0.8	)	(28.5	)	—
ITC basis difference	(5.0	)	—		—		—		(96.3	)
Federal PTCs	(1.2	)	—		—		—		(23.3	)
Amortization of ITC	(0.9	)	(0.2	)	(0.2	)	(0.1	)	(13.4	)
Noncontrolling interests	(0.3	)	—		—		—		(6.2	)
Other	0.1		(0.5	)	(0.1	)	0.4		4.7
Effective income tax (benefit) rate	27.3	%	38.8	%	36.7	%	(68.5	)%	(108.6	)%


(*)	Represents effective income tax benefit rate for Mississippi Power due to a loss before income taxes in 2016.



	Southern Company Gas
	Successor			Predecessor
	Year Ended December 31, 2018	Year Ended December 31, 2017	July 1, 2016 through December 31, 2016	January 1, 2016 through June 30, 2016
Federal statutory rate	21.0%	35.0%	35.0%	35.0%
State income tax, net of federal deduction	9.2	10.0	3.6	3.5
Flowback of excess deferred income taxes	(3.0)	(0.2)	—	—
Amortization of ITC	(0.1)	(0.2)	(0.4)	—
Tax impact on sale of subsidiaries	28.5	—	—	—
Tax Reform Legislation	(0.4)	15.0	—	—
Other	0.3	0.6	1.8	(0.9)
Effective income tax rate	55.5%	60.2%	40.0%	37.6%

Deferred Tax Assets and Liabilities

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



	December 31, 2018
	Southern Company			Alabama Power		Georgia Power			Mississippi Power			Southern Power			Southern Company Gas
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	8,461		$	2,236	$	3,005		$	335		$	1,483		$	1,176
Property basis differences	1,807			865		633			162			—			134
Federal effect of net state deferred tax assets	—			—		—			36			—			—
Leveraged lease basis differences	253			—		—			—			—			—
Employee benefit obligations	477			149		290			25			6			6
Premium on reacquired debt	88			14		74			—			—			—
Regulatory assets –
Storm damage reserves	111			—		111			—			—			—
Employee benefit obligations	975			260		344			45			—			45
AROs	1,232			276		925			31			—			—
AROs	1,210			607		575			—			—			—
Other	593			177		141			68			34			132
Total deferred income tax liabilities	15,207			4,584		6,098			702			1,523			1,493
Deferred tax assets —
Federal effect of net state deferred tax liabilities	260			155		71			—			22			46
Employee benefit obligations	1,273			286		444			62			7			150
Other property basis differences	251			—		61			—			172			—
ITC and PTC carryforward	2,730			11		430			—			2,128			—
Alternative minimum tax carryforward	62			—		—			32			21			—
Other partnership basis difference	162			—		—			—			162			—
Other comprehensive losses	82			10		3			—			—			—
AROs	2,442			883		1,500			31			—			—
Estimated loss on plants under construction	346			—		283			63			—			—
Other deferred state tax attributes	415			—		19			251			72			—
Regulatory liability associated with the Tax Reform Legislation (not subject to normalization)	294			130		127			29			—			8
Other	731			147		140			47			47			285
Total deferred income tax assets	9,048			1,622		3,078			515			2,631			489
Valuation allowance	(123		)	—		(42		)	(41		)	(27		)	(12		)
Net deferred income tax assets	8,925			1,622		3,036			474			2,604			477
Net deferred income taxes (assets)/liabilities	$	6,282		$	2,962	$	3,062		$	228		$	(1,081	)	$	1,016

Recognized in the balance sheets:
Accumulated deferred income taxes – assets	$	(276	)	$	—	$	—		$	(150	)	$	(1,186	)	$	—
Accumulated deferred income taxes – liabilities	$	6,558		$	2,962	$	3,062		$	378		$	105		$	1,016



