Document
Table of Contents

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 March 31, 2017
OR
¨ 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 18th 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
 
 
 
 
 
1-14174
 
Southern Company Gas
(A Georgia Corporation)
Ten Peachtree Place, N.E.
Atlanta, Georgia 30309
(404) 584-4000
 
58-2210952



Table of Contents

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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Registrant
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-
accelerated
Filer
 
Smaller
Reporting
Company
 
Emerging
Growth
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
 
 
 
 
Southern Company Gas
 
 
 
 
 
X
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 March 31, 2017

The Southern Company
 
Par Value $5 Per Share
 
994,598,783

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
 
7,392,717

Mississippi Power Company
 
Without Par Value
 
1,121,000

Southern Power Company
 
Par Value $0.01 Per Share
 
1,000

Southern Company Gas
 
Par Value $0.01 Per Share
 
100

This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Southern Power Company, and Southern Company Gas. 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.

2

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2017


 
 
Page
Number
 
 
 
 
 
 
 
PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2017


 
 
Page
Number
 
PART I—FINANCIAL INFORMATION (CONTINUED)
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
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.
Item 6.
 

4

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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
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Atlanta Gas Light
Atlanta Gas Light Company, a wholly-owned subsidiary of Southern Company Gas
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
CCR
Coal combustion residuals
Clean Power Plan
Final action published by the EPA in 2015 that established guidelines for states to develop plans to meet EPA-mandated CO2 emission rates or emission reduction goals for existing electric generating units
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
Dalton Pipeline
A 50% undivided ownership interest of Southern Company Gas in a pipeline facility in Georgia
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
Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas for the year ended December 31, 2016, as applicable
GAAP
U.S. generally accepted accounting principles
Georgia Power
Georgia Power Company
Gulf Power
Gulf Power Company
Heating Degree Days
A measure of weather, calculated when the average daily temperatures are less than 65 degrees Fahrenheit
Horizon Pipeline
Horizon Pipeline Company, LLC
IGCC
Integrated coal gasification combined cycle
IIC
Intercompany interchange contract
Illinois Commission
Illinois Commerce Commission, the state regulatory agency for Nicor Gas
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

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DEFINITIONS
(continued)
Term
Meaning
 
 
KWH
Kilowatt-hour
LIBOR
London Interbank Offered Rate
LIFO
Last-in, first-out
LNG
Liquefied natural gas
LOCOM
Lower of weighted average cost or current market price
LTSA
Long-term service agreement
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
Mississippi Power
Mississippi Power Company
mmBtu
Million British thermal units
Moody's
Moody's Investors Service, Inc.
MRA
Municipal and Rural Associations
MW
Megawatt
natural gas distribution utilities
Southern Company Gas' seven natural gas distribution utilities (Nicor Gas, Atlanta Gas Light, Virginia Natural Gas, Elizabethtown Gas, Florida City Gas, Chattanooga Gas Company, and Elkton Gas)
NCCR
Georgia Power's Nuclear Construction Cost Recovery
New Jersey BPU
New Jersey Board of Public Utilities, the state regulatory agency for Elizabethtown Gas
Nicor Gas
Northern Illinois Gas Company, a wholly-owned subsidiary of Southern Company Gas
Nicor Gas Credit Facility
$700 million credit facility entered into by Nicor Gas to support its commercial paper program
NRC
U.S. Nuclear Regulatory Commission
NYMEX
New York Mercantile Exchange, Inc.
OCI
Other comprehensive income
PennEast Pipeline
PennEast Pipeline Company, LLC
PEP
Mississippi Power's Performance Evaluation Plan
Piedmont
Piedmont Natural Gas Company, Inc.
Pivotal Utility Holdings
Pivotal Utility Holdings, Inc., a wholly-owned subsidiary of Southern Company Gas, doing business as Elizabethtown Gas, Elkton Gas, and Florida City Gas
Plant Vogtle Units 3 and 4
Two new nuclear generating units under construction at Georgia Power's Plant Vogtle
PowerSecure
PowerSecure, Inc.
power pool
The operating arrangement whereby the integrated generating resources of the traditional electric operating companies and Southern Power (excluding subsidiaries) are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA
Power purchase agreements, as well as, for Southern Power, contracts for differences that provide the owner of a 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

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DEFINITIONS
(continued)
Term
Meaning
 
 
Rate ECR
Alabama Power's Rate Energy Cost Recovery
Rate NDR
Alabama Power's Rate Natural Disaster Reserve
Rate RSE
Alabama Power's Rate Stabilization and Equalization plan
registrants
Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power Company, and Southern Company Gas
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 (now known as Cooperative Energy)
SNG
Southern Natural Gas Company, L.L.C.
Southern Company
The Southern Company
Southern Company Gas
Southern Company Gas and its subsidiaries
Southern Company Gas Capital
Southern Company Gas Capital Corporation, a 100%-owned subsidiary of Southern Company Gas
Southern Company Gas Credit Facility
$1.3 billion credit agreement entered into by Southern Company Gas Capital to support its commercial paper program
Southern Company system
Southern Company, the traditional electric operating companies, Southern Power, Southern Company Gas (as of July 1, 2016), Southern Electric Generating Company, Southern Nuclear, SCS, Southern Communications Services, Inc., PowerSecure (as of May 9, 2016), and other subsidiaries
Southern Nuclear
Southern Nuclear Operating Company, Inc.
Southern Power
Southern Power Company and its subsidiaries
SouthStar
SouthStar Energy Services, LLC
STRIDE
Atlanta Gas Light's Strategic Infrastructure Development and Enhancement program
Toshiba
Toshiba Corporation, parent company of Westinghouse
Toshiba Guarantee
Certain payment obligations of the Contractor guaranteed by Toshiba
traditional electric operating companies
Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Triton
Triton Container Investments, LLC
Virginia Commission
Virginia State Corporation Commission, the state regulatory agency for Virginia Natural Gas
Virginia Natural Gas
Virginia Natural Gas, Inc., a wholly-owned subsidiary of Southern Company Gas
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
WACOG
Weighted average cost of gas
WECTEC
WECTEC Global Project Services Inc.
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, customer and sales growth, 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 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 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, including potential tax reform legislation, as well as changes in application of existing laws and regulations;
current and future litigation, regulatory investigations, proceedings, or inquiries;
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, construction and operation 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 results of the Contractor's bankruptcy filing and the impact of any inability or other failure of Toshiba to perform its obligations under the Toshiba Guarantee, including any effect on the construction of Plant Vogtle Units 3 and 4, as well as the engineering, procurement, and construction agreement for Plant Vogtle Units 3 and 4 and Georgia Power's DOE loan guarantees;
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 the Southern Company system's employee and retiree benefit plans and nuclear decommissioning trust funds;
advances in technology;
ongoing renewable energy partnerships and development agreements;
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;



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)
actions related to cost recovery for the Kemper IGCC, including the ultimate impact of the 2015 decision of the Mississippi Supreme Court 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;
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 foreign 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, tornadoes, 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

10

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Operating Revenues:
 
 
 
Retail electric revenues
$
3,394

 
$
3,377

Wholesale electric revenues
531

 
396

Other electric revenues
175

 
181

Natural gas revenues
1,530

 

Other revenues
141

 
38

Total operating revenues
5,771

 
3,992

Operating Expenses:
 
 
 
Fuel
996

 
911

Purchased power
179

 
165

Cost of natural gas
719

 

Cost of other sales
88

 
19

Other operations and maintenance
1,329

 
1,107

Depreciation and amortization
716

 
541

Taxes other than income taxes
330

 
256

Estimated loss on Kemper IGCC
108

 
53

Total operating expenses
4,465

 
3,052

Operating Income
1,306

 
940

Other Income and (Expense):
 
 
 
Allowance for equity funds used during construction
57

 
53

Earnings from equity method investments
39

 

Interest expense, net of amounts capitalized
(416
)
 
(246
)
Other income (expense), net
(6
)
 
(29
)
Total other income and (expense)
(326
)
 
(222
)
Earnings Before Income Taxes
980

 
718

Income taxes
315

 
217

Consolidated Net Income
665

 
501

Less:
 
 
 
Dividends on preferred and preference stock of subsidiaries
11

 
11

Net income (loss) attributable to noncontrolling interests
(4
)
 
1

Consolidated Net Income Attributable to Southern Company
$
658

 
$
489

Common Stock Data:
 
 
 
Earnings per share (EPS) —
 
 
 
Basic EPS
$
0.66

 
$
0.53

Diluted EPS
$
0.66

 
$
0.53

Average number of shares of common stock outstanding (in millions)
 
 
 
Basic
993

 
916

Diluted
1,000

 
922

Cash dividends paid per share of common stock
$
0.5600

 
$
0.5425

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 March 31,
 
2017
 
2016
 
(in millions)
Consolidated Net Income
$
665

 
$
501

Other comprehensive income (loss):
 
 
 
Qualifying hedges:
 
 
 
Changes in fair value, net of tax of $(5) and $(72), respectively
(9
)
 
(117
)
Reclassification adjustment for amounts included in net income,
net of tax of $(1) and $1, respectively
(1
)
 
2

Pension and other post retirement benefit plans:
 
 
 
Reclassification adjustment for amounts included in net income,
net of tax of $- and $1, respectively
1

 
1

Total other comprehensive income (loss)
(9
)
 
(114
)
Less:
 
 
 
Dividends on preferred and preference stock of subsidiaries
11

 
11

Comprehensive income (loss) attributable to noncontrolling interests
(4
)
 
1

Consolidated Comprehensive Income Attributable to Southern Company
$
649

 
$
375

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 Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Operating Activities:
 
 
 
Consolidated net income
$
665

 
$
501

Adjustments to reconcile consolidated net income to net cash provided from operating activities —
 
 
 
Depreciation and amortization, total
823

 
639

Deferred income taxes
161

 
(4
)
Allowance for equity funds used during construction
(57
)
 
