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 second quarter 2024 was $108 million compared to $85 million for the corresponding period in 2023. The increase was primarily due to a $20 million increase in net income at gas distribution operations and a $3 million increase in net income at gas pipeline investments.

For year-to-date 2024, net income was $517 million compared to $393 million for the corresponding period in 2023. The increase was primarily due to a $101 million increase in net income at gas distribution operations and an $18 million increase in net income at gas marketing services.

Natural Gas Revenues

In the second quarter 2024, natural gas revenues, were $831 million compared to$852 million for the corresponding period in 2023. For year-to-date 2024, natural gas revenues were $2.5 billion compared to $2.7 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 second quarter and year-to-date 2024 compared to the corresponding periods in 2023 primarily due to rate increases and a change in timing of revenues at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" in Item 8 of the Form 10-K for additional information.

Revenues from gas costs and other cost recovery decreased in the second quarter and year-to-date 2024 compared to the corresponding periods 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 second quarter and year-to-date 2024 compared to the corresponding periods in 2023 primarily due to 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 second quarter and year-to-date 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 second quarter 2024, cost of natural gas was $149 million compared to $199 million for the corresponding period in 2023. For year-to-date 2024, cost of natural gas was $0.8 billion compared to $1.1 billion for the corresponding period in 2023. The decreases reflect lower gas cost recovery as a result of decreases of 10% and 25% in natural gas prices in the second quarter and year-to-date 2024, respectively.

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

In the second quarter 2024, other operations and maintenance expenseswere $288 million compared to$309 million for the corresponding period in 2023. The decrease was primarily due to a $30 million prior year regulatory disallowance at Nicor Gas and a decrease of $4 million related to energy service contracts. The decreases were partially offset by an increase of $11 million in compensation and benefit expenses and a gain of $6 million on the sale of a service center in 2023.

For year-to-date 2024, other oper ations and maintenance expenses were $581 million compared to $615 million for the corresponding period in 2023. The decrease was primarily due to a $30 million prior year regulatory disallowance at Nicor Gas and decreases of $20 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations, $6 million in service maintenance and meter sets maintenance expenses at Nicor Gas as well as general plant maintenance expenses, and $3 million in bad debt expenses. These decreases were partially offset by an increase of $24 million in compensation and benefit expenses and a gain of $6 million on the sale of a service center in 2023.

See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" in Item 8 of the Form 10-K for additional information.

In the second quarter 2024, depreciation and amortization was $158 million compared to $143 million for the corresponding period in 2023. For year-to-date 2024, depreciation and amortization was $313 million compared to $284 million for the corresponding period in 2023. The increases were primarily due to continued investments at the natural gas distribution utilities.

For year-to-date 2024, taxes other than income taxes were $143 million compared to $161 million for the corresponding period in 2023. The decrease was primarily due to a decrease of $15 million in revenue taxes as a result of lower natural gas revenues at Nicor Gas.

In thesecond quarter 2024, interest expense, net of amounts capitalized was $83 million compared to $73 million for the corresponding period in 2023. For year-to-date 2024, interest expense, net of amounts capitalized was $167 million compared to $150 million for the corresponding period in 2023. The increases for the second quarter and year-to-date 2024 were primarily associated with increases of approximately $5 million and $11 million, respectively, related to higher interest rates and approximately $3 million and $6 million, respectively, related to higher outstanding debt. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein for additional information on borrowings.

In the second quarter 2024, income taxes were $36 million compared to$29 million for the corresponding period in 2023. Foryear-to-date 2024, income taxes were $174 million compared to $132 million for the corresponding period in 2023. The increases were primarily due to higher pre-tax earnings including the prior year regulatory disallowance at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" in Item 8 of the Form 10-K for additional information.

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 the second quarter 2024, net income increased $20 million, or 33.3%, when compared to the corresponding period in 2023, as described further below:

•Operating revenues decreased $15 million primarily due to lower natural gas cost recovery and change in timing of revenues at Nicor Gas, partially offset by rate increases and a prior year regulatory disallowance at Nicor Gas. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas.

•Operating expenses decreased $54 million primarily due to a $46 million decrease in cost of natural gas as a result of lower gas prices and lower volumes sold compared to 2023 and the $30 million prior year regulatory disallowance at Nicor Gas, partially offset by higher compensation and benefit expenses, higher depreciation resulting from additional assets placed in service, and the gain on sale of a service center in 2023.

•Interest expense, net of amounts capitalized increased $9 million primarily due to higher interest rates and higher average outstanding debt.

•Income taxes increased $8 million primarily as a result of higher pre-tax earnings.

Foryear-to-date 2024, net income increased $101 million, or 35.9%, when compared to the corresponding period in 2023, as described further below:

•Operating revenues decreased $171 million primarily due to lower natural gas cost over recovery, partially offset by rate increases, a change in timing of revenues at Nicor Gas, and the prior year regulatory disallowance at Nicor Gas. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas.

•Operating expenses decreased $330 million primarily due to a $319 million decrease in cost of natural gas as a result of lower gas prices and lower volumes sold compared to 2023 and the $30 million prior year regulatory disallowance at Nicor Gas, partially offset by higher depreciation resulting from additional assets placed in service, higher compensation and benefit expenses, and higher revenue taxes. The decrease in operating expenses also includes costs passed through directly to customers, primarily related to bad debt expenses, energy efficiency program, and revenue taxes.

•Interest expense, net of amounts capitalized increased $18 million primarily due to higher interest rates and higher average outstanding debt.

•Income taxes increased $40 million primarily as a result of higher pre-tax earnings.

See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" in Item 8 of the Form 10-K for additional information.

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.

For year-to-date 2024, net income increased $18 million, or 32.1%, when compared to the corresponding period in 2023 primarily due to retail margins and a decrease in cost of natural gas, partially offset by higher income taxes.

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.