Edgar Filing: SOUTHERN CO

Third Quarter 2016 vs. Third Quarter 2015

Year-to-Date 2016 vs. Year-to-Date 2015

(change in millions)

(% change)

(change in millions)

(% change)

Document

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



Commission File Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.
1-3526	The Southern Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-0690070

1-3164	Alabama Power Company (An Alabama Corporation) 600 North 18^th Street Birmingham, Alabama 35203 (205) 257-1000	63-0004250

1-6468	Georgia Power Company (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526	58-0257110

001-31737	Gulf Power Company (A Florida Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111	59-0276810

001-11229	Mississippi Power Company (A Mississippi Corporation) 2992 West Beach Boulevard Gulfport, Mississippi 39501 (228) 864-1211	64-0205820

001-37803	Southern Power Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-2598670

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Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Registrant	Large Accelerated Filer	Accelerated Filer	Non- accelerated Filer	Smaller Reporting Company
The Southern Company	X
Alabama Power Company			X
Georgia Power Company			X
Gulf Power Company			X
Mississippi Power Company			X
Southern Power Company			X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ (Response applicable to all registrants.)



Registrant	Description of Common Stock	Shares Outstanding at September 30, 2016
The Southern Company	Par Value $5 Per Share	979,999,480
Alabama Power Company	Par Value $40 Per Share	30,537,500
Georgia Power Company	Without Par Value	9,261,500
Gulf Power Company	Without Par Value	5,642,717
Mississippi Power Company	Without Par Value	1,121,000
Southern Power Company	Par Value $0.01 Per Share	1,000

This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2016



		Page Number

DEFINITIONS		5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION		7

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	The Southern Company and Subsidiary Companies
	Condensed Consolidated Statements of Income	10
	Condensed Consolidated Statements of Comprehensive Income	11
	Condensed Consolidated Statements of Cash Flows	12
	Condensed Consolidated Balance Sheets	13
	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Alabama Power Company
	Condensed Statements of Income	48
	Condensed Statements of Comprehensive Income	48
	Condensed Statements of Cash Flows	49
	Condensed Balance Sheets	50
	Management's Discussion and Analysis of Financial Condition and Results of Operations	52
	Georgia Power Company
	Condensed Statements of Income	66
	Condensed Statements of Comprehensive Income	66
	Condensed Statements of Cash Flows	67
	Condensed Balance Sheets	68
	Management's Discussion and Analysis of Financial Condition and Results of Operations	70
	Gulf Power Company
	Condensed Statements of Income	89
	Condensed Statements of Comprehensive Income	89
	Condensed Statements of Cash Flows	90
	Condensed Balance Sheets	91
	Management's Discussion and Analysis of Financial Condition and Results of Operations	93
	Mississippi Power Company
	Condensed Statements of Income	108
	Condensed Statements of Comprehensive Income	108
	Condensed Statements of Cash Flows	109
	Condensed Balance Sheets	110
	Management's Discussion and Analysis of Financial Condition and Results of Operations	112
	Southern Power Company and Subsidiary Companies
	Condensed Consolidated Statements of Income	139
	Condensed Consolidated Statements of Comprehensive Income	139
	Condensed Consolidated Statements of Cash Flows	140
	Condensed Consolidated Balance Sheets	141
	Management's Discussion and Analysis of Financial Condition and Results of Operations	143
	Notes to the Condensed Financial Statements	157
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	45

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2016



		Page Number

	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	218
Item 1A.	Risk Factors	218
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Inapplicable
Item 3.	Defaults Upon Senior Securities	Inapplicable
Item 4.	Mine Safety Disclosures	Inapplicable
Item 5.	Other Information	Inapplicable
Item 6.	Exhibits	218
	Signatures	222

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DEFINITIONS



Term	Meaning

2012 MPSC CPCN Order	A detailed order issued by the Mississippi PSC in April 2012 confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC
2013 ARP	Alternative Rate Plan approved by the Georgia PSC in 2013 for Georgia Power for the years 2014 through 2016 and subsequently extended through 2019
AFUDC	Allowance for funds used during construction
Alabama Power	Alabama Power Company
ASU	Accounting Standards Update
Baseload Act	State of Mississippi legislation designed to enhance the Mississippi PSC's authority to facilitate development and construction of baseload generation in the State of Mississippi
Bridge Agreement	Senior unsecured Bridge Credit Agreement, dated as of September 30, 2015, among Southern Company, the lenders identified therein, and Citibank, N.A.
CCR	Coal combustion residuals
CO₂	Carbon dioxide
COD	Commercial operation date
Contractor	Westinghouse and its affiliate, WECTEC Global Project Services Inc. (formerly known as CB&I Stone & Webster, Inc.), formerly a subsidiary of The Shaw Group Inc. and Chicago Bridge & Iron Company N.V.
CPCN	Certificate of public convenience and necessity
CWIP	Construction work in progress
DOE	U.S. Department of Energy
ECO Plan	Mississippi Power's Environmental Compliance Overview Plan
Eligible Project Costs	Certain costs of construction relating to Plant Vogtle Units 3 and 4 that are eligible for financing under the Title XVII Loan Guarantee Program
EPA	U.S. Environmental Protection Agency
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FFB	Federal Financing Bank
Fitch	Fitch Ratings, Inc.
Form 10-K	Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power for the year ended December 31, 2015
GAAP	U.S. generally accepted accounting principles
Georgia Power	Georgia Power Company
Gulf Power	Gulf Power Company
IGCC	Integrated coal gasification combined cycle
IIC	Intercompany interchange contract
Internal Revenue Code	Internal Revenue Code of 1986, as amended
IRS	Internal Revenue Service
ITC	Investment tax credit
Kemper IGCC	IGCC facility under construction by Mississippi Power in Kemper County, Mississippi
KWH	Kilowatt-hour
LIBOR	London Interbank Offered Rate
MATS rule	Mercury and Air Toxics Standards rule
Merger	The merger, effective July 1, 2016, of a wholly-owned, direct subsidiary of Southern Company with and into Southern Company Gas, with Southern Company Gas continuing as the surviving corporation
Mirror CWIP	A regulatory liability used by Mississippi Power to record customer refunds resulting from a 2015 Mississippi PSC order

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DEFINITIONS

(continued)



Term	Meaning

Mississippi Power	Mississippi Power Company
mmBtu	Million British thermal units
Moody's	Moody's Investors Service, Inc.
MW	Megawatt
NCCR	Georgia Power's Nuclear Construction Cost Recovery
Nicor Gas	Northern Illinois Gas Company, a wholly-owned subsidiary of Southern Company Gas
NRC	U.S. Nuclear Regulatory Commission
OCI	Other comprehensive income
PATH Act	The Protecting Americans from Tax Hikes Act
PEP	Mississippi Power's Performance Evaluation Plan
Plant Vogtle Units 3 and 4	Two new nuclear generating units under construction at Georgia Power's Plant Vogtle
power pool	The operating arrangement whereby the integrated generating resources of the traditional electric operating companies and Southern Power Company (excluding subsidiaries) are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA	Power purchase agreements and contracts for differences that provide the owner of the renewable facility a certain fixed price for the electricity sold to the grid
PSC	Public Service Commission
PTC	Production tax credit
Rate CNP	Alabama Power's Rate Certificated New Plant
Rate CNP Compliance	Alabama Power's Rate Certificated New Plant Compliance
Rate CNP PPA	Alabama Power's Rate Certificated New Plant Power Purchase Agreement
Rate RSE	Alabama Power's Rate Stabilization and Equalization plan
registrants	Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power Company
ROE	Return on equity
S&P	S&P Global Ratings, a division of S&P Global Inc.
scrubber	Flue gas desulfurization system
SCS	Southern Company Services, Inc. (the Southern Company system service company)
SEC	U.S. Securities and Exchange Commission
SMEPA	South Mississippi Electric Power Association
Southern Company	The Southern Company
Southern Company Gas	Southern Company Gas (formerly known as AGL Resources Inc.) and its subsidiaries
Southern Company Gas Capital	Southern Company Gas Capital Corporation, a wholly-owned subsidiary of Southern Company Gas
Southern Company system	Southern Company, the traditional electric operating companies, Southern Power, Southern Electric Generating Company, Southern Nuclear, SCS, Southern Communications Services, Inc., other subsidiaries, and, as of July 1, 2016, Southern Company Gas
Southern Nuclear	Southern Nuclear Operating Company, Inc.
Southern Power	Southern Power Company and its subsidiaries
traditional electric operating companies	Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Vogtle Owners	Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light, and Sinking Fund Commissioners
Westinghouse	Westinghouse Electric Company LLC

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning regulated rates, the strategic goals for the wholesale business, economic conditions, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sources of capital, financing activities, completion dates of acquisitions and construction projects, filings with state and federal regulatory authorities, federal income tax benefits, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

•

the impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the utility industry, environmental laws regulating emissions, discharges, and disposal to air, water, and land, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;


•	current and future litigation, regulatory investigations, proceedings, or inquiries, including, without limitation, IRS and state tax audits;


•	the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate;

•

variations in demand for electricity and natural gas, including those relating to weather, the general economy and recovery from the last recession, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;


•	available sources and costs of natural gas and other fuels;


•	limits on pipeline capacity;


•	effects of inflation;

•

the ability to control costs and avoid cost overruns during the development and construction of facilities, which include the development and construction of generating facilities with designs that have not been finalized or previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, sustaining nitrogen supply, contractor or supplier delay, non-performance under construction, operating, or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by any PSC);


•	the ability to construct facilities in accordance with the requirements of permits and licenses, to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;


•	investment performance of Southern Company's employee and retiree benefit plans and the Southern Company system's nuclear decommissioning trust funds;


•	advances in technology;


•	state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery mechanisms;


•	legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions;

•

actions related to cost recovery for the Kemper IGCC, including the ultimate impact of the 2015 decision of the Mississippi Supreme Court, the Mississippi PSC's December 2015 rate order, and related legal or regulatory proceedings, Mississippi PSC review of the prudence of Kemper IGCC costs and approval of further permanent rate recovery plans, actions relating to proposed securitization, satisfaction of requirements to utilize grants, and the ultimate impact of the termination of the proposed sale of an interest in the Kemper IGCC to SMEPA;

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

(continued)


•	the ability to successfully operate the electric utilities' generating, transmission, and distribution facilities and Southern Company Gas' natural gas distribution and storage facilities and the successful performance of necessary corporate functions;


•	the inherent risks involved in operating and constructing nuclear generating facilities, including environmental, health, regulatory, natural disaster, terrorism, and financial risks;


•	the inherent risks involved in transporting and storing natural gas;


•	the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;


•	internal restructuring or other restructuring options that may be pursued;


•	potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

•

the possibility that the anticipated benefits from the Merger cannot be fully realized or may take longer to realize than expected, the possibility that costs related to the integration of Southern Company and Southern Company Gas will be greater than expected, the ability to retain and hire key personnel and maintain relationships with customers, suppliers, or other business partners, and the diversion of management time on integration-related issues;


•	the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;


•	the ability to obtain new short- and long-term contracts with wholesale customers;


•	the direct or indirect effect on the Southern Company system's business resulting from cyber intrusion or terrorist incidents and the threat of terrorist incidents;


•	interest rate fluctuations and financial market conditions and the results of financing efforts;


•	changes in Southern Company's and any of its subsidiaries' credit ratings, including impacts on interest rates, access to capital markets, and collateral requirements;


•	the impacts of any sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the benefits of the DOE loan guarantees;


•	the ability of Southern Company's electric utilities to obtain additional generating capacity (or sell excess generating capacity) at competitive prices;


•	catastrophic events such as fires, earthquakes, explosions, floods, hurricanes and other storms, droughts, pandemic health events such as influenzas, or other similar occurrences;


•	the direct or indirect effects on the Southern Company system's business resulting from incidents affecting the U.S. electric grid, natural gas pipeline infrastructure, or operation of generating or storage resources;


•	the effect of accounting pronouncements issued periodically by standard-setting bodies; and


•	other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.

