SOUTHERN CO

Southern Company Gas has various regulatory mechanisms, such as weather and revenue normalization and straight-fixed-variable rate design, which limit its exposure to weather changes within typical ranges in each of its utility's respective service territory. Southern Company Gas also utilizes weather hedges to limit the negative income impacts in the event of warmer-than-normal weather in Illinois for gas distribution operations and in Illinois and Georgia for gas marketing services. Therefore, weather typically does not have a significant net income impact.

During the Heating Season, natural gas usage and operating revenues are generally higher as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. In addition, because of a rate design change affecting volumetric rates ordered by the Illinois Commission in Nicor Gas' 2023 rate case, additional revenues are expected in the Heating Season, with a corresponding decrease expected in revenues in the second and third quarters of each year. This change will affect the comparison of the prior year revenue for the impacted quarters. Southern Company Gas' base operating expenses, excluding cost of natural gas and bad debt expense, are incurred relatively evenly throughout the year. Seasonality also affects the comparison of certain balance sheet items across quarters, including receivables, unbilled revenues, natural gas for sale, and notes payable. However, these items are comparable when reviewing Southern Company Gas' annual results. Thus, Southern Company Gas' operating results for the interim periods presented are not necessarily indicative of annual results and can vary significantly from quarter to quarter.

Southern Company Gas' net income in the first quarter 2024 was $409 million compared to $309 million for the corresponding period in 2023. The increase was primarily due to an $81 million increase in net income at gas distribution operations and a $15 million increase in net income at gas marketing services.

Natural Gas Revenues

In the first quarter 2024, natural gas revenues were $1.7 billion compared to $1.9 billion for the corresponding period in 2023. Details of the changes in natural gas revenues were as follows:

Revenues from rate changes increased in the first quarter 2024 compared to the corresponding period in 2023 primarily due to rate increases and a change in timing of revenues at Nicor Gas.

Revenues from gas costs and other cost recovery decreased in the first quarter 2024 compared to the corresponding period in 2023 primarily due to lower natural gas cost recovery associated with lower natural gas prices and lower demand associated with warmer weather when compared to the corresponding period in 2023. See "Cost of Natural Gas" herein for additional information.

Revenues from gas marketing services decreased in the first quarter 2024 compared to the corresponding period in 2023 primarily due lower commodity prices.

Cost of Natural Gas

Excluding Atlanta Gas Light, which does not sell natural gas to end-use customers, natural gas distribution rates include provisions to adjust billings for fluctuations in natural gas costs. Therefore, gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas and do not affect net income from gas distribution operations. Cost of natural gas at gas distribution operations represented 81% of the total cost of natural gas in the first quarter 2024. See MANAGEMENT'S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – "Southern Company Gas – Cost of Natural Gas" in Item 7 of the Form 10-K and "Natural Gas Revenues" herein for additional information.

In the first quarter 2024, cost of natural gas was $605 million compared to $898 million for the corresponding period in 2023. The decrease reflects lower gas cost recovery as a result of a 35% decrease in natural gas prices.

The following table details the volumes of natural gas sold during both periods presented:

In the first quarter 2024, other oper ations and maintenance expenses were $293 million compared to $305 million for the corresponding period in 2023. The decrease was primarily due to decreases of $18 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations, $4 million in operating expenses, $4 million in service maintenance and meter sets maintenance expenses at Nicor Gas, and $3 million in bad debt expenses. The decreases were partially offset by increases of $14 million in compensation and benefit expenses and $3 million related to energy service contracts.

In the first quarter 2024, depreciation and amortization was $155 million compared to $141 million for the corresponding period in 2023. The increase was primarily due to continued investments at the natural gas distribution utilities.

In the first quarter 2024, taxes other than income taxes was $87 million compared to $102 million for the corresponding period in 2023. The decrease primarily reflects a decrease of $13 million in revenue taxes as a result of lower natural gas revenues at Nicor Gas.

In thefirst quarter 2024, interest expense, net of amounts capitalized was $84 million compared to $76 million for the corresponding period in 2023. The increase was primarily associated with increases of approximately $5 million related to higher interest rates and approximately $3 million related to higher outstanding debt. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.

In the first quarter 2024, income taxes were $138 million compared to $103 million for the corresponding period in 2023. The increase was primarily due to higher pre-tax earnings.

Segment Information

Operating revenues, operating expenses, and net income for each segment are provided in the table below. See Note (L) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.

Gas Distribution Operations

Gas distribution operations is the largest component of Southern Company Gas' business and is subject to regulation and oversight by regulatory agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas with the opportunity to generate revenues to recover the cost of natural gas delivered to its customers and its fixed and variable costs, including depreciation, interest expense, operations and maintenance, taxes, and overhead costs, and to earn a reasonable return on its investments.

With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of the natural gas distribution utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas, and general economic conditions that may impact customers' ability to pay for natural gas consumed. Southern Company Gas has various regulatory and other mechanisms, such as weather and revenue normalization mechanisms and weather derivative instruments, that limit its exposure to changes in customer consumption, including weather changes within typical ranges in its natural gas distribution utilities' service territories. See Note 2 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K for additional information.

In thefirst quarter 2024, net income increased $81 million, or 36.7%, when compared to the corresponding period in 2023, as described further below:

•Operating revenues decreased $155 million primarily due to lower gas cost over recovery, partially offset by rate increases and a change in timing of revenues at Nicor Gas. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas.

•Operating expenses decreased $275 million primarily due to a $273 million decrease in cost of natural gas as a result of lower gas prices and lower volume sold compared to 2023, partially offset by higher depreciation resulting from additional assets placed in service, higher compensation and benefit expenses, and higher revenue taxes.

•Interest expense, net of amounts capitalized increased $10 million primarily due to higher interest rates and higher average outstanding debt.

•Income taxes increased $32 million primarily as a result of higher pre-tax earnings.

Gas Pipeline Investments

Gas pipeline investments consists primarily of joint ventures in natural gas pipeline investments including SNG and Dalton Pipeline. See Note (E) to the Condensed Financial Statements under "Southern Company Gas" herein for additional information.

Gas Marketing Services

Gas marketing services provides energy-related products and services to natural gas markets and participants in customer choice programs that were approved in various states to increase competition. These programs allow customers to choose their natural gas supplier while the local distribution utility continues to provide distribution and transportation services. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts.

In the first quarter 2024, net income increased $15 million, or 30.0%, when compared to the corresponding period in 2023 primarily due to retail margins and decreases in cost of natural gas.

All Other

All other includes a renewable natural gas business, AGL Services Company, and Southern Company Gas Capital, as well as various corporate operating expenses that are not allocated to the reportable segments and interest income (expense) associated with affiliate financing arrangements. All other included a natural gas storage facility in California through its sale in September 2023. See Note 15 to the financial statements in Item 8 of the Form 10-K for additional information.

In the first quarter 2024, net income increased $5 million when compared to the corresponding period in 2023. The increase was primarily related to decreases in operating expenses and income taxes, partially offset by a decrease in operating revenue.