(53
)
Stock based compensation expense
61

 
58

Estimated loss on Kemper IGCC
108

 
53

Mark-to-market adjustments
(81
)
 
(2
)
Other, net
(11
)
 
(6
)
Changes in certain current assets and liabilities —
 
 
 
-Receivables
312

 
235

-Prepayments
(111
)
 
(65
)
-Natural gas for sale, net of temporary LIFO liquidation
411

 

-Other current assets
(31
)
 
(7
)
-Accounts payable
(533
)
 
(72
)
-Accrued taxes
(212
)
 
(57
)
-Accrued compensation
(438
)
 
(332
)
-Retail fuel cost over recovery
(122
)
 
25

-Other current liabilities
(48
)
 
(35
)
Net cash provided from operating activities
897

 
878

Investing Activities:
 
 
 
Business acquisitions, net of cash acquired
(1,020
)
 
(114
)
Property additions
(1,488
)
 
(1,872
)
Investment in restricted cash
(13
)
 
(289
)
Distribution of restricted cash
26

 
292

Nuclear decommissioning trust fund purchases
(224
)
 
(316
)
Nuclear decommissioning trust fund sales
218

 
311

Cost of removal, net of salvage
(61
)
 
(52
)
Change in construction payables, net
(170
)
 
(94
)
Investment in unconsolidated subsidiaries
(81
)
 

Payments pursuant to LTSAs
(55
)
 
(49
)
Other investing activities
65

 
(14
)
Net cash used for investing activities
(2,803
)
 
(2,197
)
Financing Activities:
 
 
 
Increase in notes payable, net
573

 
294

Proceeds —
 
 
 
Long-term debt
1,409

 
1,997

Common stock
186

 
270

Short-term borrowings
4

 

Redemptions and repurchases —
 
 
 
Long-term debt
(608
)
 
(888
)
Short-term borrowings

 
(475
)
Distributions to noncontrolling interests
(18
)
 
(4
)
Capital contributions from noncontrolling interests
71

 
131

Purchase of membership interests from noncontrolling interests

 
(129
)
Payment of common stock dividends
(556
)
 
(497
)
Other financing activities
(36
)
 
(30
)
Net cash provided from financing activities
1,025

 
669

Net Change in Cash and Cash Equivalents
(881
)
 
(650
)
Cash and Cash Equivalents at Beginning of Period
1,975

 
1,404

Cash and Cash Equivalents at End of Period
$
1,094

 
$
754

Supplemental Cash Flow Information:
 
 
 
Cash paid (received) during the period for —
 
 
 
Interest (net of $25 and $30 capitalized for 2017 and 2016, respectively)
$
461

 
$
224

Income taxes, net
(6
)
 
(141
)
Noncash transactions — Accrued property additions at end of period
578

 
731

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 March 31, 2017
 
At December 31, 2016
 
 
(in millions)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,094

 
$
1,975

Receivables —
 
 
 
 
Customer accounts receivable
 
1,560

 
1,565

Energy marketing receivable
 
493

 
623

Unbilled revenues
 
589

 
706

Under recovered regulatory clause revenues
 
47

 
18

Income taxes receivable, current
 
544

 
544

Other accounts and notes receivable
 
433

 
377

Accumulated provision for uncollectible accounts
 
(53
)
 
(43
)
Materials and supplies
 
1,477

 
1,462

Fossil fuel for generation
 
687

 
689

Natural gas for sale
 
346

 
631

Prepaid expenses
 
401

 
364

Other regulatory assets, current
 
560

 
581

Other current assets
 
249

 
230

Total current assets
 
8,427

 
9,722

Property, Plant, and Equipment:
 
 
 
 
In service
 
99,774

 
98,416

Less: Accumulated depreciation
 
30,330

 
29,852

Plant in service, net of depreciation
 
69,444

 
68,564

Nuclear fuel, at amortized cost
 
902

 
905

Construction work in progress
 
9,465

 
8,977

Total property, plant, and equipment
 
79,811

 
78,446

Other Property and Investments:
 
 
 
 
Goodwill
 
6,251

 
6,251

Equity investments in unconsolidated subsidiaries
 
1,615

 
1,549

Other intangible assets, net of amortization of $97 and $62
at March 31, 2017 and December 31, 2016, respectively
 
935

 
970

Nuclear decommissioning trusts, at fair value
 
1,678

 
1,606

Leveraged leases
 
780

 
774

Miscellaneous property and investments
 
293

 
270

Total other property and investments
 
11,552

 
11,420

Deferred Charges and Other Assets:
 
 
 
 
Deferred charges related to income taxes
 
1,647

 
1,629

Unamortized loss on reacquired debt
 
218

 
223

Other regulatory assets, deferred
 
6,748

 
6,851

Other deferred charges and assets
 
1,357

 
1,406

Total deferred charges and other assets
 
9,970

 
10,109

Total Assets
 
$
109,760

 
$
109,697

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 March 31, 2017
 
At December 31, 2016
 
 
(in millions)
Current Liabilities:
 
 
 
 
Securities due within one year
 
$
3,269

 
$
2,587

Notes payable
 
2,818

 
2,241

Energy marketing trade payables
 
471

 
597

Accounts payable
 
1,750

 
2,228

Customer deposits
 
541

 
558

Accrued taxes —
 
 
 
 
Accrued income taxes
 
258

 
193

Unrecognized tax benefits
 
400

 
385

Other accrued taxes
 
326

 
667

Accrued interest
 
453

 
518

Accrued compensation
 
461

 
915

Asset retirement obligations, current
 
386

 
378

Liabilities from risk management activities, net of collateral
 
63

 
107

Acquisitions payable
 

 
489

Other regulatory liabilities, current
 
221

 
236

Other current liabilities
 
867

 
818

Total current liabilities
 
12,284

 
12,917

Long-term Debt
 
42,786

 
42,629

Deferred Credits and Other Liabilities:
 
 
 
 
Accumulated deferred income taxes
 
14,307

 
14,092

Deferred credits related to income taxes
 
215

 
219

Accumulated deferred investment tax credits
 
2,264

 
2,228

Employee benefit obligations
 
2,234

 
2,299

Asset retirement obligations, deferred
 
4,170

 
4,136

Accrued environmental remediation
 
388

 
397

Other cost of removal obligations
 
2,724

 
2,748

Other regulatory liabilities, deferred
 
237

 
258

Other deferred credits and liabilities
 
873

 
880

Total deferred credits and other liabilities
 
27,412

 
27,257

Total Liabilities
 
82,482

 
82,803

Redeemable Preferred Stock of Subsidiaries
 
118

 
118

Redeemable Noncontrolling Interests
 
164

 
164

Stockholders' Equity:
 
 
 
 
Common Stockholders' Equity:
 
 
 
 
Common stock, par value $5 per share —
 
 
 
 
Authorized — 1.5 billion shares
 
 
 
 
Issued — March 31, 2017: 995 million shares
 
 
 
 
 — December 31, 2016: 991 million shares
 
 
 
 
Treasury — March 31, 2017: 0.9 million shares
 
 
 
 
     — December 31, 2016: 0.8 million shares
 
 
 
 
Par value
 
4,973

 
4,952

Paid-in capital
 
9,884

 
9,661

Treasury, at cost
 
(33
)
 
(31
)
Retained earnings
 
10,459

 
10,356

Accumulated other comprehensive loss
 
(189
)
 
(180
)
Total Common Stockholders' Equity
 
25,094

 
24,758

Preferred and Preference Stock of Subsidiaries
 
609

 
609

Noncontrolling Interests
 
1,293

 
1,245

Total Stockholders' Equity
 
26,996

 
26,612

Total Liabilities and Stockholders' Equity
 
$
109,760

 
$
109,697

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2017 vs. FIRST QUARTER 2016


OVERVIEW
Southern Company is a holding company that owns all of the common stock of the traditional electric operating companies and of 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 the distribution of natural gas by Southern Company Gas. 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 distributes natural gas through natural gas distribution utilities in seven states 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 energy technologies and services to electric utilities and large industrial, commercial, institutional, and municipal customers. Customer solutions include distributed generation systems, utility infrastructure solutions, and energy efficiency products and services. Other business activities also include investments in telecommunications, leveraged lease projects, and gas storage facilities. For additional information, see BUSINESS – "The Southern Company System – Traditional Electric Operating Companies," " – Southern Power," " – Southern Company Gas," and " – Other Businesses" in Item 1 of the Form 10-K.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, electric and natural gas system reliability, execution of major construction projects, and earnings per share.
Construction Program
See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," and Note (B) to the Condensed Financial Statements under "Regulatory MattersGeorgia PowerNuclear Construction" and "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the construction program. 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.
On March 29, 2017, Westinghouse and WECTEC each filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Also on March 29, 2017, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an interim assessment agreement with the Contractor and WECTEC Staffing Services LLC (WECTEC Staffing) to provide for a continuation of work with respect to Plant Vogtle Units 3 and 4. In February 2017, the Contractor provided Georgia Power with revised forecasted in-service dates of December 2019 and September 2020 for Plant Vogtle Units 3 and 4, respectively. However, based on information subsequently made available during Westinghouse and WECTEC's bankruptcy proceedings and pursuant to the interim assessment agreement, Georgia Power and the Vogtle Owners do not believe the revised in-service dates are achievable. Georgia Power, along with the other Vogtle Owners, is undertaking a comprehensive schedule and cost-to-complete assessment, as well as a cancellation cost assessment. It is reasonably possible these assessments result in estimated incremental costs to complete, including owners' costs, that materially exceed the value of the Toshiba Guarantee. Georgia Power intends to work with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4. Georgia Power, for itself and as agent for the other Vogtle Owners, is also negotiating a new service agreement which would, if necessary, engage the Contractor to provide design, engineering, and procurement services to Southern Nuclear, in the event Southern Nuclear assumes control over construction management. The Contractor's bankruptcy filing is expected to have a material impact on the construction cost and schedule of, as well as the cost recovery for, Plant Vogtle Units 3 and 4 and could have a material impact on