The registrants expressly disclaim any obligation to update any forward-looking statements.

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THE SOUTHERN COMPANY

AND SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)						(in millions)
Operating Revenues:
Retail electric revenues	$	4,808		$	4,701		$	11,932		$	11,958
Wholesale electric revenues	613			520			1,455			1,435
Other electric revenues	181			169			529			494
Natural gas revenues	518			—			518			—
Other revenues	144			11			281			34
Total operating revenues	6,264			5,401			14,715			13,921
Operating Expenses:
Fuel	1,400			1,520			3,334			3,932
Purchased power	227			193			581			507
Cost of natural gas	133			—			133			—
Cost of other sales	84			—			161			—
Other operations and maintenance	1,411			1,097			3,616			3,320
Depreciation and amortization	695			528			1,805			1,515
Taxes other than income taxes	309			264			821			761
Estimated loss on Kemper IGCC	88			150			222			182
Total operating expenses	4,347			3,752			10,673			10,217
Operating Income	1,917			1,649			4,042			3,704
Other Income and (Expense):
Allowance for equity funds used during construction	52			60			150			163
Interest expense, net of amounts capitalized	(374		)	(218		)	(913		)	(612		)
Other income (expense), net	21			(21		)	(38		)	(41		)
Total other income and (expense)	(301		)	(179		)	(801		)	(490		)
Earnings Before Income Taxes	1,616			1,470			3,241			3,214
Income taxes	448			500			942			1,076
Consolidated Net Income	1,168			970			2,299			2,138
Less:
Dividends on Preferred and Preference Stock of Subsidiaries	11			11			34			42
Net income attributable to noncontrolling interests	27			—			39			—
Consolidated Net Income Attributable to Southern Company	$	1,130		$	959		$	2,226		$	2,096
Common Stock Data:
Earnings per share (EPS) —
Basic EPS	$	1.17		$	1.05		$	2.37		$	2.30
Diluted EPS	$	1.16		$	1.05		$	2.36		$	2.30
Average number of shares of common stock outstanding (in millions)
Basic	968			910			940			910
Diluted	975			912			945			913
Cash dividends paid per share of common stock	$	0.5600		$	0.5425		$	1.6625		$	1.6100

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016			2015
	(in millions)					(in millions)
Consolidated Net Income	$	1,168	$	970		$	2,299		$	2,138
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $12, $(11), $(74), and $(10), respectively	19		(18		)	(118		)	(16		)
Reclassification adjustment for amounts included in net income, net of tax of $2, $1, $13, and $3, respectively	2		1			20			4
Pension and other postretirement benefit plans:
Reclassification adjustment for amounts included in net income, net of tax of $1, $1, $2, and $3, respectively	1		2			3			5
Total other comprehensive income (loss)	22		(15		)	(95		)	(7		)
Less:
Dividends on preferred and preference stock of subsidiaries	11		11			34			42
Comprehensive income attributable to noncontrolling interests	27		—			39			—
Consolidated Comprehensive Income Attributable to Southern Company	$	1,152	$	944		$	2,131		$	2,089

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	For the Nine Months Ended September 30,
	2016			2015
	(in millions)
Operating Activities:
Consolidated net income	$	2,299		$	2,138
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization, total	2,109			1,787
Deferred income taxes	(22		)	821
Investment tax credits	—			319
Allowance for equity funds used during construction	(150		)	(163		)
Pension, postretirement, and other employee benefits	(158		)	79
Settlement of asset retirement obligations	(117		)	(20		)
Stock based compensation expense	87			77
Hedge settlements	(236		)	(4		)
Estimated loss on Kemper IGCC	222			182
Income taxes receivable, non-current	—			(444		)
Other, net	(98		)	(48		)
Changes in certain current assets and liabilities —
-Receivables	(458		)	(118		)
-Fossil fuel for generation	204			239
-Natural gas for sale	(222		)	—
-Other current assets	(111		)	(40		)
-Accounts payable	(9		)	(266		)
-Accrued taxes	1,062			408
-Accrued compensation	(122		)	(129		)
-Mirror CWIP	—			99
-Other current liabilities	(18		)	171
Net cash provided from operating activities	4,262			5,088
Investing Activities:
Business acquisitions, net of cash acquired	(9,513		)	(1,128		)
Property additions	(5,252		)	(3,490		)
Investment in restricted cash	(750		)	—
Distribution of restricted cash	746			—
Nuclear decommissioning trust fund purchases	(838		)	(1,164		)
Nuclear decommissioning trust fund sales	832			1,159
Cost of removal, net of salvage	(155		)	(118		)
Change in construction payables, net	(259		)	20
Investment in unconsolidated subsidiaries	(1,421		)	—
Prepaid long-term service agreement	(125		)	(166		)
Other investing activities	95			7
Net cash used for investing activities	(16,640		)	(4,880		)
Financing Activities:
Increase in notes payable, net	655			662
Proceeds —
Long-term debt	14,091			3,992
Common stock	3,265			136
Short-term borrowings	—			280
Redemptions and repurchases —
Long-term debt	(2,405		)	(2,562		)
Interest-bearing refundable deposits	—			(275		)
Preferred and preference stock	—			(412		)
Common stock	—			(115		)
Short-term borrowings	(475		)	(255		)
Distributions to noncontrolling interests	(22		)	(6		)
Capital contributions from noncontrolling interests	367			274
Purchase of membership interests from noncontrolling interests	(129		)	—
Payment of common stock dividends	(1,553		)	(1,465		)
Other financing activities	(151		)	(63		)
Net cash provided from financing activities	13,643			191
Net Change in Cash and Cash Equivalents	1,265			399
Cash and Cash Equivalents at Beginning of Period	1,404			710
Cash and Cash Equivalents at End of Period	$	2,669		$	1,109
Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $94 and $88 capitalized for 2016 and 2015, respectively)	$	766		$	590
Income taxes, net	(151		)	(13		)
Noncash transactions — Accrued property additions at end of period	578			483

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



Assets	At September 30, 2016			At December 31, 2015
	(in millions)
Current Assets:
Cash and cash equivalents	$	2,669		$	1,404
Receivables —
Customer accounts receivable	1,718			1,058
Energy marketing receivable	526			—
Unbilled revenues	639			397
Under recovered regulatory clause revenues	54			63
Income taxes receivable, current	—			144
Other accounts and notes receivable	317			398
Accumulated provision for uncollectible accounts	(43		)	(13		)
Materials and supplies	1,268			1,061
Fossil fuel for generation	664			868
Natural gas for sale	627			—
Vacation pay	178			178
Prepaid expenses	459			495
Other regulatory assets, current	414			402
Other current assets	168			71
Total current assets	9,658			6,526
Property, Plant, and Equipment:
In service	94,174			75,118
Less accumulated depreciation	29,590			24,253
Plant in service, net of depreciation	64,584			50,865
Other utility plant, net	—			233
Nuclear fuel, at amortized cost	901			934
Construction work in progress	10,069			9,082
Total property, plant, and equipment	75,554			61,114
Other Property and Investments:
Goodwill	6,223			2
Equity investments in unconsolidated subsidiaries	1,541			6
Other intangible assets, net of amortization of $39 and $12 at September 30, 2016 and December 31, 2015, respectively	942			317
Nuclear decommissioning trusts, at fair value	1,616			1,512
Leveraged leases	769			755
Miscellaneous property and investments	249			160
Total other property and investments	11,340			2,752
Deferred Charges and Other Assets:
Deferred charges related to income taxes	1,590			1,560
Unamortized loss on reacquired debt	228			227
Other regulatory assets, deferred	6,446			4,989
Income taxes receivable, non-current	413			413
Other deferred charges and assets	1,133			737
Total deferred charges and other assets	9,810			7,926
Total Assets	$	106,362		$	78,318

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



Liabilities and Stockholders' Equity	At September 30, 2016			At December 31, 2015
	(in millions)
Current Liabilities:
Securities due within one year	$	2,254		$	2,674
Notes payable	1,670			1,376
Energy marketing trade payables	533			—
Accounts payable	1,732			1,905
Customer deposits	577			404
Accrued taxes —
Accrued income taxes	375			19
Other accrued taxes	641			484
Accrued interest	410			249
Accrued vacation pay	231			228
Accrued compensation	505			549
Asset retirement obligations, current	390			217
Liabilities from risk management activities, net of collateral	125			156
Other regulatory liabilities, current	99			278
Mandatorily redeemable noncontrolling interest	174			—
Other current liabilities	851			590
Total current liabilities	10,567			9,129
Long-term Debt	41,550			24,688
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes	14,218			12,322
Deferred credits related to income taxes	204			187
Accumulated deferred investment tax credits	1,721			1,219
Employee benefit obligations	3,022			2,582
Asset retirement obligations, deferred	4,124			3,542
Unrecognized tax benefits	381			370
Accrued environmental remediation	415			42
Other cost of removal obligations	2,771			1,162
Other regulatory liabilities, deferred	401			254
Other deferred credits and liabilities	641			678
Total deferred credits and other liabilities	27,898			22,358
Total Liabilities	80,015			56,175
Redeemable Preferred Stock of Subsidiaries	118			118
Redeemable Noncontrolling Interests	49			43
Stockholders' Equity:
Common Stockholders' Equity:
Common stock, par value $5 per share —
Authorized — 1.5 billion shares
Issued — September 30, 2016: 981 million shares
— December 31, 2015: 915 million shares
Treasury — September 30, 2016: 0.8 million shares
— December 31, 2015: 3.4 million shares
Par value	4,900			4,572
Paid-in capital	9,217			6,282
Treasury, at cost	(30		)	(142		)
Retained earnings	10,685			10,010
Accumulated other comprehensive loss	(225		)	(130		)
Total Common Stockholders' Equity	24,547			20,592
Preferred and Preference Stock of Subsidiaries	609			609
Noncontrolling Interests	1,024			781
Total Stockholders' Equity	26,180			21,982
Total Liabilities and Stockholders' Equity	$	106,362		$	78,318