	December 31, 2017
	Southern Company			Alabama Power		Georgia Power		Mississippi Power			Southern Power			Southern Company Gas
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	9,059		$	2,135	$	2,889	$	303		$	1,922		$	1,150
Property basis differences	1,853			725		606		207			2			204
Federal effect of net state deferred tax assets	—			—		—		9			—			—
Leveraged lease basis differences	251			—		—		—			—			—
Employee benefit obligations	527			162		287		28			7			4
Premium on reacquired debt	54			16		34		—			—			—
Regulatory assets –
Storm damage reserves	89			—		89		—			—			—
Employee benefit obligations	1,044			260		349		46			—			75
AROs	821			249		501		33			—			—
AROs	370			220		130		—			—			—
Other	689			147		140		73			30			208
Total deferred income tax liabilities	14,757			3,914		5,025		699			1,961			1,641
Deferred tax assets —
Federal effect of net state deferred tax liabilities	330			143		85		—			42			54
Employee benefit obligations	1,339			286		448		62			8			185
Other property basis differences	343			—		59		—			184			—
ITC and PTC carryforward	2,414			9		403		—			2,002			—
Federal NOL carryforward	518			—		—		40			333			92
Alternative minimum tax carryforward	69			—		—		32			21			—
Other partnership basis difference	23			—		—		—			23			—
Other comprehensive losses	84			10		4		—			1			—
AROs	1,191			469		631		33			—			—
Estimated loss on plants under construction	722			—		—		722			—			—
Other deferred state tax attributes	330			—		6		133			77			—
Regulatory liability associated with the Tax Reform Legislation (not subject to normalization)	304			126		123		27			—			9
Other	538			111		91		54			9			223
Total deferred income tax assets	8,205			1,154		1,850		1,103			2,700			563
Valuation allowance	(184		)	—		—		(157		)	(13		)	(11		)
Net deferred income tax assets	8,021			1,154		1,850		946			2,687			552
Net deferred income taxes (assets)/liabilities	$	6,736		$	2,760	$	3,175	$	(247	)	$	(726	)	$	1,089

Recognized in the balance sheets:
Accumulated deferred income taxes – assets	$	(106	)	$	—	$	—	$	(247	)	$	(925	)	$	—
Accumulated deferred income taxes – liabilities	$	6,842		$	2,760	$	3,175	$	—		$	199		$	1,089

The implementation of the Tax Reform Legislation significantly reduced accumulated deferred income taxes in 2017, partially offset by bonus depreciation provisions in the PATH Act.

The traditional electric operating companies and natural gas distribution utilities have tax-related regulatory assets (deferred income tax charges) and regulatory liabilities (deferred income tax credits). The regulatory 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. The regulatory liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs. See Note 2 for each registrant's related balances at December 31, 2018 and 2017.

Tax Credit Carryforwards

Federal ITC/PTC carryforwards at December 31, 2018 were as follows:



	Southern Company		Alabama Power		Georgia Power		Southern Power
	(in millions)
Federal ITC/PTC carryforwards	$	2,410	$	11	$	108	$	2,128
Year in which federal ITC/PTC carryforwards begin expiring	2032		2033		2032		2034
Year by which federal ITC/PTC carryforwards are expected to be utilized	2022		2021		2021		2022

The estimated tax credit utilization reflects the 2018 abandonment loss related to certain Kemper County energy facility expenditures as well as the projected taxable gains on the various sale transactions described in Note 15 and "Legal Entity Reorganizations" herein. The expected utilization of tax credit carryforwards could be further delayed by numerous factors, including the acquisition of additional renewable projects, the purchase of rights to additional PTCs of Plant Vogtle Units 3 and 4 pursuant to the MEAG Funding Agreement or the Global Amendments, and changes in taxable income projections. See Note 2 under "Georgia Power – Nuclear Construction" for additional information on Plant Vogtle Units 3 and 4.

At December 31, 2018, Georgia Power also had approximately $341 million in state investment and other state tax credit carryforwards for the State of Georgia that will expire between 2020 and 2028 and are not expected to be fully utilized. Georgia Power has a net state valuation allowance of $33 million associated with these carryforwards.

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

Net Operating Loss Carryforwards

In the 2018 tax year, Southern Company expects to fully utilize the carryforward from federal NOLs generated in 2016 and 2017.

At December 31, 2018, the state and local NOL carryforwards for Southern Company's subsidiaries were as follows:



Company/Jurisdiction	Approximate NOL Carryforwards		Approximate Net State Income Tax Benefit		Tax Year NOL Begins Expiring
	(in millions)
Mississippi Power
Mississippi	$	5,062	$	200	2031

Southern Power
Oklahoma	846		40		2035
Florida	264		11		2033
South Carolina	62		2		2034
Other states	42		3		2029
Southern Power Total	$	1,214	$	56

Other^(*)
Georgia	358		16		2019
New York	223		11		2036
New York City	208		15		2036
Other states	278		14		Various
Southern Company Total	$	7,343	$	312


(*)	Represents other Southern Company subsidiaries. Alabama Power, Georgia Power, and Southern Company Gas did not have state NOL carryforwards at December 31, 2018.