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southern Company's financial statements. In addition, an inability or other failure by Toshiba to perform its obligations under the Toshiba Guarantee could have a further material impact on the net cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4 and, therefore, on Southern Company's financial statements. The ultimate outcome of these matters also is dependent on the results of the assessments currently underway, as well as the related regulatory treatment, and cannot be determined at this time.
RESULTS OF OPERATIONS
Net Income
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$169
 
34.6
Consolidated net income attributable to Southern Company was $658 million ($0.66 per share) for the first quarter 2017 compared to $489 million ($0.53 per share) for the corresponding period in 2016. Consolidated net income increased by $239 million as a result of earnings from Southern Company Gas, which was acquired on July 1, 2016, and decreased $12 million as a result of a loss at PowerSecure, which was acquired on May 9, 2016. Also contributing to the increase were higher retail electric revenues resulting from increases in non-fuel retail base rates, an increase in renewable energy sales and income tax benefits at Southern Power, and a decrease in non-fuel operations and maintenance expenses. These increases were partially offset by a decrease in retail electric revenues resulting from milder weather, higher interest expense, higher depreciation and amortization, and higher charges related to revisions of the estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC in the first quarter 2017 compared to the corresponding period in 2016.
See Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information on the Merger and the acquisition of PowerSecure and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC.
Retail Electric Revenues
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$17
 
0.5
In the first quarter 2017, retail electric revenues were $3.39 billion compared to $3.38 billion for the corresponding period in 2016.
Details of the changes in retail electric revenues were as follows:
 
 
First Quarter 2017
 
 
(in millions)
 
(% change)
Retail electric – prior year
 
$
3,377

 
 
Estimated change resulting from –
 
 
 
 
Rates and pricing
 
118

 
3.5

Sales decline
 
(11
)
 
(0.3
)
Weather
 
(137
)
 
(4.1
)
Fuel and other cost recovery
 
47

 
1.4

Retail electric – current year
 
$
3,394

 
0.5
 %
Revenues associated with changes in rates and pricing increased in the first quarter 2017 when compared to the corresponding period in 2016 primarily due to a Rate RSE increase at Alabama Power effective January 1, 2017, the

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

rate pricing effect of decreased customer usage and higher contributions from commercial and industrial customers under a rate plan allowing for variable demand-driven pricing at Georgia Power, and an ECO Plan rate increase at Mississippi Power implemented in the third quarter 2016.
See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power" and " Georgia Power Rate Plans" 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 first quarter 2017 when compared to the corresponding period in 2016. Industrial KWH sales decreased 2.2% in the first quarter 2017 primarily in the chemicals, stone, clay, and glass, and paper sectors. A strong dollar, low oil prices, weak global economic conditions, and economic policy uncertainty have constrained sales in the industrial sector. Weather-adjusted commercial KWH sales decreased 1.9% in the first quarter 2017 primarily due to decreased customer usage resulting from an increase in electronic commerce transactions and energy saving initiatives, partially offset by customer growth. Weather-adjusted residential KWH sales increased 0.8% in the first quarter 2017 primarily due to customer growth, partially offset by decreased customer usage primarily resulting from efficiency improvements in residential appliances and lighting.
Fuel and other cost recovery revenues increased $47 million in the first quarter 2017 when compared to the corresponding period in 2016 primarily due to an increase in fuel prices. Electric rates for the traditional electric operating companies include provisions to adjust billings for fluctuations in 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
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$135
 
34.1
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 generally represent the greatest contribution to net income and are designed to provide recovery of fixed costs plus 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. Electricity sales from solar and wind PPAs do not have a capacity charge and customers either purchase the energy output of a dedicated renewable facility through an energy charge or through a fixed price for electricity. As a result, Southern Company's ability to recover fixed and variable operations and maintenance expenses is dependent upon the level of energy generated from these facilities, which can be impacted by weather conditions, equipment performance, and other factors. 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 first quarter 2017, wholesale electric revenues were $531 million compared to $396 million for the corresponding period in 2016. This increase was primarily related to a $118 million increase in energy revenues and a $17 million increase in capacity revenues. The increase in energy revenues primarily related to Southern Power increases in renewable energy sales arising from new solar and wind facilities, sales from new natural gas PPAs, and

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

non-PPA revenues from short-term sales. The increase in capacity revenues was primarily due to PPAs related to new natural gas facilities and additional customer load requirements at Southern Power.
Natural Gas Revenues
Natural gas revenues represent sales from the natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $1.5 billion of natural gas revenues are included in the consolidated statements of income for the first quarter 2017.
See Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.
Other Revenues
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$103
 
N/M
N/M - Not meaningful
In the first quarter 2017, other revenues were $141 million compared to $38 million for the corresponding period in 2016. The increase was primarily due to $70 million from products and services at PowerSecure, which was acquired on May 9, 2016, and $30 million of revenues from gas marketing products and services at Southern Company Gas following the Merger.
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
 
 
First Quarter 2017
vs.
First Quarter 2016
 
 
(change in millions)
 
(% change)
Fuel
 
$
85

 
9.3
Purchased power
 
14

 
8.5
Total fuel and purchased power expenses
 
$
99

 
 
In the first quarter 2017, total fuel and purchased power expenses were $1.2 billion compared to $1.1 billion for the corresponding period in 2016. The increase was primarily the result of a $121 million increase in the average cost of fuel and purchased power primarily due to higher natural gas prices, partially offset by a $22 million decrease 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 MattersFuel 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the Southern Company system's generation and purchased power were as follows:
 
 
First Quarter
2017
 
First Quarter
2016
Total generation (in billions of KWHs)
 
44
 
44
Total purchased power (in billions of KWHs)
 
4
 
4
Sources of generation (percent) —
 
 
 
 
Coal
 
29
 
27
Nuclear
 
17
 
17
Gas
 
46
 
47
Hydro
 
2
 
7
Other
 
6
 
2
Cost of fuel, generated (in cents per net KWH) 
 
 
 
 
Coal
 
2.88
 
3.24
Nuclear
 
0.79
 
0.82
Gas
 
2.92
 
2.16
Average cost of fuel, generated (in cents per net KWH)
 
2.50
 
2.23
Average cost of purchased power (in cents per net KWH)(*)
 
6.11
 
5.27
(*)
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 first quarter 2017, fuel expense was $996 million compared to $911 million for the corresponding period in 2016. The increase was primarily due to a 35.2% increase in the average cost of natural gas per KWH generated and a 5.5% increase in the volume of KWHs generated by coal, partially offset by an 11.1% decrease in the average cost of coal per KWH generated and an 8.4% decrease in the volume of KWHs generated by natural gas.
Purchased Power
In the first quarter 2017, purchased power expense was $179 million compared to $165 million for the corresponding period in 2016. The increase was primarily due to a 15.9% increase in the average cost per KWH purchased, primarily as a result of higher natural gas prices, partially offset by a 3.6% decrease in the volume of KWHs purchased.
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.
Cost of Natural Gas
Cost of natural gas represents the cost of natural gas sold by the natural gas distribution utilities and certain non-regulated operations of Southern Company Gas. Following the Merger, $719 million of natural gas costs were included in the consolidated statements of income for the first quarter 2017.
See Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cost of Other Sales
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$69
 
N/M
N/M - Not meaningful
In the first quarter 2017, cost of other sales were $88 million compared to $19 million for the corresponding period in 2016. The increase was primarily due to costs related to sales of products and services by PowerSecure, which was acquired on May 9, 2016.
See Note (I) to the Condensed Financial Statements under "Southern CompanyAcquisition of PowerSecure" herein for additional information.
Other Operations and Maintenance Expenses
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$222
 
20.1
In the first quarter 2017, other operations and maintenance expenses were $1.3 billion compared to $1.1 billion for the corresponding period in 2016. The increase was primarily due to $253 million in operations and maintenance expenses at Southern Company Gas following the Merger, $32.5 million resulting from the write-down of Gulf Power's ownership of Plant Scherer Unit 3 in accordance with a settlement agreement approved by the Florida PSC on April 4, 2017 (2017 Rate Case Settlement Agreement), and $21 million in operations and maintenance expenses at PowerSecure, which was acquired on May 9, 2016, partially offset by a decrease of $38 million in scheduled outage and maintenance costs at generation facilities and a $19 million increase in gains from sales of integrated transmission system assets at Georgia Power.
See Note (B) to the Condensed Financial Statements under "Regulatory MattersGulf PowerRetail Base Rate Cases" herein for additional information regarding the 2017 Rate Case Settlement Agreement and Note (I) to the Condensed Financial Statements under "Southern Company" herein for additional information related to the Merger and the acquisition of PowerSecure.
Depreciation and Amortization
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$175
 
32.3
In the first quarter 2017, depreciation and amortization was $716 million compared to $541 million for the corresponding period in 2016. Following the Merger, $120 million in depreciation and amortization for Southern Company Gas is included in the consolidated statements of income for the first quarter 2017. Additionally, the increase reflects $60 million related to additional plant in service at the traditional electric operating companies and Southern Power, partially offset by $20 million more of a reduction in depreciation in the first quarter 2017 compared to the corresponding period in 2016 at Gulf Power, as authorized in its 2013 rate case settlement approved by the Florida PSC.
See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Gulf Power – Retail Base Rate Cases" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory MattersGulf PowerRetail Base Rate Cases" herein for additional information. Also, see Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Taxes Other Than Income Taxes
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$74
 
28.9
In the first quarter 2017, taxes other than income taxes were $330 million compared to $256 million for the corresponding period in 2016. The increase primarily related to $70 million in taxes other than income taxes associated with Southern Company Gas following the Merger.
See Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.
Estimated Loss on Kemper IGCC
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$55
 
N/M
N/M - Not meaningful
In the first quarter 2017 and 2016, estimated probable losses on the Kemper IGCC of $108 million and $53 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 ProgramIntegrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Earnings from Equity Method Investments
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$39
 