The accompanying notes as they relate to Southern Company are an integral part of these condensed consolidated financial statements.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2016 vs. THIRD QUARTER 2015

AND

YEAR-TO-DATE 2016 vs. YEAR-TO-DATE 2015

OVERVIEW

Southern Company is a holding company that owns all of the common stock of the traditional electric operating companies and the parent entities of Southern Power and Southern Company Gas and owns other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system's primary business of electricity sales by the traditional electric operating companies and Southern Power and, following the closing of the Merger on July 1, 2016, the distribution of natural gas by Southern Company Gas, formerly known as AGL Resources Inc. The four traditional electric operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, owns, and manages power generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company Gas is an energy services holding company whose primary business is the distribution of natural gas through seven natural gas distribution utilities and is involved in several other complementary businesses including gas marketing services, wholesale gas services, and gas midstream operations. Southern Company's other business activities include providing products and services in the areas of distributed generation, energy efficiency, and utility infrastructure, as well as investments in telecommunications and leveraged lease projects. For additional information, see BUSINESS – "The Southern Company System – Traditional Operating Companies," " – Southern Power," and " – Other Businesses" in Item 1 of the Form 10-K.

Merger with Southern Company Gas

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.

Prior to the completion of the Merger, Southern Company and Southern Company Gas operated as separate companies. The discussion and analysis of results of operations and financial condition set forth herein include Southern Company Gas' results of operations since July 1, 2016 and financial condition as of September 30, 2016. See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information regarding the Merger.

During the three and nine months ended September 30, 2016, Southern Company recorded in its statements of income costs associated with the Merger of approximately $40.8 million and $104.1 million, respectively, of which $40.6 million and $73.5 million is included in operating expenses and $0.2 million and $30.6 million is included in other income and (expense), respectively. These costs include external transaction costs for financing, legal, and consulting services, as well as rate credits and additional compensation-related expenses.

See RISK FACTORS in Item 1A herein for additional information related to the various risks related to the Merger.

Construction Program

Construction continues on Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Integrated Coal Gasification Combined Cycle" herein for additional information. For information about Southern Power's acquisitions and construction of renewable energy facilities, see Note (I) to the Condensed Financial Statements under "Southern Power" herein.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key Performance Indicators

Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, execution of major construction projects, and earnings per share. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Southern Company in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Net Income

Consolidated net income attributable to Southern Company was $1.1 billion ($1.17 per share) for the third quarter 2016 compared to $959 million ($1.05 per share) for the third quarter 2015. The increase was primarily the result of an increase in retail electric revenues resulting from warmer weather and base rate increases, a decrease in income taxes primarily from income tax benefits at Southern Power, and lower charges related to revisions of the estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC, partially offset by increases in interest expense, depreciation and amortization, and non-fuel operations and maintenance expenses. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.

Consolidated net income attributable to Southern Company was $2.2 billion ($2.37 per share) for year-to-date 2016 compared to $2.1 billion ($2.30 per share) for the corresponding period in 2015. The increase was primarily the result of an increase in retail electric revenues resulting from base rate increases as well as the 2015 correction of a Georgia Power billing error and a decrease in income taxes primarily from income tax benefits at Southern Power, partially offset by increases in interest expense and depreciation and amortization.

Although several individual income statement line items reflect variances resulting from the Merger on July 1, 2016 and the acquisition of PowerSecure International, Inc. (PowerSecure) on May 9, 2016, consolidated net income for the third quarter and year-to-date 2016 was not significantly impacted by these transactions.

See Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information on the Merger and the acquisition of PowerSecure.

Retail Electric Revenues

In the third quarter 2016, retail electric revenues were $4.8 billion compared to $4.7 billion for the corresponding period in 2015. For year-to-date 2016, retail electric revenues decreased slightly compared to the corresponding period in 2015.

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Details of the changes in retail electric revenues were as follows:



	Third Quarter 2016					Year-to-Date 2016
	(in millions)			(% change)		(in millions)			(% change)
Retail electric – prior year	$	4,701				$	11,958
Estimated change resulting from –
Rates and pricing	84			1.8		379			3.2
Sales growth (decline)	(18		)	(0.4	)	(14		)	(0.1	)
Weather	169			3.6		82			0.7
Fuel and other cost recovery	(128		)	(2.7	)	(473		)	(4.0	)
Retail electric – current year	$	4,808		2.3	%	$	11,932		(0.2	)%

Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2016 when compared to the corresponding periods in 2015 primarily due to increases in base tariffs at Georgia Power under the 2013 ARP and the NCCR tariff and increased revenues at Alabama Power under Rate CNP Compliance, all effective January 1, 2016. Also contributing to the increase in rates and pricing for year-to-date 2016 was the 2015 correction of a Georgia Power billing error to a small number of large commercial and industrial customers and the implementation of rates at Mississippi Power for certain Kemper IGCC in-service assets, effective September 2015.

See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power," "Retail Regulatory Matters – Georgia Power – Rate Plans" and " – Nuclear Construction," and "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.

Revenues attributable to changes in sales decreased in the third quarter 2016 when compared to the corresponding period in 2015. Industrial KWH sales decreased 3.3% in the third quarter 2016 primarily in the primary metals, paper, chemicals, pipelines, and stone, clay, and glass sectors. A strong dollar, low oil prices, and weak global economic conditions have constrained growth in the industrial sector. Weather-adjusted commercial KWH sales decreased 0.7% in the third quarter 2016 primarily due to decreased customer usage resulting from an increase in energy saving initiatives, partially offset by customer growth. Weather-adjusted residential KWH sales decreased 0.4% in the third quarter 2016 primarily due to decreased customer usage primarily resulting from an increase in multi-family housing and efficiency improvements in residential appliances and lighting, partially offset by customer growth.

Revenues attributable to changes in sales decreased for year-to-date 2016 when compared to the corresponding period in 2015. Industrial KWH sales decreased 2.1% for year-to-date 2016 primarily in the primary metals, chemicals, pipelines, and stone, clay, and glass sectors. A strong dollar, low oil prices, and weak global economic conditions have constrained growth in the industrial sector. Weather-adjusted commercial KWH sales decreased 0.6% for year-to-date 2016 primarily due to decreased customer usage resulting from an increase in energy saving initiatives, partially offset by customer growth. Weather-adjusted residential KWH sales increased 0.2% for year-to-date 2016 due to customer growth, partially offset by decreased customer usage primarily resulting from an increase in multi-family housing and efficiency improvements in residential appliances and lighting.

In the first quarter 2015, Mississippi Power updated the methodology to estimate the unbilled revenue allocation among customer classes. This change did not have a significant impact on net income. The KWH sales variances discussed above reflect an adjustment to the estimated allocation of Mississippi Power's unbilled first quarter 2015 KWH sales among customer classes that is consistent with the actual allocation in 2016. Without this adjustment, year-to-date 2016 weather-adjusted residential sales increased 0.3%, weather-adjusted commercial sales decreased 0.5%, and industrial KWH sales decreased 2.0% as compared to the corresponding period in 2015.

Fuel and other cost recovery revenues decreased $128 million and $473 million in the third quarter and year-to-date 2016, respectively, when compared to the corresponding periods in 2015 primarily due to a decrease in fuel prices. Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in

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fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of PPA costs, and do not affect net income. The traditional electric operating companies each have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPA capacity costs.

Wholesale Electric Revenues

Wholesale electric revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives and short-term opportunity sales. Wholesale electric revenues from PPAs (other than solar and wind PPAs) have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system's generation, demand for energy within the Southern Company system's electric service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Solar and wind PPAs do not have a capacity charge and customers purchase the energy output of a dedicated renewable facility through an energy charge. Wholesale electric revenues at Mississippi Power include FERC-regulated municipal and rural association sales as well as market-based sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Southern Company system's variable cost to produce the energy.

In the third quarter 2016, wholesale electric revenues were $613 million compared to $520 million for the corresponding period in 2015. This increase was primarily related to a $121 million increase in energy revenues, partially offset by a $28 million decrease in capacity revenues. For year-to-date 2016, wholesale electric revenues were $1.46 billion compared to $1.44 billion for the corresponding period in 2015. This increase was primarily related to a $112 million increase in energy revenues, partially offset by a $92 million decrease in capacity revenues. The increases in energy revenues were primarily due to an increase in short-term sales and renewable energy sales at Southern Power, partially offset by lower fuel prices. The decreases in capacity revenues were primarily due to the elimination in consolidation of a Southern Power PPA that was remarketed from a third party to Georgia Power in January 2016, the expiration of Plant Scherer Unit 3 power sales agreements at Gulf Power, and the expiration of wholesale contracts at Georgia Power, partially offset by an increase due to a new wholesale contract at Alabama Power. Additionally, the year-to-date 2016 decrease in capacity revenues was due to unit retirements at Georgia Power.

See FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" herein for additional information regarding the expiration of long-term sales agreements at Gulf Power for Plant Scherer Unit 3, which will impact future wholesale earnings, and Gulf Power's request to rededicate its ownership interest in Scherer Unit 3 to the retail jurisdiction.

Other Electric Revenues

For year-to-date 2016, other electric revenues were $529 million compared to $494 million for the corresponding period in 2015. The increase was primarily due to increases in customer temporary facilities services revenues, outdoor lighting revenues, and solar application fee revenues at Georgia Power.

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Natural Gas Revenues

Natural gas revenues represent sales from the seven natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $518 million of natural gas revenues are included in the consolidated statements of income for the third quarter and year-to-date 2016.

See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information.