State NOLs for Mississippi, Oklahoma, and Florida are not expected to be fully utilized prior to expiration. At December 31, 2018, Mississippi Power had a net state valuation allowance of $32 million for the Mississippi NOL and Southern Power had a net state valuation allowance of $9 million for the Oklahoma NOL and $11 million for the Florida NOL.

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

Unrecognized Tax Benefits

Unrecognized tax benefits changes in 2018, 2017, and 2016 for Southern Company, Mississippi Power, and Southern Power are provided below. The remaining registrants did not have any material unrecognized tax benefits for the periods presented.



	Southern Company			Mississippi Power			Southern Power
	(in millions)
Unrecognized tax benefits at December 31, 2015	$	433		$	421		$	8
Tax positions changes –
Increase from current periods	45			26			17
Increase from prior periods	21			18			—
Decrease from prior periods	(15		)	—			(8		)
Unrecognized tax benefits at December 31, 2016	484			465			17
Tax positions changes –
Increase from current periods	10			—			—
Increase from prior periods	10			2			—
Decrease from prior periods	(196		)	(177		)	(17		)
Reductions due to settlements	(290		)	(290		)	—
Unrecognized tax benefits at December 31, 2017	18			—			—
Tax positions changes –
Decrease from prior periods	(18		)	—			—
Unrecognized tax benefits at December 31, 2018	$	—		$	—		$	—

Mississippi Power's tax positions increase from current and prior periods for 2017 and 2016 relate to state tax benefits, deductions for R&E expenditures, and charitable contribution carryforwards that were impacted as a result of the settlement of R&E expenditures associated with the Kemper County energy facility, as well as federal income tax benefits from deferred ITCs. Mississippi Power's tax positions decrease from prior periods and the reductions due to settlements for 2017 relate primarily to the settlement of R&E expenditures associated with the Kemper County energy facility. See Note 2 under "Mississippi Power – Kemper County Energy Facility" and "Section 174 Research and Experimental Deduction" herein for more information.

Southern Power's increase in unrecognized tax benefits from current periods for 2016, and the decrease from prior periods for 2017 and 2016, primarily relate to federal income tax benefits from deferred ITCs.

There were no unrecognized tax benefits at December 31, 2018. The impact on the effective tax rate of Southern Company, Mississippi Power, and Southern Power, if recognized, was as follows for 2017 and 2016:



	Southern Company		Mississippi Power		Southern Power
	(in millions)
2017
Tax positions impacting the effective tax rate	$	18	$	—	$	—
Tax positions not impacting the effective tax rate	—		—		—
Balance of unrecognized tax benefits	$	18	$	—	$	—

2016
Tax positions impacting the effective tax rate	$	20	$	1	$	17
Tax positions not impacting the effective tax rate	464		464		—
Balance of unrecognized tax benefits	$	484	$	465	$	17

Mississippi Power's tax positions not impacting the effective tax rate for 2016 relate to deductions for R&E expenditures associated with the Kemper County energy facility. 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.

Southern Power's impact on the effective tax rate was determined based on the amount of ITCs, which were uncertain.

All of the registrants classify interest on tax uncertainties as interest expense. Accrued interest for all tax positions other than the Section 174 R&E deductions was immaterial for all years presented. None of the registrants accrued any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. New audit findings or settlements associated with ongoing audits could result in significant unrecognized tax benefits. At this time, a range of reasonably possible outcomes cannot be determined.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2017, as well as the pre-Merger Southern Company Gas tax returns. Southern Company is a participant in the Compliance Assurance Process of the IRS. The audits for the registrants' state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2012.

Section 174 Research and Experimental Deduction

Southern Company, on behalf of Mississippi Power, has reflected deductions for R&E expenditures related to the Kemper County energy facility in its federal income tax calculations since 2013 and filed amended federal income tax returns for 2008 through 2013 to also include such deductions. In September 2017, the U.S. Congress Joint Committee on Taxation approved a settlement between Southern Company and the IRS, resolving a methodology for these deductions. As a result of this approval, Mississippi Power recognized $176 million in 2017 of previously unrecognized tax benefits and reversed $36 million of associated accrued interest.