N/M
N/M - Not meaningful
In the first quarter 2017, earnings from equity method investments were $39 million, primarily related to earnings from Southern Company Gas' equity method investment in SNG effective September 2016.
See Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest Expense, Net of Amounts Capitalized
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$170
 
69.1
In the first quarter 2017, interest expense, net of amounts capitalized was $416 million compared to $246 million in the corresponding period in 2016. The increase was primarily due to an increase in average outstanding long-term debt primarily related to the financing of the Merger and the funding of Southern Power's growth strategy and continuous construction program. In addition, following the Merger, $46 million in interest expense of Southern Company Gas is included in the consolidated statements of income for the first quarter 2017.
See Note (E) to the Condensed Financial Statements herein and Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" herein for additional information.
Other Income (Expense), Net
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$23
 
79.3
In the first quarter 2017, other income (expense), net was $(6) million compared to $(29) million for the corresponding period in 2016. The change was primarily due to parent company expenses incurred in 2016 associated with bridge financing for the Merger. The change also includes a currency loss of $17 million at Southern Power arising from a translation of euro-denominated fixed-rate notes into U.S. dollars, fully offset by a gain of $17 million on the related foreign currency hedge that was reclassified from accumulated OCI into earnings.
See Note (H) to the Condensed Financial Statements under "Foreign Currency Derivatives" herein for additional information.
Income Taxes
First Quarter 2017 vs. First Quarter 2016
(change in millions)
 
(% change)
$98
 
45.2
In the first quarter 2017, income taxes were $315 million compared to $217 million for the corresponding period in 2016. The increase was primarily due to $150 million in taxes at Southern Company Gas following the Merger and a $12 million increase related to a decrease in tax benefits from solar ITCs at Southern Power, partially offset by increases in tax benefits of $30 million from wind PTCs at Southern Power, $21 million related to the estimated probable losses on construction of the Kemper IGCC at Mississippi Power, and $9 million from state apportionment rate changes at Southern Power.
See Note (G) to the Condensed Financial Statements herein and Note (I) to the Condensed Financial Statements under "Southern CompanyMerger with Southern Company Gas" 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 businesses of selling electricity and distributing natural gas. These factors include the traditional electric operating companies' and the natural gas distribution utilities' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and limited projected demand growth over the next several years. The completion of construction and resolution of cost recovery relating to the Kemper IGCC and the

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

impact of the Contractor's bankruptcy on the construction cost and schedule of, as well as the cost recovery for, Plant Vogtle Units 3 and 4 are other major factors. In addition, the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects are also major factors.
Current proposals related to potential tax reform legislation are primarily focused on reducing the corporate income tax rate, allowing 100% of capital expenditures to be deducted, and eliminating the interest deduction. The ultimate impact of any tax reform proposals, including any potential changes to the availability or realizability of ITCs and PTCs, is dependent on the final form of any legislation enacted and the related transition rules and cannot be determined at this time, but could have a material impact on Southern Company's financial statements.
Future earnings for the electricity and natural gas businesses will be driven primarily by customer growth. Earnings in the electricity business will also depend upon maintaining and growing sales, considering, among other things, the adoption and/or penetration rates of increasingly energy-efficient technologies, increasing volumes of electronic commerce transactions, and higher multi-family home construction. Earnings for both the electricity and natural gas businesses are subject to a variety of other 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 electric generating capacity available and related costs, future acquisitions and construction of electric 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. In addition, the volatility of natural gas prices has a significant impact on the natural gas distribution utilities' 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 or businesses, 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.
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.
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 for the traditional electric operating companies and the natural gas distribution utilities or through long-term wholesale agreements for the traditional electric operating companies and Southern Power. 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 and natural gas, 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

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statements of Southern Company under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
Environmental Statutes and Regulations
Water Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL "Environmental Matters Environmental Statutes and Regulations Water Quality" of Southern Company in Item 7 of the Form 10-K for additional information regarding the final rule revising the regulatory definition of waters of the U.S. for all Clean Water Act (CWA) programs and the final effluent guidelines rule.
On March 1, 2017, the EPA and the U.S. Army Corps of Engineers released a notice of intent to review and rescind or further revise the final rule that revised the regulatory definition of waters of the U.S. for all CWA programs. The final rule has been stayed since October 2015 by the U.S. Court of Appeals for the Sixth Circuit.
On April 25, 2017, the EPA published a notice announcing it would reconsider the effluent guidelines rule, which had been finalized in November 2015. As part of its planned reconsideration, the EPA also announced it is administratively staying the compliance deadlines under the rule and will conduct additional rulemaking to that effect.
The ultimate outcome of these matters cannot be determined at this time.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL "Environmental Matters Global Climate Issues" of Southern Company in Item 7 of the Form 10-K for additional information.
On March 28, 2017, the President signed an executive order directing agencies to review actions that potentially burden the development or use of domestically produced energy resources. The executive order specifically directs the EPA to review the Clean Power Plan and final greenhouse gas emission standards for new, modified, and reconstructed electric generating units and, if appropriate, take action to suspend, revise, or rescind those rules. The ultimate outcome of this matter cannot be determined at this time.
Regulatory Matters
Fuel Cost Recovery
See MANAGEMENT'S DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL "Regulatory Matters Fuel Cost Recovery" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Regulatory Matters – Alabama Power – Rate ECR" and "Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery for the traditional electric operating companies.
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.
Renewables
See MANAGEMENT'S DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL "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.

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Of the three Mississippi Power solar projects expected to be in service in 2017, one was placed in service in the first quarter 2017, while the remaining two are expected to be placed in service in June and July 2017. Mississippi Power may retire the renewable energy credits (REC) 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 Rate RSE, Rate CNP, Rate ECR, and Rate NDR. 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 "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.
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 a separate fuel cost recovery tariff. See Note (B) to the Condensed Financial Statements under "Regulatory MattersGeorgia PowerNuclear Construction" herein and Note 3 to the financial statements of Southern Company under "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 "Regulatory MattersGeorgia PowerFuel Cost Recovery" herein for additional information regarding Georgia Power's fuel cost recovery.
Integrated Resource Plan
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "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.
On March 7, 2017, the Georgia PSC approved Georgia Power's decision to suspend work at a future generation site in Stewart County, Georgia, due to changing economics, including load forecasts and lower fuel costs. The timing of recovery for costs of approximately $50 million incurred through March 31, 2017 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.
Gulf Power
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Regulatory Matters – Gulf Power" of Southern Company in Item 7 of the Form 10-K for additional information regarding Gulf Power's October 2016 request to the Florida PSC to increase retail base rates and Gulf Power's ownership of Plant Scherer Unit 3.
On April 4, 2017, the Florida PSC approved the 2017 Rate Case Settlement Agreement among Gulf Power and three of the intervenors to Gulf Power's retail base rate case, with respect to Gulf Power's request to increase retail base rates. Under the terms of the 2017 Rate Case Settlement Agreement, Gulf Power will, among other things, increase rates effective July 1, 2017 to provide an annual overall net customer impact of approximately $54.3 million. The net customer impact consists of a $62.0 million increase in annual base revenues less an annual credit for certain wholesale revenues to be provided through December 2019 through the purchased power capacity cost recovery clause, which is estimated to be approximately $7.7 million for 2017. Gulf Power also will (1) continue its current authorized retail ROE midpoint (10.25%) and range (9.25% to 11.25%); (2) be deemed to have an equity ratio of

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52.5% for all retail regulatory purposes; (3) begin amortizing the regulatory asset associated with the investment balances remaining after the retirement of Plant Smith Units 1 and 2 (357 MWs) over 15 years effective January 1, 2018; and (4) implement new depreciation rates effective January 1, 2018. The 2017 Rate Case Settlement Agreement also resulted in a $32.5 million write-down of Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs), which was recorded in the first quarter 2017. The remaining issues related to the inclusion of Gulf Power's investment in Plant Scherer Unit 3 in retail rates have been resolved as a result of the 2017 Rate Case Settlement Agreement, including recoverability of certain costs associated with the ongoing ownership and operation of the unit through the environmental cost recovery clause rate approved by the Florida PSC in November 2016.
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 flows.
Base Rate Cases
On March 10, 2017, Nicor Gas filed a general base rate case with the Illinois Commission requesting a $208 million increase in annual base rate revenues. The requested increase is based on a 2018 projected test year and an ROE of 10.7%. The Illinois Commission is expected to rule on the requested increase within the 11-month statutory time limit, after which rate adjustments will be effective. The ultimate outcome of this matter 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 its strategy of developing and constructing new electric generating facilities, adding environmental modifications to certain existing units, 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 improvement programs designed to update or expand the natural gas distribution systems of the natural gas distribution utilities to improve reliability and meet operational flexibility and growth. The natural gas distribution utilities recover their investment and a return associated with these infrastructure programs through their regulated rates.
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 "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 "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" herein. See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Southern Company Gas – Regulatory Infrastructure Programs" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Regulatory Matters Southern Company Gas