Other Revenues

N/M - Not meaningful

In the third quarter 2016, other revenues were $144 million compared to $11 million for the corresponding period in 2015. For year-to-date 2016, other revenues were $281 million compared to $34 million for the corresponding period in 2015. These increases were primarily due to $91 million and $150 million for the third quarter and year-to-date 2016, respectively, of revenues from products and services at PowerSecure, which was acquired on May 9, 2016, and $25 million of revenues from gas marketing products and services at Southern Company Gas following the Merger. Additionally, for the third quarter and year-to-date 2016, revenues from certain non-regulated sales of products and services by the traditional electric operating companies of $17 million and $63 million, respectively, were reclassified as other revenues for consistency of presentation on a consolidated basis. In prior periods, these revenues were included in other income (expense), net.

See Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information on the Merger and the acquisition of PowerSecure.

Fuel and Purchased Power Expenses



	Third Quarter 2016 vs. Third Quarter 2015				Year-to-Date 2016 vs. Year-to-Date 2015
	(change in millions)			(% change)	(change in millions)			(% change)
Fuel	$	(120	)	(7.9)	$	(598	)	(15.2)
Purchased power	34			17.6	74			14.6
Total fuel and purchased power expenses	$	(86	)		$	(524	)

In the third quarter 2016, total fuel and purchased power expenses were $1.6 billion compared to $1.7 billion for the corresponding period in 2015. The decrease was primarily the result of a $209 million decrease in the average cost of fuel and purchased power primarily due to lower coal prices, partially offset by a $123 million increase in the volume of KWHs generated and purchased.

For year-to-date 2016, total fuel and purchased power expenses were $3.9 billion compared to $4.4 billion for the corresponding period in 2015. The decrease was primarily the result of a $573 million decrease in the average cost of fuel and purchased power primarily due to lower coal and natural gas prices, partially offset by a $49 million net increase in the volume of KWHs generated and purchased.

Fuel and purchased power energy transactions at the traditional electric operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Fuel Cost Recovery" herein for additional information. Fuel expenses incurred under Southern Power's PPAs are generally the responsibility of the counterparties and do not significantly impact net income.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the Southern Company system's generation and purchased power were as follows:



	Third Quarter 2016	Third Quarter 2015	Year-to-Date 2016	Year-to-Date 2015
Total generation (in billions of KWHs)	56	53	145	146
Total purchased power (in billions of KWHs)	5	4	13	10
Sources of generation (percent) —
Coal	38	40	33	37
Nuclear	15	15	16	16
Gas	44	43	46	44
Hydro	1	1	3	2
Other Renewables	2	1	2	1
Cost of fuel, generated (in cents per net KWH) —
Coal	2.97	3.86	3.10	3.65
Nuclear	0.81	0.84	0.82	0.78
Gas	2.74	2.71	2.40	2.72
Average cost of fuel, generated (in cents per net KWH)	2.54	2.90	2.38	2.78
Average cost of purchased power (in cents per net KWH)^(*)	5.57	5.95	5.31	6.13


(*)	Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider.

Fuel

In the third quarter 2016, fuel expense was $1.4 billion compared to $1.5 billion for the corresponding period in 2015. The decrease was primarily due to a 23.1% decrease in the average cost of coal per KWH generated, partially offset by an 8.7% increase in the volume of KWHs generated by natural gas.

For year-to-date 2016, fuel expense was $3.3 billion compared to $3.9 billion for the corresponding period in 2015. The decrease was primarily due to a 15.1% decrease in the average cost of coal per KWH generated, an 11.9% decrease in the volume of KWHs generated by coal, and an 11.8% decrease in the average cost of natural gas per KWH generated, partially offset by a 6.1% increase in the volume of KWHs generated by natural gas.

Purchased Power

In the third quarter 2016, purchased power expense was $227 million compared to $193 million for the corresponding period in 2015. The increase was primarily due to a 24.1% increase in the volume of KWHs purchased, partially offset by a 6.4% decrease in the average cost per KWH purchased, primarily as a result of lower fuel prices.

For year-to-date 2016, purchased power expense was $581 million compared to $507 million for the corresponding period in 2015. The increase was primarily due to a 29.4% increase in the volume of KWHs purchased, partially offset by a 13.4% decrease in the average cost per KWH purchased, primarily as a result of lower fuel prices.

Energy purchases will vary depending on demand for energy within the Southern Company system's electric service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, and the availability of the Southern Company system's generation.

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Cost of Natural Gas

Cost of natural gas represents the cost of natural gas sold by the seven natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $133 million of natural gas costs is included in the consolidated statements of income for the third quarter and year-to-date 2016.

See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information.

Cost of Other Sales

In the third quarter and year-to-date 2016, cost of other sales were $84 million and $161 million, respectively. These costs were primarily related to sales of products and services by PowerSecure, which was acquired on May 9, 2016, of $69 million and $111 million for the third quarter and year-to-date 2016, respectively. Additionally, for the third quarter and year-to-date 2016, costs of $11 million and $43 million, respectively, related to certain non-regulated sales of products and services by the traditional electric operating companies were reclassified as cost of other sales for consistency of presentation on a consolidated basis. In prior periods, these costs were included in other income (expense), net.

See "Other Revenues" herein and Note (I) to the Condensed Financial Statements under "Southern Company – Acquisition of PowerSecure International, Inc." herein for additional information.

Other Operations and Maintenance Expenses

In the third quarter 2016, other operations and maintenance expenses were $1.4 billion compared to $1.1 billion for the corresponding period in 2015. The increase was primarily related to $251 million in operations and maintenance expenses at Southern Company Gas following the Merger, a $26 million charge in connection with an employee attrition plan at Georgia Power, a $19 million increase in transmission and distribution expenses primarily related to overhead line maintenance at Georgia Power, $18 million in operations and maintenance expenses at PowerSecure, and a $9 million increase at Southern Power associated with new solar and wind facilities placed in service in 2015 and 2016, partially offset by an $11 million net decrease in employee compensation and benefits, including pension costs.

For year-to-date 2016, other operations and maintenance expenses were $3.6 billion compared to $3.3 billion for the corresponding period in 2015. The increase was primarily due to $251 million in operations and maintenance expenses at Southern Company Gas following the Merger, $28 million in operations and maintenance expenses at PowerSecure since the acquisition closed on May 9, 2016, a $28 million increase in transaction fees related to the Merger and the acquisition of PowerSecure, a $27 million increase in transmission and distribution expenses primarily related to overhead line maintenance and integrated transmission system billings at Georgia Power, a $26 million charge in connection with an employee attrition plan at Georgia Power, and a $22 million increase at Southern Power associated with new solar and wind facilities placed in service in 2015 and 2016. The increase was partially offset by a $53 million decrease in scheduled outage and maintenance costs at generation facilities and a $48 million net decrease in employee compensation and benefits, including pension costs.

See Note (F) to the Condensed Financial Statements herein for additional information related to pension costs and Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information related to the Merger and the acquisition of PowerSecure.

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Depreciation and Amortization

In the third quarter 2016, depreciation and amortization was $695 million compared to $528 million for the corresponding period in 2015. For year-to-date 2016, depreciation and amortization was $1.8 billion compared to $1.5 billion for the corresponding period in 2015. Following the Merger, $116 million in depreciation and amortization for Southern Company Gas is included in the consolidated financial statements for the third quarter and year-to-date 2016. Additionally, the increases were due to additional plant in service at the traditional electric operating companies and Southern Power.

See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information.

Taxes Other Than Income Taxes

In the third quarter 2016, taxes other than income taxes were $309 million compared to $264 million for the corresponding period in 2015. For year-to-date 2016, taxes other than income taxes were $821 million compared to $761 million for the corresponding period in 2015. Following the Merger, $29 million in taxes other than income taxes associated with Southern Company Gas is included in the consolidated financial statements for the third quarter and year-to-date 2016. Additionally, property taxes at the traditional electric operating companies increased for the third quarter and year-to-date 2016 primarily due to an increase in the assessed value of property.

See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information.

Estimated Loss on Kemper IGCC

In the third quarter 2016 and 2015, estimated probable losses on the Kemper IGCC of $88 million and $150 million, respectively, were recorded at Southern Company. For year-to-date 2016 and 2015, estimated probable losses on the Kemper IGCC of $222 million and $182 million, respectively, were recorded at Southern Company. These losses reflect revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO₂ pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). See FUTURE EARNINGS POTENTIAL – "Construction Program – Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.

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Interest Expense, Net of Amounts Capitalized

In the third quarter 2016, interest expense, net of amounts capitalized was $374 million compared to $218 million in the corresponding period in 2015. For year-to-date 2016, interest expense, net of amounts capitalized was $913 million compared to $612 million in the corresponding period in 2015. These increases were primarily due to an increase in average outstanding long-term debt primarily related to the financing of the Merger. In addition, following the Merger, $39 million in interest expense of Southern Company Gas is included in the consolidated financial statements for the third quarter and year-to-date 2016. Also contributing to the year-to-date 2016 increase was the May 2015 termination of an asset purchase agreement between Mississippi Power and SMEPA and the resulting reversal of accrued interest on related deposits.

See Note (E) to the Condensed Financial Statements herein for additional information.

Other Income (Expense), Net

N/M - Not meaningful

In the third quarter 2016, other income (expense), net was $21 million compared to $(21) million for the corresponding period in 2015. For year-to-date 2016, other income (expense), net was $(38) million compared to $(41) million for the corresponding period in 2015. Following the Merger, $38 million in other income of Southern Company Gas is included in the consolidated financial statements for the third quarter and year-to-date 2016, primarily related to $27 million of earnings from the equity method investment in Southern Natural Gas Company, L.L.C. (SNG) in September 2016. Additionally, in the third quarter 2016, revenues and costs associated with certain non-regulated sales of products and services by the traditional electric operating companies were reclassified to other revenues and cost of other sales for consistency of presentation on a consolidated basis following the PowerSecure acquisition. For the third quarter and year-to-date 2016, net amounts reclassified were $6 million and $20 million, respectively. The year-to-date 2016 increase was partially offset by fees associated with the Bridge Agreement for the Merger.

See "Other Revenues" and "Cost of Other Sales" herein and Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information. Also see Note 12 to the financial statements of Southern Company under "Southern Company – Merger Financing" in Item 8 of the Form 10-K for additional information.

Income Taxes

In the third quarter 2016, income taxes were $448 million compared to $500 million for the corresponding period in 2015. The decrease was primarily due to increased federal income tax benefits from ITCs and PTCs at Southern Power, partially offset by a reduction in tax benefits related to the estimated probable losses on Mississippi Power's construction of the Kemper IGCC and an increase in pre-tax earnings.