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Regulatory Infrastructure Programs" herein for information regarding infrastructure improvement programs at the 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 continues to progress toward completing the construction and start-up of the Kemper IGCC, which was approved by the Mississippi PSC in the 2010 CPCN proceedings, subject to a construction cost cap of $2.88 billion, net of $245 million of Initial DOE Grants and excluding the Cost Cap Exceptions. The current cost estimate for the Kemper IGCC in total is approximately $7.16 billion, which includes approximately $5.75 billion of costs subject to the construction cost cap and is net of the $137 million in additional grants from the DOE received on April 8, 2016 (Additional DOE Grants), which are expected to be used to reduce future rate impacts to 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. Southern Company recorded pre-tax charges to income for revisions to the cost estimate subject to the construction cost cap totaling $108 million ($67 million after tax) in the first quarter 2017. Since 2013, in the aggregate, Southern Company has incurred charges of $2.87 billion ($1.77 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through March 31, 2017. The current cost estimate includes costs through May 31, 2017, as well as identified costs to be incurred beyond May 31, 2017, expected to be subject to the $2.88 billion cost cap. Additional improvement projects to enhance plant performance, safety, and/or operations ultimately may be completed after the remainder of the Kemper IGCC is placed in service. These projects have yet to be fully evaluated, have not been included in the current cost estimate, and may be subject to the $2.88 billion cost cap.
The expected completion date of the Kemper IGCC at the time of the Mississippi PSC's approval in 2010 was May 2014. The combined cycle and the associated common facilities portion of the Kemper IGCC were placed in service in August 2014. The remainder of the plant, including the gasifiers and the gas clean-up facilities, represents first-of-a-kind technology. Mississippi Power achieved integrated operation of both gasifiers on January 29, 2017, including the production of electricity from syngas in both combustion turbines. Mississippi Power continues to work toward achieving sustained operation sufficient to place the remainder of the plant in service. The plant has, however, produced and captured CO2, and has produced sulfuric acid and ammonia, all of acceptable quality under the related off-take agreements. As a result of ongoing challenges associated with the ash removal and gas cleanup sour water systems, efforts to improve reliability and reach sustained operation of both gasifiers and production of electricity from syngas in both combustion turbines remain in process. Mississippi Power currently expects the remainder of the Kemper IGCC, including both gasifiers, will be placed in service by the end of May 2017.
In December 2015, the Mississippi PSC issued an order, based on a stipulation between Mississippi Power and the Mississippi Public Utilities Staff (MPUS), authorizing rates that provide for the recovery of approximately $126 million annually related to the combined cycle and associated common facilities portion of Kemper IGCC assets previously placed in service. Upon placing the remainder of the plant in service, Mississippi Power will be focused primarily on completing the regulatory cost recovery process.
Mississippi Power is required to file a rate case to address Kemper IGCC cost recovery by June 3, 2017 (2017 Rate Case). Costs incurred through March 31, 2017 totaled $6.93 billion, net of the Initial and Additional DOE Grants. Of this total, $2.87 billion of costs has been recognized through income as a result of the $2.88 billion cost cap, $0.83 billion is included in retail and wholesale rates for the assets in service, and the remainder will be the subject of the 2017 Rate Case to be filed with the Mississippi PSC and expected subsequent wholesale Municipal and Rural Associations rate filing with the FERC. Mississippi Power continues to believe that all costs related to the Kemper IGCC that remain subject to recovery have been prudently incurred in accordance with the requirements of the 2012 MPSC CPCN Order. Mississippi Power recognizes significant areas of potential challenge during future regulatory proceedings (and any subsequent, related legal challenges) exist. As described further herein, these challenges include, but are not limited to, prudence issues associated with capital costs, financing costs (AFUDC), and future

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operating costs, net of chemical revenues; potential operating parameters; income tax issues; costs deferred as regulatory assets; and the 15% portion of the project previously contracted to SMEPA.
In connection with the 2017 Rate Case, Mississippi Power expects to request authority from the Mississippi PSC, and separately from the FERC, to defer all Kemper IGCC costs incurred after the in-service date that cannot be capitalized, are not included in current rates, and are not required to be charged against earnings as a result of the $2.88 billion cost cap until such time as the Mississippi PSC completes its review and includes the resulting allowable costs in rates. In the event that the Mississippi PSC does not grant Mississippi Power's request for an accounting order, monthly expenses in the amount of $25 million per month will be charged to income as incurred and will not be recoverable through rates. In addition, after the remainder of the plant is placed in service, AFUDC equity of approximately $12 million per month will no longer be recorded in income.
Although the 2017 Rate Case has not yet been filed and is subject to future developments with either the Kemper IGCC or the Mississippi PSC, consistent with its approach in the 2013 and 2015 rate proceedings in accordance with the law passed in 2013 authorizing multi-year rate plans, Mississippi Power is developing both a traditional rate case requesting full cost recovery of the $3.37 billion (net of $137 million in Additional DOE Grants) not currently in rates and a rate mitigation plan that together represent Mississippi Power's probable filing strategy. Mississippi Power has evaluated various scenarios in connection with its processes to prepare the 2017 Rate Case and recognized an $80 million charge to income in 2016, which is the estimated minimum probable amount of the $3.37 billion of Kemper IGCC costs not currently in rates that would not be recovered under the probable rate mitigation plan to be filed by June 3, 2017. Mississippi Power expects that timely resolution of the 2017 Rate Case will likely require a settlement agreement between Mississippi Power and the MPUS (and other parties) that may include other operational or cost recovery alternatives and would be subject to the approval of the Mississippi PSC. While Mississippi Power intends to pursue any available settlement alternatives, the ability to achieve a negotiated settlement is uncertain. If a settlement is achieved, full regulatory recovery of the amounts not currently in rates is unlikely and could result in further material charges; however, the impact of such an agreement on Southern Company's financial statements would depend on the method, amount, and type of cost recovery ultimately excluded, none of which can be reasonably determined at this time. Certain costs, including operating costs, would be recorded to income in the period incurred, while other costs, including investment-related costs, would be charged to income when it is probable they will not be recovered and the amounts can be reasonably estimated. In the event an agreement acceptable to the parties cannot be reached, Mississippi Power intends to fully litigate its request for full recovery through the Mississippi PSC regulatory process and any subsequent legal challenges. Given the variety of potential scenarios and the uncertainty of the outcome of future regulatory proceedings with the Mississippi PSC (and any subsequent related legal challenges), the ultimate outcome of these matters cannot now be determined but could result in further charges that could have a material impact on Southern Company's results of operations, financial condition, and liquidity.
For additional information on the Kemper IGCC, including information on the project economic viability analysis, pending lawsuits, and an ongoing SEC investigation, 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. Also see "Litigation" and "Other Matters" herein.
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. The plaintiffs filed a request to remand the case back to state court, which was granted on November 17, 2016. 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

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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 December 7, 2016, Southern Company filed motions to dismiss, which the Circuit Court is expected to address in the second quarter 2017.
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 CO2 contract 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, which the court is expected to address in the second quarter 2017.
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
See Note 3 to the financial statements of Southern Company under "Regulatory Matters – Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, Vogtle Construction Monitoring (VCM) reports, the NCCR tariff, the Vogtle Construction Litigation (as defined below), and the Contractor Settlement Agreement (as defined below).
Vogtle 3 and 4 Agreement and Contractor Bankruptcy
In 2008, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an agreement with the Contractor, pursuant to which the Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4 (Vogtle 3 and 4 Agreement). Under the terms of the Vogtle 3 and 4 Agreement, the Vogtle Owners agreed to pay a purchase price subject to certain price escalations and adjustments, including fixed escalation amounts and index-based adjustments, as well as adjustments for change orders, and performance bonuses for early completion and unit performance. The Vogtle 3 and 4 Agreement also provides for liquidated damages upon the Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million. In addition, the Vogtle 3 and 4 Agreement provides for limited cost sharing by the Vogtle Owners for Contractor costs under certain conditions with maximum additional capital costs under this provision attributable to Georgia Power (based on Georgia Power's ownership interest) of approximately $114 million. Each Vogtle Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Contractor under the Vogtle 3 and 4 Agreement. Georgia Power's proportionate share is 45.7%. In the event of a credit rating downgrade below investment grade of any Vogtle Owner, such Vogtle Owner will be required to provide a letter of credit or other credit enhancement.
On December 31, 2015, Westinghouse and the Vogtle Owners entered into a definitive settlement agreement (Contractor Settlement Agreement) to resolve disputes between the Vogtle Owners and the Contractor under the Vogtle 3 and 4 Agreement, including litigation that was pending in the U.S. District Court for the Southern District of Georgia (Vogtle Construction Litigation). Among other things, the Contractor Settlement Agreement and the related amendment to the Vogtle 3 and 4 Agreement (i) revised the guaranteed substantial completion dates to June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4; (ii) provided that delay liquidated damages will commence if the nuclear fuel loading date for each unit does not occur by December 31, 2018 for Unit 3 and December 31, 2019 for Unit 4; and (iii) provided that, pursuant to the amendment to the Vogtle 3 and 4 Agreement, Georgia Power, based

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on its ownership interest, pay to the Contractor and capitalize to the project cost approximately $350 million in settlement of disputed claims. Further, as a consequence of the settlement and Westinghouse's acquisition of WECTEC, Westinghouse engaged Fluor Enterprises, Inc. (Fluor Enterprises), a subsidiary of Fluor Corporation (Fluor), as a new construction subcontractor.
Under the terms of the Vogtle 3 and 4 Agreement, the Contractor does not have a right to terminate the Vogtle 3 and 4 Agreement for convenience. The Contractor may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including certain Vogtle Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events. In the event of an abandonment of work by the Contractor, the maximum liability of the Contractor under the Vogtle 3 and 4 Agreement is increased to 40% of the contract price (approximately $1.7 billion based on Georgia Power's ownership interest). The Vogtle Owners may terminate the Vogtle 3 and 4 Agreement at any time for convenience, provided that the Vogtle Owners will be required to pay certain termination costs. In addition, the Vogtle Owners may terminate the Vogtle 3 and 4 Agreement for certain Contractor breaches, including abandonment of work by the Contractor.
Under the Toshiba Guarantee, Toshiba has guaranteed certain payment obligations of the Contractor, including any liability of the Contractor for abandonment of work. However, due to Toshiba's financial situation described below, substantial risk regarding the Vogtle Owners' ability to fully collect under the Toshiba Guarantee exists. In January 2016, Westinghouse delivered to the Vogtle Owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the Contractor's potential obligations under the Vogtle 3 and 4 Agreement. The Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020 and require 60 days' written notice to Georgia Power in the event the Westinghouse Letters of Credit will not be renewed. In the event of such notice, the Vogtle Owners would be able to draw on the entire balance of the Westinghouse Letters of Credit. The Westinghouse Letters of Credit remain in place in accordance with the terms of the Vogtle 3 and 4 Agreement.
On March 29, 2017, Westinghouse and WECTEC each filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an interim assessment agreement with the Contractor and WECTEC Staffing, as of March 29, 2017 (Interim Assessment Agreement), to provide for a continuation of work with respect to Plant Vogtle Units 3 and 4. Georgia Power's entry into the Interim Assessment Agreement was conditioned upon South Carolina Electric & Gas Company entering into a similar interim assessment agreement with the Contractor relating to V.C. Summer, which also occurred on March 29, 2017. The provisions in the Interim Assessment Agreement became effective upon approval of the Interim Assessment Agreement by the bankruptcy court on March 30, 2017. The term of the Interim Assessment Agreement was originally scheduled to expire on April 28, 2017. On April 28, 2017, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an amendment to the Interim Assessment Agreement with the Contractor and WECTEC Staffing solely to extend the term of the Interim Assessment Agreement through the earlier of (i) May 12, 2017 and (ii) termination of the Interim Assessment Agreement by any party upon five business days' notice (Interim Assessment Period).
The Interim Assessment Agreement provides, among other items, that (i) Georgia Power will be obligated to pay, on behalf of the Vogtle Owners, all costs accrued by the Contractor for subcontractors and vendors for services performed or goods provided during the Interim Assessment Period, with these amounts to be paid to the Contractor, except for amounts accrued for Fluor, which will be paid directly to Fluor; (ii) during the Interim Assessment Period, the Contractor shall provide certain engineering, procurement, and management services for Plant Vogtle Units 3 and 4, to the same extent as contemplated by the Vogtle 3 and 4 Agreement, and Georgia Power, on behalf of the Vogtle Owners, will make payments of $5.4 million per week for these services; (iii) Georgia Power will have the right to make payments, on behalf of the Vogtle Owners, directly to subcontractors and vendors who have accounts past due with the Contractor; (iv) during the Interim Assessment Period, the Contractor will use its commercially reasonable efforts to provide information reasonably requested by Georgia Power as is necessary to continue construction and investigate the completion status of Plant Vogtle Units 3 and 4; (v) the Contractor will reject or accept the Vogtle 3 and 4 Agreement by the termination of the Interim Assessment

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Agreement; and (vi) during the Interim Assessment Period, Georgia Power will not exercise any remedies against Toshiba under the Toshiba Guarantee. Under the Interim Assessment Agreement, all parties expressly reserve all rights and remedies under the Vogtle 3 and 4 Agreement, all related security and collateral, under applicable law.
A number of subcontractors to the Contractor, including Fluor Enterprises, have alleged non-payment by the Contractor for amounts owed for work performed on Plant Vogtle Units 3 and 4. Georgia Power, acting for itself and as agent for the Vogtle Owners, has taken, and continues to take, action to remove liens filed by these subcontractors through the posting of surety bonds.
Georgia Power estimates the aggregate liability for the Vogtle Owners under the Interim Assessment Agreement and the removal of subcontractor liens to be approximately $470 million, of which Georgia Power's proportionate share would total approximately $215 million. As of March 31, 2017, $245 million of this aggregate liability had been paid or accrued. Georgia Power is evaluating remedies available to the Vogtle Owners for these payments, including draws under the Westinghouse Letters of Credit and enforcement of the Toshiba Guarantee.
In February 2017, the Contractor provided Georgia Power with revised forecasted in-service dates of December 2019 and September 2020 for Plant Vogtle Units 3 and 4, respectively. However, based on information subsequently made available during Westinghouse and WECTEC's bankruptcy proceedings and pursuant to the Interim Assessment Agreement, Georgia Power and the Vogtle Owners do not believe the revised in-service dates are achievable. Georgia Power, along with the other Vogtle Owners, is undertaking a comprehensive schedule and cost-to-complete assessment, as well as a cancellation cost assessment. It is reasonably possible these assessments result in estimated incremental costs to complete, including owners' costs, that materially exceed the value of the Toshiba Guarantee. Georgia Power intends to work with the Georgia PSC and the other Vogtle Owners to determine future actions related to Plant Vogtle Units 3 and 4. Georgia Power, for itself and as agent for the other Vogtle Owners, is also negotiating a new service agreement which would, if necessary, engage the Contractor to provide design, engineering, and procurement services to Southern Nuclear, in the event Southern Nuclear assumes control over construction management. In addition, Georgia Power, on behalf of itself and the other Vogtle Owners, intends to take all actions available to it to enforce its rights related to the Vogtle 3 and 4 Agreement, including enforcing the Toshiba Guarantee, subject to the Interim Assessment Agreement, and accessing the Westinghouse Letters of Credit.
On April 11, 2017, Toshiba filed its unaudited financial statements as of and for the nine months ended December 31, 2016, which reflected a negative shareholders' equity balance of $1.9 billion, with Japanese regulators. Toshiba also announced that further substantial charges may be required in the quarter ended March 31, 2017 in connection with the bankruptcy filing of Westinghouse and WECTEC and that there are material events and conditions that raise substantial doubt about Toshiba's ability to continue as a going concern.
The Contractor's bankruptcy filing is expected to have a material impact on the construction cost and schedule of, as well as the cost recovery for, Plant Vogtle Units 3 and 4 and could have a material impact on Southern Company's financial statements. In addition, an inability or other failure by Toshiba to perform its obligations under the Toshiba Guarantee could have a further material impact on the net cost to the Vogtle Owners to complete construction of Plant Vogtle Units 3 and 4 and, therefore, on Southern Company's financial statements.
The ultimate outcome of these matters also is dependent on the results of the assessments currently underway, as well as the related regulatory treatment, and cannot be determined at this time.
Regulatory Matters
In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 with a certified capital cost of $4.418 billion. In addition, in 2009 the Georgia PSC approved inclusion of the Plant Vogtle Units 3 and 4 related CWIP accounts in rate base, and the State of Georgia enacted the Georgia Nuclear Energy Financing Act, which allows Georgia Power to recover financing costs for nuclear construction projects certified by the Georgia PSC. Financing costs are recovered on all applicable certified costs through annual adjustments to the NCCR tariff by including the related CWIP accounts in rate base during the construction period.

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On December 20, 2016, the Georgia PSC voted to approve a settlement agreement (Vogtle Cost Settlement Agreement) resolving the following prudence matters: (i) none of the $3.3 billion of costs incurred through December 31, 2015 and reflected in the fourteenth VCM report will be disallowed from rate base on the basis of imprudence; (ii) the 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 then 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 the date each unit is placed in service. The ROE used to calculate the NCCR tariff was 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 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 placed in service by December 31, 2020, then (i) the ROE for purposes of calculating the NCCR tariff will be reduced an additional 300 basis points, or $8 million per month, and may, at the Georgia PSC's discretion, be accrued to be used for the benefit of customers, until such time as the units are placed in service 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 when placed in service, 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 Georgia PSC has approved fifteen VCM reports covering the periods through June 30, 2016, including construction capital costs incurred, which through that date totaled $3.7 billion. Georgia Power filed its sixteenth VCM report, covering the period from July 1 through December 31, 2016, requesting approval of $222 million of construction capital costs incurred during that period, with the Georgia PSC on February 27, 2017. Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was approximately $4.1 billion as of March 31, 2017 and Georgia Power had incurred $1.3 billion in financing costs through March 31, 2017.
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
As of March 31, 2017, Georgia Power had borrowed $2.6 billion related to Plant Vogtle Units 3 and 4 costs through a loan guarantee agreement between Georgia Power and the DOE and a multi-advance credit facility among Georgia Power, the DOE, and the FFB. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing.
The IRS has allocated PTCs to Plant Vogtle Units 3 and 4 which require that the applicable unit be placed in service prior to 2021. The net present value of Georgia Power's PTCs is estimated at approximately $400 million per unit.
There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4 at the federal and state level and additional challenges may arise as construction proceeds. Processes are in place

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that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses, and Acceptance Criteria and the related approvals by the NRC, may arise as construction proceeds, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs.
As construction continues, the risk remains that challenges with labor productivity, fabrication, delivery, assembly, and installation of plant systems, structures, and components, or other issues could arise and may further impact project schedule and cost. Georgia Power's previously estimated owner's costs of approximately $10 million per month and financing costs of approximately $30 million per month for Plant Vogtle Units 3 and 4 are being evaluated as part of the comprehensive schedule and cost-to-complete analysis being performed as a result of the Contractor's bankruptcy.
The ultimate outcome of these matters cannot be determined at this time.
See RISK FACTORS of Southern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world. See additional risks in Item 1A herein regarding the Contractor's bankruptcy.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company in Item 7 of the Form 10-K and Note (G) to the Condensed Financial Statements herein for additional information.
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, 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 Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
On January 20, 2017, a purported securities class action complaint was filed against Southern Company, certain of its officers, and certain of Mississippi Power's former officers in the U.S. District Court for the Northern District of Georgia, Atlanta Division, by Monroe County Employees' Retirement System on behalf of all persons who purchased shares of Southern Company's common stock between April 25, 2012 and October 29, 2013. The complaint alleges that Southern Company, certain of its officers, and certain of Mississippi Power's former officers made materially false and misleading statements regarding the Kemper IGCC in violation of certain provisions

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under the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, compensatory damages and litigation costs and attorneys' fees. Southern Company believes this legal challenge has no merit; however, an adverse outcome in this proceeding could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in this matter, and the ultimate outcome of this matter cannot be determined at this time.
On February 27, 2017, Jean Vineyard filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of Georgia that names as defendants Southern Company, certain of its directors, certain of its officers, and certain of Mississippi Power's former officers. The complaint alleges that the defendants caused Southern Company to make false or misleading statements regarding the Kemper IGCC cost and schedule. Further, the complaint alleges that the defendants were unjustly enriched and caused the waste of corporate assets. The plaintiff seeks to recover, on behalf of Southern Company, unspecified actual damages and, on her own behalf, attorneys' fees and costs in bringing the lawsuit. The plaintiff also seeks certain changes to Southern Company's corporate governance and internal processes. On March 27, 2017, the court deferred this lawsuit until 30 days after certain further action in the purported securities class action complaint discussed above. Southern Company believes that this legal challenge has no merit; however, an adverse outcome in this proceeding could have an impact on Southern Company's results of operations, financial condition, and liquidity. Southern Company will vigorously defend itself in this matter, and the ultimate outcome of this matter cannot be determined at this time.
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 believes 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 Utility Regulation, Asset Retirement Obligations, Pension and Other Postretirement Benefits, Goodwill and Other Intangible Assets, Derivatives and Hedging Activities, and Contingent Obligations.
Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery
During 2017, 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 revisions to the cost estimate, Southern Company recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC subject to the construction cost cap of $108 million ($67 million after tax) in the first quarter 2017, $127 million ($78 million after tax) in the fourth quarter 2016, $88 million ($54 million after tax) in the third quarter 2016, $81 million ($50 million after tax) in the second quarter 2016, $53