For year-to-date 2016, income taxes were $942 million compared to $1.1 billion for the corresponding period in 2015. The decrease was primarily due to increased federal income tax benefits from ITCs and PTCs at Southern

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Power, partially offset by an increase in pre-tax earnings and an increase related to state income tax benefits realized in 2015.

See Note (G) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company's future earnings potential. The level of Southern Company's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of the Southern Company system's primary business of selling electricity and, as a result of closing the Merger, the distribution of natural gas. These factors include the traditional electric operating companies' and Southern Company Gas' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and the completion and subsequent operation of the Kemper IGCC and Plant Vogtle Units 3 and 4 as well as other ongoing construction projects. Other major factors include the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects. Future earnings for the electricity and natural gas businesses in the near term will depend, in part, upon maintaining and growing sales and customers which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the prices of electricity and natural gas, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale electric business also depends on numerous factors including regulatory matters, creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity and natural gas is primarily driven by economic growth. The pace of economic growth and electricity and natural gas demand may be affected by changes in regional and global economic conditions, which may impact future earnings.

Volatility of natural gas prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services businesses to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability.

As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company.

On July 10, 2016, Southern Company and Kinder Morgan, Inc. (Kinder Morgan) entered into a definitive agreement for Southern Company to acquire a 50% equity interest in SNG, which is the owner of a 7,000-mile pipeline system connecting natural gas supply basins in Texas, Louisiana, Mississippi, and Alabama to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. In addition, the agreement committed Southern Company and Kinder Morgan to cooperatively pursue specific growth opportunities to develop natural gas infrastructure through SNG. On August 31, 2016, Southern Company assigned its rights and obligations under the definitive agreement to a wholly-owned, indirect subsidiary of Southern Company Gas. On September 1, 2016, Southern Company Gas completed the acquisition for a purchase price of approximately $1.4 billion. The investment in SNG is accounted for using the equity method.

For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K and RISK FACTORS in Item 1A herein.

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Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through market-based contracts. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Environmental Matters" in Item 8 of the Form 10-K for additional information.

Environmental Statutes and Regulations

Air Quality

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations – Air Quality" of Southern Company in Item 7 of the Form 10-K for additional information regarding the EPA's final MATS rule, regional haze regulations, fine particulate matter National Ambient Air Quality Standards (NAAQS), and the Cross State Air Pollution Rule (CSAPR).

On April 25, 2016, in response to a June 2015 U.S. Supreme Court opinion, the EPA published its supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule compliance requirements, costs, or deadlines, and all units within the Southern Company system that are subject to the MATS rule completed the measures necessary to achieve compliance with the MATS rule by the applicable deadlines.

Also on April 25, 2016, the EPA issued proposed revisions to the regional haze regulations. The ultimate impact of the proposed revisions will depend on their ultimate adoption, implementation, and any legal challenges and cannot be determined at this time.

On September 6, 2016, the EPA designated all remaining areas within Georgia Power's and Gulf Power's service territories as attainment for the 2012 annual fine particulate matter NAAQS. Following the EPA's decision, all areas within the traditional electric operating companies' service territory have now been designated as attainment for the 2012 fine particulate matter NAAQS.

On October 26, 2016, the EPA published a final rule that updates the CSAPR ozone season nitrogen oxide program, including revising ozone-season emissions budgets in Alabama, Mississippi, and Texas and removing Florida and North Carolina from the program. The ultimate impact of this rule will depend on the outcome of any legal challenges and implementation at the state level and cannot be determined at this time.

Coal Combustion Residuals

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Residuals" of Southern Company in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.

On June 13, 2016, Georgia Power announced that all of its 29 ash ponds will cease operations and stop receiving coal ash in the next three years, and all ponds will eventually be closed either by removal, consolidation, and/or recycling for the beneficial use of coal ash or through closure in place using advanced engineering methods. On October 26, 2016, the Georgia Department of Natural Resources approved amendments to its state solid waste regulations to incorporate the requirements of the EPA's Disposal of Coal Combustion Residuals from Electric Utilities Rule (CCR Rule) and establish additional requirements for all of Georgia Power's onsite storage units consisting of landfills and surface impoundments. The final State of Georgia regulations are not anticipated to have a material impact on the Southern Company system's compliance obligations under the CCR Rule. See Note (A) to

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the Condensed Financial Statements herein for information regarding Southern Company's asset retirement obligations (ARO) as of September 30, 2016.

Environmental Remediation

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations – Environmental Remediation" of Southern Company in Item 7 of the Form 10-K for additional information.

As a result of closing the Merger, Southern Company's Consolidated Balance Sheet at September 30, 2016 includes the environmental remediation liabilities of Southern Company Gas. See Note (B) to the Condensed Financial Statements under "Environmental Remediation" herein for additional information. See Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information regarding the Merger.

Regulatory Matters

Fuel Cost Recovery

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail Fuel Cost Recovery" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Rate ECR" and "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding retail fuel cost recovery.

The traditional electric operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional electric operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.

On May 17, 2016, the Georgia PSC approved Georgia Power's request to decrease fuel rates by 15% effective June 1, 2016, which will reduce annual billings by approximately $313 million. Georgia Power is currently scheduled to file its next fuel case by February 28, 2017.

Renewables

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Renewables" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Southern Company system's renewables activity.

In accordance with the Alabama PSC order approving up to 500 MWs of renewable projects, Alabama Power has entered into agreements to purchase power from or to build renewable generation sources, including a 72-MW solar PPA approved by the Alabama PSC in June 2016. Alabama Power is marketing the associated renewable energy credits (REC) generated by this solar PPA to customers interested in supporting renewable energy development. The terms of the renewable agreements permit Alabama Power to use the energy and retire the associated RECs in service of its customers or to sell RECs, separately or bundled with energy.

As part of the Georgia Power Advanced Solar Initiative (ASI), four PPAs totaling 149 MWs of Georgia Power's solar contracted capacity from Southern Power began in the first quarter 2016. During the second quarter 2016, Georgia Power executed PPAs to purchase an additional 41 MWs of solar capacity under the ASI. Ownership of any associated RECs is specified in each respective PPA. The party that owns the RECs retains the right to use them.

On October 4, 2016, two 30-MW solar generating facilities at Fort Gordon and Fort Stewart Army bases began commercial operation. These solar generating facilities were approved by the Georgia PSC in 2014.

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The Florida PSC issued a final approval order on Gulf Power's Community Solar Pilot Program on April 15, 2016. The program will offer all Gulf Power customers an opportunity to voluntarily contribute to the construction and operation of a solar photovoltaic facility with electric generating capacity of up to 1 MW through annual subscriptions. The energy generated from the solar facility is expected to provide power to all of Gulf Power's customers.

On October 11, 2016, the Florida PSC preliminarily approved Gulf Power's energy purchase agreement for up to 94 MWs of wind generation in central Oklahoma. Purchases under this agreement will be for energy only and will be recovered through Gulf Power's fuel cost recovery clause.

In November 2015, the Mississippi PSC issued orders approving three solar facilities for a combined total of approximately 105 MWs. Mississippi Power will purchase all of the energy produced by the solar facilities for the 25-year term under each of the three PPAs. The projects are expected to be in service by the second quarter 2017 and the resulting energy purchases are expected to be recovered through Mississippi Power's fuel cost recovery mechanism. Mississippi Power may retire the RECs generated on behalf of its customers or sell the RECs, separately or bundled with energy, to third parties.

Alabama Power

Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through its Rate RSE, Rate CNP Compliance, rate energy cost recovery, and rate natural disaster reserve. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power" in Item 8 of the Form 10-K for additional information regarding Alabama Power's rate mechanisms and accounting orders. The recovery balance of each regulatory clause for Alabama Power is reported in Note (B) to the Condensed Financial Statements herein.

Environmental Accounting Order

In April 2016, as part of its environmental compliance strategy, Alabama Power ceased using coal at Plant Greene County Units 1 and 2 (300 MWs representing Alabama Power's ownership interest) and began operating Units 1 and 2 solely on natural gas in June 2016 and July 2016, respectively.

Georgia Power

Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to the construction of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through separate fuel cost recovery tariffs. See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" herein and Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's NCCR tariff. Also see Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.

Pursuant to the terms and conditions of a settlement agreement related to Southern Company's acquisition of Southern Company Gas approved by the Georgia PSC on April 14, 2016, Georgia Power's 2013 ARP will continue in effect until December 31, 2019, and Georgia Power will be required to file its next base rate case by July 1, 2019. Furthermore, through December 31, 2019, Georgia Power and Atlanta Gas Light Company (collectively, Utilities) each will retain their respective merger savings, net of transition costs, as defined in the settlement agreement; through December 31, 2022, such net merger savings applicable to each utility will be shared on a 60/40 basis between their respective customers and the Utilities; thereafter, all merger savings will be retained by customers.

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See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power" in Item 8 of the Form 10-K for additional information regarding the 2013 ARP and Note (I) to the Condensed Financial Statements under "Southern Company – Merger with Southern Company Gas" herein for additional information regarding the Merger.

Integrated Resource Plan

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Georgia Power – Integrated Resource Plan" of Southern Company in Item 7 of the Form 10-K for additional information regarding Georgia Power's triennial Integrated Resource Plan (2016 IRP).

On July 28, 2016, the Georgia PSC voted to approve the 2016 IRP including the decertification and retirement of Plant Mitchell Units 3, 4A, and 4B (217 MWs) and Plant Kraft Unit 1 combustion turbine (17 MWs), as well as the decertification of the Intercession City unit (143 MWs total capacity). On August 2, 2016, the Plant Mitchell and Plant Kraft units were retired. On August 31, 2016, Georgia Power sold its 33% ownership interest in the Intercession City unit to Duke Energy Florida, Inc.

Additionally, the Georgia PSC approved Georgia Power's environmental compliance strategy and related expenditures proposed in the 2016 IRP, including measures taken to comply with existing government-imposed environmental mandates, subject to limits on expenditures for Plant McIntosh Unit 1 and Plant Hammond Units 1 through 4.

The Georgia PSC approved the reclassification of the remaining net book value of Plant Mitchell Unit 3 and costs associated with materials and supplies remaining at the unit retirement date to a regulatory asset. Recovery of the unit's net book value will continue through December 31, 2019, as provided in the 2013 ARP. The timing of the recovery of the remaining balance of the unit's net book value as of December 31, 2019 and costs associated with materials and supplies remaining at the unit retirement date will be deferred for consideration in Georgia Power's base rate case required to be filed by July 1, 2019.