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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 $2.87 billion ($1.77 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through March 31, 2017.
Mississippi Power's revised cost estimate reflects an expected in-service date of May 31, 2017 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, continued issues with ash removal systems, 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 to the current construction cost estimate, Mississippi Power is also identifying potential improvement projects to enhance plant performance, safety, and/or operations that ultimately may be completed subsequent to placing the remainder of the Kemper IGCC in service. Approximately $12 million of related potential costs was recorded in 2016 and included in the current construction cost estimate. Other projects have yet to be fully evaluated, have not been included in the current cost estimate, 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 the end of May 2017 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 beyond the end of May 2017 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 $16 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.
Mississippi Power continues to believe that all costs related to the Kemper IGCC that remain subject to recovery have been prudently incurred in accordance with the requirements of the 2012 MPSC CPCN Order. Mississippi Power also recognizes significant areas of potential challenge during future regulatory proceedings (and any subsequent, related legal challenges) exist. As described further in Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs," " – Prudence," " – Lignite Mine and CO2 Pipeline Facilities," " – Termination of Proposed Sale of Undivided Interest," and " – Income Tax Matters" herein, these challenges include, but are not limited to, prudence issues associated with capital costs, financing costs (AFUDC), and future operating costs, net of chemical revenues; potential operating parameters; income tax issues; costs deferred as regulatory assets; and the 15% portion of the project previously contracted to SMEPA.
Although the 2017 Rate Case has not yet been filed and is subject to future developments with either the Kemper IGCC or the Mississippi PSC, consistent with its approach in the 2013 and 2015 rate proceedings in accordance with the law passed in 2013 authorizing multi-year rate plans, Mississippi Power is developing both a traditional rate case requesting full cost recovery of the amounts not currently in rates and a rate mitigation plan that together

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represent Mississippi Power's probable filing strategy. Mississippi Power has evaluated various scenarios in connection with its processes to prepare the 2017 Rate Case and recognized an $80 million charge to income in 2016, which is the estimated minimum probable amount of the $3.37 billion of Kemper IGCC costs not currently in rates that would not be recovered under the probable rate mitigation plan to be filed by June 3, 2017. Mississippi Power expects that timely resolution of the 2017 Rate Case will likely require a settlement agreement between Mississippi Power and the MPUS (and other parties) that may include other operational or cost recovery alternatives and would be subject to the approval of the Mississippi PSC. While Mississippi Power intends to pursue any available settlement alternatives, the ability to achieve a negotiated settlement is uncertain. If a settlement is achieved, full regulatory recovery of the amounts not currently in rates is unlikely and could result in further material charges; however, the impact of such an agreement on Southern Company's financial statements would depend on the method, amount, and type of cost recovery ultimately excluded, none of which can be reasonably determined at this time. Certain costs, including operating costs, would be recorded to income in the period incurred, while other costs, including investment-related costs, would be charged to income when it is probable they will not be recovered and the amounts can be reasonably estimated. In the event an agreement acceptable to the parties cannot be reached, Mississippi Power intends to fully litigate its request for full recovery through the Mississippi PSC regulatory process and any subsequent legal challenges.
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.
Recently Issued Accounting Standards
In 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. The new standard also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers.
While Southern Company expects most of its revenue to be included in the scope of ASC 606, it has not fully completed its evaluation of all revenue arrangements. The majority of Southern Company's revenue, including energy provided to customers, is from tariff offerings that provide electricity or natural gas without a defined contractual term. For such arrangements, Southern Company expects that the revenue from contracts with these customers will continue to be equivalent to the electricity or natural gas supplied and billed in that period (including unbilled revenues) and the adoption of ASC 606 will not result in a significant shift in the timing of revenue recognition for such sales.
Southern Company's ongoing evaluation of other revenue streams and related contracts includes longer term contractual commitments and unregulated sales to customers. Some revenue arrangements, such as certain PPAs and alternative revenue programs, are excluded from the scope of ASC 606 and, therefore, will be accounted for and presented separately from revenues under ASC 606 on Southern Company's financial statements. In addition, the power and utilities industry is currently addressing other specific industry issues, including the applicability of ASC 606 to contributions in aid of construction (CIAC). Although final implementation guidance has not been issued, Southern Company expects CIAC to be out of the scope of ASC 606.
The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. Southern Company must select a transition method to be applied either retrospectively to each prior reporting period presented or retrospectively with a cumulative effect adjustment to retained earnings at the date of initial adoption. As the ultimate impact of the new standard has not yet been determined, Southern Company has not elected its transition method.

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On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with the carrying amount as part of Step 2 of the goodwill impairment test. Under the new standard, the goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value, not exceeding the total amount of goodwill allocated to that reporting unit, which may increase the frequency of goodwill impairment charges if a future goodwill impairment test does not pass the Step 1 evaluation. ASU 2017-04 is effective prospectively for annual and interim periods beginning on or after December 15, 2019, and early adoption is permitted on testing dates after January 1, 2017.
On March 10, 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs and requires the other components of net periodic pension and postretirement benefit costs to be separately presented in the income statement outside income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and postretirement benefit costs in the income statement. The capitalization of the service cost component of net periodic pension and postretirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Southern Company is currently evaluating the new standard. The presentation changes required for net periodic pension and postretirement benefit costs will result in a decrease in Southern Company's operating income and an increase in other income for 2016 and 2017 and are expected to result in a decrease in operating income and an increase in other income for 2018. The adoption of ASU 2017-07 is not expected to have a material impact on Southern Company's financial statements.
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 March 31, 2017. 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 $897 million for the first three months of 2017, an increase of $19 million from the corresponding period in 2016. The increase in net cash provided from operating activities was primarily due to $758 million of net cash provided from operating activities of Southern Company Gas, which was acquired on July 1, 2016, largely offset by the timing of vendor payments and a decrease in fuel cost recovery. Net cash used for investing activities totaled $2.8 billion for the first three months of 2017 primarily due to the construction of electric generation, transmission, and distribution facilities, installation of equipment to comply with environmental standards, and Southern Power's acquisition and construction of renewable facilities. Net cash provided from financing activities totaled $1.0 billion for the first three months of 2017 primarily due to issuances of long-term debt, 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 three months of 2017 include an increase of $1.4 billion in total property, plant, and equipment primarily related to Southern Power's wind facility acquisition and the traditional electric operating companies' installation of equipment to comply with environmental standards and construction of electric generation, transmission, and distribution facilities; a decrease of $0.9 billion in cash and cash equivalents primarily related to acquisition payments at Southern Power; an increase of $0.6 billion in notes payable primarily

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related to an increase in commercial paper borrowings; and a decrease of $0.5 billion in accounts payable primarily due to the timing of vendor payments.
At the end of the first quarter 2017, the market price of Southern Company's common stock was $49.78 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $25.23 per share, representing a market-to-book ratio of 197%, compared to $49.19, $25.00, and 197%, respectively, at the end of 2016. Southern Company's common stock dividend for the first quarter 2017 was $0.56 per share compared to $0.5425 per share in the first quarter 2016.
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 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, pipeline charges, storage capacity, and gas supply, asset management agreements, standby letters of credit and performance/surety bonds, trust funding requirements, and unrecognized tax benefits. Approximately $3.3 billion will be required through March 31, 2018 to fund maturities of long-term debt. See "Sources of Capital" herein for additional information.
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 electric generating plants, including unit retirements and replacements and adding or changing fuel sources at existing electric generating 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 "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 "Regulatory MattersGeorgia PowerNuclear Construction" and "Integrated Coal Gasification Combined Cycle" herein for information regarding additional factors that may impact construction expenditures.
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 2017, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements and will depend upon prevailing market conditions and other factors. 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 LIQUIDITY "Sources of Capital" of Southern Company in Item 7 of the Form 10-K for additional information.
In addition, Georgia Power has entered into a loan guarantee agreement (Loan Guarantee Agreement) with the DOE, under which the proceeds of borrowings 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 March 31, 2017 would allow for borrowings of up to $2.8 billion under the FFB Credit Facility, of which Georgia Power has borrowed $2.6 billion. The Contractor's bankruptcy and failure to perform its obligations under the Vogtle 3 and 4 Agreement could impact Georgia Power's ability to make further borrowings under the Loan Guarantee Agreement. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "DOE Loan Guarantee Borrowings" herein for additional information regarding the Loan Guarantee Agreement, including applicable covenants, events of default, mandatory prepayment events, and conditions to borrowing. Also see Note (B) to the Condensed Financial Statements under "Regulatory MattersGeorgia PowerNuclear 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. In April 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. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for information regarding legislation related to the securitization of certain costs of the Kemper IGCC.
As of March 31, 2017, Southern Company's current liabilities exceeded current assets by $3.9 billion, primarily due to long-term debt that is due within one year of $3.3 billion, including approximately $0.4 billion at the parent company, $0.4 billion at Alabama Power, $0.5 billion at Georgia Power, $0.1 billion at Gulf Power, $1.3 billion at Mississippi Power, and $0.6 billion at Southern Power. To meet short-term cash needs and contingencies, the Southern Company system 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.