The Georgia PSC also approved the Renewable Energy Development Initiative to procure an additional 1,200 MWs of renewable resources primarily utilizing market-based prices established through a competitive bidding process with expected in-service dates between 2018 and 2021. Additionally, 200 MWs of self-build capacity for use by Georgia Power was approved, as well as consideration for no more than 200 MWs of capacity as part of a renewable commercial and industrial program.

The Georgia PSC also approved recovery of costs up to $99 million through June 30, 2019 to preserve the nuclear option at a future generation site in Stewart County, Georgia. The timing of cost recovery will be determined by the Georgia PSC in a future base rate case. The ultimate outcome of this matter cannot be determined at this time.

Storm Damage Recovery

As of September 30, 2016, the balance in Georgia Power's regulatory asset related to storm damage was $94 million. During October 2016, Hurricane Matthew caused significant damage to Georgia Power's transmission and distribution facilities. The total amount of restoration costs related to this hurricane is estimated to be between $130 million and $155 million, which will be charged to capital accounts or to the storm damage reserve. Georgia Power is accruing $30 million annually through December 31, 2019, as provided in the 2013 ARP, to the storm damage reserve to cover the operating and maintenance costs of damages from major storms to its transmission and distribution facilities, which is recoverable through base rates. The rate of recovery of storm damage costs after December 31, 2019 is expected to be adjusted in Georgia Power's base rate case required to be filed by July 1, 2019. As a result of this regulatory treatment, costs related to storms are not expected to have a material impact on Southern Company's financial statements. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Storm Damage Recovery" in Item 8 of the Form 10-K for additional information regarding Georgia Power's storm damage reserve.

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Gulf Power

Through 2015, long-term non-affiliate capacity sales from Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs) provided the majority of Gulf Power's wholesale earnings. The revenues from wholesale contracts covering 100% of this capacity represented 82% of Gulf Power's wholesale capacity revenues in 2015. Following contract expirations at the end of 2015 and the end of May 2016, Gulf Power's remaining contracted sales from the unit cover approximately 24% of Gulf Power's ownership of the unit through 2019. The expiration of these contracts is not expected to have a material impact on Southern Company's earnings. On May 5, 2016, Gulf Power delivered a letter to the Florida PSC requesting recognition of Gulf Power's ownership in Plant Scherer Unit 3 as being in service to retail customers when and as its existing wholesale contracts expire. As a result, on September 13, 2016, the Florida PSC instructed Gulf Power to file its monthly earnings surveillance reports both including and excluding its share of investment and expenses related to Plant Scherer Unit 3 that is not covered by contracts.

On October 12, 2016, Gulf Power filed a petition (2016 Rate Case) with the Florida PSC requesting an increase in retail rates and charges of $106.8 million based on the projected test year of January 1, 2017 through December 31, 2017 and a retail ROE of 11% compared to the current retail ROE of 10.25%. The recoverability of the costs associated with the ongoing ownership and operation of Plant Scherer Unit 3 will be decided in this matter. The Florida PSC is expected to make a decision on the 2016 Rate Case in the second quarter 2017. Gulf Power has requested that the increase in base rates, if approved by the Florida PSC, become effective in July 2017.

On November 2, 2016, the Florida PSC approved Gulf Power's annual rate clause request for its cost recovery clause factors for 2017. The fuel and environmental factors include certain costs associated with the ongoing ownership and operation of Plant Scherer Unit 3. See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Gulf Power – Cost Recovery Clauses" herein for additional information.

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

Southern Company Gas

Natural Gas Cost Recovery

Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow.

Regulatory Infrastructure Programs

Southern Company Gas' natural gas distribution utilities are involved in ongoing capital projects associated with infrastructure improvement programs that have been previously approved by their applicable state regulatory agencies and provide an appropriate return on invested capital. These infrastructure improvement programs update or expand the natural gas distribution systems of the utilities to improve safety and reliability and meet operational flexibility and growth. Southern Company Gas currently has approved infrastructure improvement programs in six different states with initial program lengths ranging from four to 10 years, with the longest set to expire in 2025. The average annual spend under these programs ranges from $10 million to $250 million.

Southern Company Gas currently has proposed infrastructure improvement programs pending approval by the applicable state regulatory agencies in Georgia and New Jersey requesting average annual spending of $44 million through 2020 and $110 million through 2027, respectively. The ultimate outcome of these matters cannot be determined at this time.

Construction Program

Overview

The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue

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its strategy of developing and constructing new electric generating facilities, as well as adding or changing fuel sources for certain existing units, adding environmental control equipment, expanding the electric transmission and distribution systems, and updating and expanding the natural gas distribution systems. For the traditional electric operating companies, major generation construction projects are subject to state PSC approval in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. Southern Company Gas is engaged in various infrastructure programs that update or expand its natural gas distribution systems to improve reliability and ensure the safety of its utility infrastructure and recovers in rates its investment and a return associated with these infrastructure programs.

The two largest construction projects currently underway in the Southern Company system are Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Integrated Coal Gasification Combined Cycle" herein for additional information. For additional information about costs relating to Southern Power's acquisitions that involve construction of renewable energy facilities, see Note 12 to the financial statements of Southern Company under "Southern Power – Construction Projects" in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements under "Southern Power – Construction Projects" herein. See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" herein for additional information regarding infrastructure improvement programs at Southern Company Gas' natural gas distribution utilities.

Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.

Integrated Coal Gasification Combined Cycle

Mississippi Power's current cost estimate for the Kemper IGCC in total is approximately $6.82 billion, which includes approximately $5.52 billion of costs subject to the construction cost cap and is net of $137 million in additional DOE grants Mississippi Power received for the Kemper IGCC on April 8, 2016 (Additional DOE Grants), which are expected to be used to reduce future rate impacts for customers. Mississippi Power does not intend to seek any rate recovery for any related costs that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. In the aggregate, Southern Company has incurred charges of $2.63 billion ($1.63 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through September 30, 2016. Mississippi Power's current cost estimate includes costs through December 31, 2016.

The initial production of syngas began on July 14, 2016 for gasifier "B" and on September 13, 2016 for gasifier "A." On October 11, 2016, the Kemper IGCC began testing using clean syngas from gasifier "A" and the related gas clean-up systems to produce electricity. On November 2, 2016, Mississippi Power determined a maintenance outage of gasifier "A" is needed to make improvements to the ash removal systems. The remaining schedule reflects the time expected to achieve production of electricity using gasifier "B," complete gasifier "A" outage activities, and resume electricity production using gasifier "A," as well as to complete the integration of all systems necessary for both combustion turbines to simultaneously generate electricity with syngas.

In subsequent periods, any further changes in the estimated costs of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Southern Company's statements of income and these changes could be material.

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

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Litigation

On April 26, 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court (Circuit Court) by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean, which was amended and refiled on July 11, 2016 to include, among other things, Southern Company as a defendant. On August 12, 2016, Southern Company and Mississippi Power removed the case to the U.S. District Court for the Southern District of Mississippi, where the case is currently pending. However, the plaintiffs have filed a request to remand the case back to state court. The individual plaintiff, John Carlton Dean, alleges that Mississippi Power and Southern Company violated the Mississippi Unfair Trade Practices Act. All plaintiffs have alleged that Mississippi Power and Southern Company concealed, falsely represented, and failed to fully disclose important facts concerning the cost and schedule of the Kemper IGCC and that these alleged breaches have unjustly enriched Mississippi Power and Southern Company. The plaintiffs seek unspecified actual damages and punitive damages; ask the Circuit Court to appoint a receiver to oversee, operate, manage, and otherwise control all affairs relating to the Kemper IGCC; ask the Circuit Court to revoke any licenses or certificates authorizing Mississippi Power or Southern Company to engage in any business related to the Kemper IGCC in Mississippi; and seek attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper IGCC costs from being charged to customers through electric rates.

On June 9, 2016, Treetop Midstream Services, LLC (Treetop) and other related parties filed a complaint against Mississippi Power, Southern Company, and SCS in the state court in Gwinnett County, Georgia. The complaint relates to the cancelled CO₂contract with Treetop and alleges fraudulent misrepresentation, fraudulent concealment, civil conspiracy, and breach of contract on the part of Mississippi Power, Southern Company, and SCS and seeks compensatory damages of $100 million, as well as unspecified punitive damages. Southern Company, Mississippi Power, and SCS have moved to compel arbitration pursuant to the terms of the CO₂ contract.

Southern Company believes these legal challenges have no merit; however, an adverse outcome in these proceedings could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in these matters, and the ultimate outcome of these matters cannot be determined at this time.

Nuclear Construction

On October 20, 2016, Georgia Power and the Georgia PSC Staff entered into a settlement agreement (Vogtle Cost Settlement Agreement) resolving the following prudence and cost recovery matters related to Plant Vogtle Units 3 and 4: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth Vogtle Construction Monitoring report will be disallowed from rate base on the basis of imprudence; (ii) the definitive settlement agreement entered into on December 31, 2015 by Westinghouse and the Vogtle Owners (Contractor Settlement Agreement) is reasonable and prudent and none of the amounts paid or to be paid pursuant to the Contractor Settlement Agreement should be disallowed from rate base on the basis of imprudence; (iii) financing costs on verified and approved capital costs will be deemed prudent provided they are incurred prior to December 31, 2019 and December 31, 2020 for Plant Vogtle Units 3 and 4, respectively; and (iv) (a) the in-service capital cost forecast will be adjusted to $5.680 billion (Revised Forecast), which includes a contingency of $240 million above Georgia Power's current forecast of $5.440 billion, (b) capital costs incurred up to the Revised Forecast will be presumed to be reasonable and prudent with the burden of proof on any party challenging such costs, and (c) Georgia Power would have the burden to show that any capital costs above the Revised Forecast are reasonable and prudent. Under the terms of the Vogtle Cost Settlement Agreement, the certified in-service capital cost for purposes of calculating the NCCR tariff will remain at $4.418 billion. Construction capital costs above $4.418 billion will accrue AFUDC through commercial operation. The ROE used to calculate the NCCR tariff will be reduced from 10.95% (the ROE rate setting point authorized by the Georgia PSC in the 2013 ARP) to 10.00% effective January 1, 2016. For purposes of the AFUDC calculation, the ROE on costs between $4.418 billion and $5.440 billion will also be 10.00% and the ROE on any amounts above $5.440 billion would be Georgia Power's average cost of long-term debt. If the Georgia PSC adjusts Georgia Power's ROE rate setting point in a rate case prior to Plant Vogtle Units 3 and 4 being placed into retail rate base, then the ROE for purposes of calculating both

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the NCCR tariff and AFUDC will likewise be 95 basis points lower than the revised ROE rate setting point. If Plant Vogtle Units 3 and 4 are not commercially operational by December 31, 2020, then (i) the ROE for purposes of calculating the NCCR tariff will be reduced an additional 300 basis points, and may, at the Georgia PSC's discretion, be accrued to be used for the benefit of customers, until such time as the units reach commercial operation and (ii) the ROE used to calculate AFUDC will be Georgia Power's average cost of long-term debt.

Under the terms of the Vogtle Cost Settlement Agreement, Plant Vogtle Units 3 and 4 will be placed into retail rate base on December 31, 2020 or upon reaching commercial operation, whichever is later. The Georgia PSC will determine for retail ratemaking purposes the process of transitioning Plant Vogtle Units 3 and 4 from a construction project to an operating plant no later than Georgia Power's base rate case required to be filed by July 1, 2019.

The Vogtle Cost Settlement Agreement is subject to approval by the Georgia PSC, which is scheduled to vote on this matter on December 20, 2016. Accordingly, the terms of the Vogtle Cost Settlement Agreement are subject to change and the terms of any final agreement approved by the Georgia PSC may differ materially from the terms of the Vogtle Cost Settlement Agreement. If approved, the Vogtle Cost Settlement Agreement is expected to reduce Georgia Power's revenues for the years 2016 through 2020 by a total of approximately $325 million ($115 million reduction in net income).

See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" for additional information.

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

Income Tax Matters

Bonus Depreciation

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Bonus Depreciation" of Southern Company in Item 7 of the Form 10-K for additional information.

The extension of 50% bonus depreciation included in the PATH Act is expected to result in approximately $1.7 billion of positive cash flows for the 2016 tax year, which may not all be realized in 2016 due to a projected consolidated net operating loss for Southern Company. Approximately $370 million of the benefit is dependent upon placing the remainder of the Kemper IGCC in service by December 31, 2016. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" and Note (G) to the Condensed Financial Statements under "Current and Deferred Income Taxes – Net Operating Loss" herein for additional information. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company's subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements, such as air quality and water standards, has occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO₂ and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.

The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company's financial statements. See Note (B) to the Condensed Financial

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Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

The SEC is conducting a formal investigation of Southern Company and Mississippi Power concerning the estimated costs and expected in-service date of the Kemper IGCC. Southern Company and Mississippi Power believe the investigation is focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC. See ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" herein for additional information on the Kemper IGCC estimated construction costs and expected in-service date. The ultimate outcome of this matter cannot be determined at this time; however, it is not expected to have a material impact on the financial statements of Southern Company.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates related to Electric Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, and Contingent Obligations.

Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery

During 2016, Mississippi Power further revised its cost estimate to complete construction and start-up of the Kemper IGCC to an amount that exceeds the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power does not intend to seek any rate recovery for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions.

As a result of the revisions to the cost estimate, Southern Company recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC of $88 million ($54 million after tax) in the third quarter 2016, $81 million ($50 million after tax) in the second quarter 2016, $53 million ($33 million after tax) in the first quarter 2016, $183 million ($113 million after tax) in the fourth quarter 2015, $150 million ($93 million after tax) in the third quarter 2015, $23 million ($14 million after tax) in the second quarter 2015, $9 million ($6 million after tax) in the first quarter 2015, $70 million ($43 million after tax) in the fourth quarter 2014, $418 million ($258 million after tax) in the third quarter 2014, $380 million ($235 million after tax) in the first quarter 2014, $40 million ($25 million after tax) in the fourth quarter 2013, $150 million ($93 million after tax) in the third quarter 2013, $450 million ($278 million after tax) in the second quarter 2013, and $540 million ($333 million after tax) in the first quarter 2013. In the aggregate, Southern Company has incurred charges of $2.63 billion ($1.63 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through September 30, 2016.

Mississippi Power's revised cost estimate reflects an expected in-service date of December 31, 2016 and includes certain post-in-service costs which are expected to be subject to the cost cap. Mississippi Power has experienced, and may continue to experience, material changes in the cost estimate for the Kemper IGCC. Further cost increases and/or extensions of the expected in-service date may result from factors including, but not limited to, difficulties integrating the systems required for sustained operations, sustaining nitrogen supply, major equipment failure, unforeseen engineering or design problems including any repairs and/or modifications to systems, and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by the Mississippi PSC). In addition, during the start-up and commissioning process, Mississippi Power is also identifying

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potential improvement projects that ultimately may be completed subsequent to placing the remainder of the Kemper IGCC in service. If completed, such improvement projects would be expected to enhance plant performance, safety, and/or operations. The related potential costs have yet to be fully evaluated, have not been included in the current cost estimates, and may be subject to the $2.88 billion cost cap. In subsequent periods, any further changes in the estimated costs of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Southern Company's statements of income and these changes could be material.

Any extension of the in-service date beyond December 31, 2016 is currently estimated to result in additional base costs of approximately $25 million to $35 million per month, which includes maintaining necessary levels of start-up labor, materials, and fuel, as well as operational resources required to execute start-up and commissioning activities. However, additional costs may be required for remediation of any further equipment and/or design issues identified. Any extension of the in-service date with respect to the Kemper IGCC beyond December 31, 2016 would also increase costs for the Cost Cap Exceptions, which are not subject to the $2.88 billion cost cap established by the Mississippi PSC. These costs include AFUDC, which is currently estimated to total approximately $15 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting and legal fees of approximately $3 million per month.

Given the significant judgment involved in estimating the future costs to complete construction and start-up, the project completion date, the ultimate rate recovery for the Kemper IGCC, and the potential impact on Southern Company's results of operations, Southern Company considers these items to be critical accounting estimates. See Note 3 to the financial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.

Goodwill and Other Intangible Assets

Southern Company accounts for acquisitions using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recorded at the date of acquisition at their respective estimated fair values. Southern Company recognizes goodwill as of the acquisition date, as a residual over the fair values of the identifiable net assets acquired. Goodwill will be tested for impairment on an annual basis in the fourth quarter of the year as well as on an interim basis as events and changes in circumstances occur. Primarily as a result of the acquisitions of Southern Company Gas and PowerSecure in 2016, goodwill totaled approximately $6.2 billion at September 30, 2016.

Definite-lived intangible assets acquired are amortized over the estimated useful lives of the respective assets to reflect the pattern in which the economic benefits of the intangible assets are consumed. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment. Primarily as a result of the acquisitions of Southern Company Gas and PowerSecure in 2016, other intangible assets, net of amortization totaled approximately $0.9 billion at September 30, 2016.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can significantly impact Southern Company's results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. As the determination of an asset's fair value and useful life involves management making certain estimates and because these estimates form the basis for the determination of whether or not an impairment charge should be recorded, Southern Company considers these estimates to be critical accounting estimates.

See Note (A) to the Condensed Financial Statements under "Goodwill and Other Intangible Assets" herein for additional information regarding Southern Company's goodwill and other intangible assets as of September 30, 2016 and Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information related to Southern Company's recent acquisitions.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Derivatives and Hedging Activities

Derivative instruments are recorded on the balance sheets as either assets or liabilities measured at their fair value, unless the transactions qualify for the normal purchases or normal sales scope exception and are instead subject to traditional accrual accounting. For those transactions that do not qualify as a normal purchase or normal sale, changes in the derivatives' fair values are recognized concurrently in earnings unless specific hedge accounting criteria are met. If the derivatives meet those criteria, derivative gains and losses offset related results of the hedged item in the income statement in the case of a fair value hedge, or gains and losses are deferred in OCI until the hedged transaction occurs in the case of a cash flow hedge. Certain subsidiaries of Southern Company enter into energy-related derivatives that are designated as regulatory hedges where gains and losses are initially recorded as regulatory liabilities and assets and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through billings to customers.

Southern Company uses derivative instruments to reduce the impact to the results of operations due to the risk of changes in the price of natural gas, to manage fuel hedging programs per guidelines of state regulatory agencies, and to mitigate residual changes in the price of electricity, weather, interest rates, and foreign currency exchange rates. The fair value of commodity derivative instruments used to manage exposure to changing prices reflects the estimated amounts that Southern Company would receive or pay to terminate or close the contracts at the reporting date. To determine the fair value of the derivative instruments, Southern Company utilizes market data or assumptions that market participants would use in pricing the derivative asset or liability, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

Southern Company classifies derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The determination of the fair value of the derivative instruments incorporates various factors required under the guidance. These factors include:


•	the creditworthiness of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit);


•	events specific to a given counterparty; and


•	the impact of Southern Company's nonperformance risk on its liabilities.

Given the assumptions used in pricing the derivative asset or liability, Southern Company considers the valuation of derivative assets and liabilities a critical accounting estimate. See "Quantitative and Qualitative Disclosures About Market Risk" in Item 3 herein for more information.

Recently Issued Accounting Standards

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged and there is no change to the accounting for existing leveraged leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Southern Company is currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to have a significant impact on Southern Company's balance sheet.

On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, 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. Southern Company currently recognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock

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compensation as additional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted and Southern Company intends to adopt the ASU in the fourth quarter 2016. The adoption is not expected to have a material impact on the results of operations, financial position, or cash flows of Southern Company.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company's financial condition remained stable at September 30, 2016. Through September 30, 2016, Southern Company has incurred non-recoverable cash expenditures of $2.42 billion and is expected to incur approximately $0.21 billion in additional non-recoverable cash expenditures through completion of the construction and start-up of the Kemper IGCC, which includes certain post-in-service costs expected to be subject to the cost cap. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.

Net cash provided from operating activities totaled $4.3 billion for the first nine months of 2016, a decrease of $0.8 billion from the corresponding period in 2015. The decrease in net cash provided from operating activities was primarily due to an increase in unutilized ITCs and PTCs. Net cash used for investing activities totaled $16.6 billion for the first nine months of 2016 primarily due to the closing of the Merger, the construction of electric generation, transmission, and distribution facilities and installation of equipment to comply with environmental standards, and Southern Power's acquisitions and construction of renewable facilities. Net cash provided from financing activities totaled $13.6 billion for the first nine months of 2016 primarily due to issuances of long-term debt and common stock associated with financing and completing the Merger and Southern Company Gas' investment in SNG, partially offset by redemptions of long-term debt and common stock dividend payments. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first nine months of 2016 include an increase of $14.4 billion in total property, plant, and equipment primarily related to the inclusion of Southern Company Gas as a result of the Merger, construction to comply with environmental standards, and construction of electric generation, transmission, and distribution facilities; an increase of $6.2 billion in goodwill related to the acquisitions of Southern Company Gas and PowerSecure; an increase of $1.5 billion in equity investments in unconsolidated subsidiaries primarily related to Southern Company Gas' investment in SNG; increases of $1.5 billion in other regulatory assets, deferred and $0.8 billion in AROs primarily related to changes in ash pond closure strategy principally for Georgia Power; increases of $16.9 billion in long-term debt and $4.0 billion in total common stockholder's equity primarily associated with financing and completing the Merger and Southern Company Gas' investment in SNG; and increases of $1.9 billion in accumulated deferred income taxes and $1.6 billion in other cost of removal obligations primarily related to the inclusion of Southern Company Gas as a result of the Merger. See Notes (A) and (I) to the Condensed Financial Statements herein under "Asset Retirement Obligations" and "Southern Company," respectively, for additional information.