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At March 31, 2017, Southern Company and its subsidiaries had approximately $1.1 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2017 were as follows:
 
Expires
 
 
 
Executable Term
Loans
 
Expires Within One Year
Company
2017
2018
2020
 
Total
 
Unused
 
One
Year
 
Two
Years
 
Term
Out
 
No Term
Out
 
(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
85

195


 
280

 
280

 
45

 

 
25

 
70

Mississippi Power
173



 
173

 
141

 

 
13

 
13

 
160

Southern Power Company


600

 
600

 
524

 

 

 

 

Southern Company Gas(b)
75

1,925


 
2,000

 
1,949

 

 

 

 
75

Other
55



 
55

 
55

 
20

 

 
20

 
35

Southern Company Consolidated
$
423

$
3,620

$
4,400

 
$
8,443

 
$
8,266

 
$
65

 
$
13

 
$
58

 
$
375

(a)
Represents the Southern Company parent entity.
(b)
Southern Company Gas, as the parent entity, 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 for which Nicor Gas is the borrower and which is 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.
Most of these bank credit arrangements, as well as the term loan arrangements of Alabama Power, Gulf Power, Mississippi Power, and Southern Power Company, 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. At March 31, 2017, Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, and Nicor Gas were 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 pollution control revenue bonds of the traditional electric operating companies and the commercial paper programs of Southern Company, the traditional electric operating companies, Southern Power Company, Southern Company Gas, and Nicor Gas. The amount of variable rate pollution control revenue bonds of the traditional electric operating companies outstanding requiring liquidity support as of March 31, 2017 was approximately $1.9 billion. In addition, at March 31, 2017, the traditional electric operating companies had approximately $386 million of fixed rate pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.
Southern Company, the traditional electric operating companies (other than Mississippi Power), Southern Power Company, Southern Company Gas, and Nicor Gas make short-term borrowings primarily through commercial paper

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

programs that have the liquidity support of the committed bank credit arrangements described above. Short-term borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
 
 
Short-term Debt at
March 31, 2017
 
Short-term Debt During the Period(*)
 
 
Amount
Outstanding
 
Weighted
Average
Interest
Rate
 
Average
Amount
Outstanding
 
Weighted
Average
Interest
Rate
 
Maximum
Amount
Outstanding
 
 
(in millions)
 
 
 
(in millions)
 
 
 
(in millions)
Commercial paper
 
$
2,682

 
1.2
%
 
$
2,355

 
1.1
%
 
$
2,885

Short-term bank debt
 
136

 
2.2
%
 
125

 
1.8
%
 
349

Total
 
$
2,818

 
1.3
%
 
$
2,480

 
1.1
%
 
 
(*)
Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2017.
In addition, in connection with the construction of the Roserock solar facility, RE Roserock LLC, an indirect subsidiary of Southern Power, previously entered into a credit agreement that was fully repaid on January 31, 2017. For the three-month period ended March 31, 2017, this credit agreement had a maximum amount outstanding of $209 million and an average amount outstanding of $70 million at a weighted average interest rate of 2.1%.
Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank term loans, and operating cash flows.
Credit Rating Risk
At March 31, 2017, Southern Company and its subsidiaries did not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain subsidiaries to BBB and/or Baa2 or below. These contracts are for physical electricity and natural gas purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, foreign currency risk management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 2017 were as follows:
Credit Ratings
Maximum Potential
Collateral
Requirements
 
(in millions)
At BBB and/or Baa2
$
39

At BBB- and/or Baa3
$
659

At BB+ and/or Ba1(*)
$
2,649

(*)
Any additional credit rating downgrades at or below BB- and/or Ba3 could increase collateral requirements up to an additional $38 million.
Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Company and its subsidiaries to access capital markets, and would be likely to impact the cost at which they do so.
On March 1, 2017, Moody's downgraded the senior unsecured debt rating of Mississippi Power to Ba1 from Baa3.
On March 20, 2017, Moody's revised its rating outlook for Georgia Power from stable to negative.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On March 24, 2017, S&P revised its consolidated credit rating outlook for Southern Company and its subsidiaries (including the traditional electric operating companies, Southern Power, Southern Company Gas, Southern Company Gas Capital, and Nicor Gas) from stable to negative.
On March 30, 2017, Fitch placed the ratings of Southern Company, Georgia Power, and Mississippi Power on rating watch negative.
Financing Activities
During the first three months of 2017, Southern Company issued approximately 4.2 million shares of common stock primarily through employee equity compensation plans and received proceeds of approximately $186 million.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2017:
Company(a)
Senior
Note Issuances
 
Senior
Note Maturities and Redemptions
 
Other
Long-Term
Debt
Issuances
 
Other
Long-Term
Debt Redemptions
and
Maturities(b)
 
(in millions)
Southern Company(c)
$

 
$

 
$

 
$
400

Alabama Power
550

 
200

 

 

Georgia Power
850

 

 

 
2

Gulf Power

 

 
6

 

Southern Power

 

 
3

 
2

Other

 

 

 
4

Southern Company Consolidated
$
1,400

 
$
200

 
$
9

 
$
408

(a)
Mississippi Power and Southern Company Gas did not issue or redeem any long-term debt during the first three months of 2017.
(b)
Includes reductions in capital lease obligations resulting from cash payments under capital leases.
(c)
Represents the Southern Company parent entity.
In March 2017, Southern Company repaid at maturity a $400 million 18-month floating rate bank loan.
Southern Company's subsidiaries used the proceeds of the debt issuances shown in the table above for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including their continuous construction programs.
In March 2017, Gulf Power extended the maturity of a $100 million short-term floating rate bank loan bearing interest based on one-month LIBOR from April 2017 to October 2017.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2017, there were no material changes to Southern Company's, Alabama Power's, Georgia Power's, Mississippi Power's, and Southern Power's disclosures about market risk. For additional market risk disclosures relating to Gulf Power and Southern Company Gas, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Gulf Power and Southern Company Gas, respectively, herein. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K and Note 1 to the financial statements of each registrant under "Financial Instruments," Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power, Mississippi Power, and Southern Company Gas, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (C) and Note (H) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Southern Power, and Southern Company Gas conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
(b)
Changes in internal controls over financial reporting.
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the first quarter 2017 that have materially affected or are reasonably likely to materially affect Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, Southern Power's, or Southern Company Gas' internal control over financial reporting.

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ALABAMA POWER COMPANY

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Table of Contents

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Operating Revenues:
 
 
 
Retail revenues
$
1,227

 
$
1,193

Wholesale revenues, non-affiliates
66

 
63

Wholesale revenues, affiliates
33

 
22

Other revenues
56

 
53

Total operating revenues
1,382

 
1,331

Operating Expenses:
 
 
 
Fuel
298

 
268

Purchased power, non-affiliates
34

 
36

Purchased power, affiliates
28

 
33

Other operations and maintenance
369

 
392

Depreciation and amortization
181

 
172

Taxes other than income taxes
96

 
97

Total operating expenses
1,006

 
998

Operating Income
376

 
333

Other Income and (Expense):
 
 
 
Allowance for equity funds used during construction
8

 
10

Interest expense, net of amounts capitalized
(75
)
 
(73
)
Other income (expense), net
(5
)
 
(8
)
Total other income and (expense)
(72
)
 
(71
)
Earnings Before Income Taxes
304

 
262

Income taxes
126

 
102

Net Income
178

 
160

Dividends on Preferred and Preference Stock
4

 
4

Net Income After Dividends on Preferred and Preference Stock
$
174

 
$
156


CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Net Income
$
178

 
$
160

Other comprehensive income (loss):
 
 
 
Qualifying hedges:
 
 
 
Changes in fair value, net of tax of $- and $(1), respectively

 
(2
)
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $1, respectively
1

 
1

Total other comprehensive income (loss)
1

 
(1
)
Comprehensive Income
$
179

 
$
159

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Operating Activities:
 
 
 
Net income
$
178

 
$
160

Adjustments to reconcile net income to net cash provided from operating activities —
 
 
 
Depreciation and amortization, total
219

 
211

Deferred income taxes
59

 
68

Other, net
(3
)
 
(14
)
Changes in certain current assets and liabilities —
 
 
 
-Receivables
30

 
191

-Fossil fuel stock
10

 
(27
)
-Other current assets
(87
)
 
(87
)
-Accounts payable
(214
)
 
(143
)
-Accrued taxes
77

 
66

-Accrued compensation
(96
)
 
(75
)
-Retail fuel cost over recovery
(36
)
 
(1
)
-Other current liabilities
(9
)
 
(8
)
Net cash provided from operating activities
128

 
341

Investing Activities:
 
 
 
Property additions
(306
)
 
(313
)
Nuclear decommissioning trust fund purchases
(63
)
 
(105
)
Nuclear decommissioning trust fund sales
63

 
105

Cost of removal, net of salvage
(26
)
 
(31
)
Change in construction payables
5

 
(15
)
Other investing activities
(2
)
 
(9
)
Net cash used for investing activities
(329
)
 
(368
)
Financing Activities:
 
 
 
Proceeds —
 
 
 
Senior notes
550

 
400

Capital contributions from parent company
314

 
236

Other long-term debt

 
45

Redemptions and repurchases — Senior notes
(200
)
 
(200
)
Payment of common stock dividends
(179
)
 
(191
)
Other financing activities
(8
)
 
(13
)
Net cash provided from financing activities
477

 
277

Net Change in Cash and Cash Equivalents
276

 
250

Cash and Cash Equivalents at Beginning of Period
420

 
194

Cash and Cash Equivalents at End of Period
$
696

 
$
444

Supplemental Cash Flow Information:
 
 
 
Cash paid (received) during the period for —
 
 
 
Interest (net of $3 and $4 capitalized for 2017 and 2016, respectively)
$
84

 
$
76

Income taxes, net

 
(162
)
Noncash transactions — Accrued property additions at end of period
90

 
106

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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Table of Contents

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
 
<
Assets
 
At March 31, 2017
 
At December 31, 2016