At the end of the third quarter 2016, the market price of Southern Company's common stock was $51.30 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $25.05 per share, representing a market-to-book ratio of 205%, compared to $46.79, $22.59, and 207%, respectively, at the end of 2015. Southern Company's common stock dividend for the third quarter 2016 was $0.560 per share compared to $0.5425 per share in the third quarter 2015.

Capital Requirements and Contractual Obligations

See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Company in Item 7 of the Form 10-K for a

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description of Southern Company's capital requirements for the construction programs of the Southern Company system, including estimated capital expenditures for new electric generating facilities and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, trust funding requirements, and unrecognized tax benefits. Subsequent to September 30, 2016, Mississippi Power repaid at maturity $300 million aggregate principal amount of its Series 2011A 2.35% Senior Notes due October 15, 2016 and Southern Company Gas repaid at maturity $120 million aggregate principal amount of Series A Floating Rate Senior Notes due October 27, 2016. An additional $1.8 billion will be required through September 30, 2017 to fund maturities of long-term debt. During the nine months ended September 30, 2016, and subsequent to that date, Southern Power entered into new long-term service agreements, which begin between 2017 and 2020 and result in additional future commitments totaling approximately $927 million. See "Sources of Capital" herein for additional information.

The Southern Company system's construction program is currently estimated to total $10.2 billion for 2016, $8.9 billion for 2017, $8.2 billion for 2018, $7.6 billion for 2019, $7.3 billion for 2020, and $6.6 billion for 2021. These amounts include expenditures of approximately $0.7 billion for 2016 and $0.1 billion for 2017 related to the construction and start-up of the Kemper IGCC; $0.6 billion for 2016, $0.6 billion for 2017, $0.7 billion for 2018, $0.4 billion for 2019, and $0.1 billion for 2020 to continue and complete construction of Plant Vogtle Units 3 and 4; and $4.4 billion for 2016 and $1.5 billion per year for 2017 through 2021 for Southern Power's acquisitions and/or construction of new generating facilities. These estimated expenditures do not include potential compliance costs that may arise from the EPA's final rules and guidelines or subsequently approved state plans that would limit CO₂ emissions from existing, new, modified, or reconstructed fossil-fuel-fired electric generating units.

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, to meet regulatory requirements; changes in FERC rules and regulations; state regulatory agency approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Additionally, planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 12 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Integrated Coal Gasification Combined Cycle" herein for information regarding additional factors that may impact construction expenditures.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As a result of closing the Merger, the funding requirements of the Southern Company system include the contractual obligations of Southern Company Gas. The following table details the amounts related to Southern Company Gas as of September 30, 2016:



	2016		2017- 2018		2019- 2020		After 2020		Total
	(in millions)
Long-term debt^(a) —
Principal	$	120	$	177	$	350	$	4,185	$	4,832
Interest	48		412		382		2,641		3,483
Pipeline charges, storage capacity, and gas supply^(b)	308		1,350		806		2,913		5,377
Operating leases^(c)	6		44		31		52		133
Asset management agreements^(d)	2		15		2		—		19
Standby letters of credit, performance/surety bonds^(e)	33		51		—		—		84
Financial derivative obligations^(f)	195		211		21		2		429
Pension and other postretirement benefit plans^(g)	5		44		—		—		49
Purchase commitments—
Capital^(h)	401		3,540		3,058		1,221		8,220
Other⁽ⁱ⁾	11		53		—		—		64
Total	$	1,129	$	5,897	$	4,650	$	11,014	$	22,690


(a)	Amounts are reflected based on final maturity dates. Variable rate interest obligations are estimated based on rates as of September 30, 2016.


(b)	Includes charges recoverable through a natural gas cost recovery mechanism or alternatively billed to marketers and demand charges associated with wholesale gas services.


(c)	Certain operating leases have provisions for step rent or escalation payments and certain lease concessions are accounted for by recognizing the future minimum lease payments on a straight-line basis over the respective minimum lease terms.


(d)	Represents fixed-fee minimum payments for asset management agreements at wholesale gas services.


(e)	Guarantees are provided to certain municipalities and other agencies and certain natural gas suppliers of SouthStar Energy Services, LLC (SouthStar) in support of payment obligations.


(f)	Includes derivative liabilities related to energy-related derivatives.


(g)	Estimated benefit payments for Southern Company Gas' retirement benefit plans are provided through 2018. No mandatory contributions to the plans are anticipated during this period.


(h)	Estimated capital expenditures are provided through 2021.


(i)	Primarily consists of contractual environmental remediation liabilities that are primarily recoverable through base rates or rate rider mechanisms.

Sources of Capital

Southern Company intends to meet its future capital needs through operating cash flows, short-term debt, term loans, and external security issuances. Equity capital can be provided from any combination of Southern Company's stock plans, private placements, or public offerings. The amount and timing of additional equity capital and debt issuances in 2016, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements. See "Capital Requirements and Contractual Obligations" herein for additional information.

Except as described herein, the traditional electric operating companies, Southern Power, and Southern Company Gas plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, term loans, short-term borrowings, and equity contributions or loans from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS –

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information.

In addition, Georgia Power may make borrowings through a loan guarantee agreement (Loan Guarantee Agreement) between Georgia Power and the DOE, the proceeds of which may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4. Under the Loan Guarantee Agreement, the DOE agreed to guarantee borrowings of up to $3.46 billion (not to exceed 70% of Eligible Project Costs) to be made by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, and the FFB. Eligible Project Costs incurred through September 30, 2016 would allow for borrowings of up to $2.6 billion under the FFB Credit Facility, of which Georgia Power has borrowed $2.5 billion. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information regarding the Loan Guarantee Agreement and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.

Mississippi Power received $245 million of Initial DOE Grants in prior years that were used for the construction of the Kemper IGCC. An additional $25 million of grants from the DOE is expected to be received for commercial operation of the Kemper IGCC. On April 8, 2016, Mississippi Power received approximately $137 million in Additional DOE Grants for the Kemper IGCC, which are expected to be used to reduce future rate impacts for customers. In addition, see Note 3 to the financial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K for information regarding legislation related to the securitization of certain costs of the Kemper IGCC.

As of September 30, 2016, Southern Company's current liabilities exceeded current assets by $0.9 billion, primarily due to long-term debt that is due within one year of $2.3 billion, including approximately $0.8 billion at the parent company, $0.2 billion at Alabama Power, $0.5 billion at Georgia Power, $0.2 billion at Gulf Power, $0.3 billion at Mississippi Power, $0.1 billion at Southern Power, and $0.1 billion at Southern Company Gas. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional electric operating companies, Southern Power, and Southern Company Gas, equity contributions and/or loans from Southern Company to meet their short-term capital needs. In addition, Georgia Power expects to utilize borrowings through the FFB Credit Facility as an additional source of long-term borrowed funds.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At September 30, 2016, Southern Company and its subsidiaries had approximately $2.7 billion of cash and cash equivalents. Committed credit arrangements with banks at September 30, 2016 were as follows:



	Expires												Executable Term Loans				Due Within One Year
Company	2016		2017		2018		2020		Total		Unused		One Year		Two Years		Term Out		No Term Out
	(in millions)								(in millions)				(in millions)				(in millions)
Southern Company^(a)	$	—	$	—	$	1,000	$	1,250	$	2,250	$	2,250	$	—	$	—	$	—	$	—
Alabama Power	—		35		500		800		1,335		1,335		—		—		—		35
Georgia Power	—		—		—		1,750		1,750		1,732		—		—		—		—
Gulf Power	50		65		165		—		280		280		45		—		45		70
Mississippi Power	100		75		—		—		175		150		—		15		15		160
Southern Power Company^(b)	—		—		—		600		600		532		—		—		—		—
Southern Company Gas^(c)	—		75		1,925		—		2,000		1,947		—		—		—		—
Other	—		55		—		—		55		55		20		—		20		35
Southern Company Consolidated	$	150	$	305	$	3,590	$	4,400	$	8,445	$	8,281	$	65	$	15	$	80	$	300


(a)	Represents the Southern Company parent entity.


(b)	Excludes credit agreements (Project Credit Facilities) assumed with the acquisition of certain solar facilities, which are non-recourse to Southern Power Company, the proceeds of which are being used to finance project costs related to such solar facilities currently under construction. See Note (I) to the Condensed Financial Statements under "Southern Power" herein for additional information.


(c)	Southern Company Gas guarantees the obligations of Southern Company Gas Capital, which is the borrower of $1.3 billion of these arrangements. Southern Company Gas' committed credit arrangements also include $700 million restricted for working capital needs of Nicor Gas.

See Note 6 to the financial statements of Southern Company under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.

On May 24, 2016, the $8.1 billion Bridge Agreement to provide Merger financing, to the extent necessary, was terminated.

Most of these bank credit arrangements, as well as the term loan arrangements of Southern Company, Alabama Power, Mississippi Power, and Southern Power, contain covenants that limit debt levels and contain cross acceleration or cross default provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of the individual company. Such cross default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. Southern Company, the traditional electric operating companies, Southern Power Company, and Southern Company Gas are currently in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.

Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.

A portion of the unused credit with banks is allocated to provide liquidity support to the traditional electric operating companies' pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2016 was approximately $1.9 billion. In addition, at September 30, 2016, the traditional electric operating companies had approximately $358 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.

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Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas may also borrow through various other arrangements with banks. Short-term borrowings are included in notes payable in the balance sheets.

Details of short-term borrowings were as follows:

Short-term Debt at

September 30, 2016

Short-term Debt During the Period^(*)

Amount

Outstanding

Weighted

Average

Interest

Rate

Average

Amount

Outstanding

Weighted

Average

Interest

Rate

Maximum

Amount

Outstanding

(in millions)

Commercial paper

717