SOUTHERN CO

Southern Company Gas measures weather and the effect on its business using Heating Degree Days. Generally, increased Heating Degree Days result in higher demand for natural gas on Southern Company Gas' distribution system. 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, more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. 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. Thus, Southern Company Gas'

II-31 operating results can vary significantly from quarter to quarter as a result of seasonality. The impact of Heating Season on Southern Company Gas' annual results is illustrated in the table below.

Net Income

Net income attributable to Southern Company Gas in 2024 was $740 million, an increase of $125 million, or 20.3%, compared to 2023. The increase was primarily due to a $109 million increase in net income at gas distribution operations and an $11 million increase in net income at gas marketing services.

A condensed income statement for Southern Company Gas follows:

Operating revenues in 2024 were $4.5 billion, reflecting a $246 million, or 5.2%, decrease compared to 2023. Details of operating revenues were as follows:

Revenues increased from rate changes in 2024 primarily due to base rate increases at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas – Rate Proceedings" for additional information.

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Revenues associated with gas costs and other cost recovery decreased in 2024 primarily due to lower natural gas cost recovery associated with lower natural gas prices and lower demand associated with warmer weather. The natural gas distribution utilities have weather or revenue normalization mechanisms that mitigate revenue fluctuations from customer consumption changes. Natural gas distribu tion 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. See "Cost of Natural Gas" herein for additional information.

Revenues from gas marketing services decreased in 2024 primarily due to lower commodity prices.

Customer Count

The number of customers served by gas distribution operations and gas marketing services can be impacted by natural gas prices, economic conditions, and competition from alternative fuels. Gas distribution operations' and gas marketing services' customers are primarily located in Georgia and Illinois.

The following table provides the number of customers served by Southern Company Gas at December 31, 2024 and 2023:

Southern Company Gas anticipates customer growth and uses a variety of targeted marketing programs to attract new customers and to retain existing customers.

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. See Note 2 to the financial statements under "Southern Company Gas –Natural Gas Cost Recovery" for additional information. Cost of natural gas at gas distribution operations repr esented 80.3% of the total cost of natural gas for 2024.

Gas marketing services customers are charged for actual and estimated natural gas consumed. Cost of natural gas includes the cost of fuel and associated transportation costs, lost and unaccounted for gas, and gains and losses associated with certain derivatives.

Cost of natural gas was $1.2 billion, a decrease of $448 million, or 27.3%, in 2024 as compared to 2023, which reflects lower gas cost recovery in 2024 as a result of a 17.1% decrease in natural gas prices compared to 2023.

Volumes of Natural Gas Sold

Southern Company Gas' natural gas volume metrics for gas distribution operations and gas marketing services illustrate the effects of weather and customer demand for natural gas.

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The following table details the volumes of natural gas sold during 2024 and 2023:

Other operations and maintenance expenses increased $48 million, or 4.0%, in 2024 as compared to 2023. The increase was primarily due to increases of $56 million in compensation and benefit expenses and $20 million in survey, locate, and inspection expenses for distribution gas mains. These increases were partially offset by decreases of $12 million related to energy services contracts and $9 million in expenses passed through to customers primarily related to bad debt and energy efficiency programs at gas distribution operations.

Depreciation and amortization increased $68 million, or 11.7%, in 2024 as compared to 2023. The increase was primarily due to continued investments at the natural gas distribution utilities. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects" for additional information.

Estimated Loss on Regulatory Disallowance

In 2023, Southern Company Gas recorded $88 million in charges related to disallowances of certain capital investments at Nicor Gas. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for additional information.

Interest expense, net of amounts capitalized increased $31 million, or 10.0%, in 2024 as compared to 2023. The increase reflects approximately $17 million related to higher average outstanding borrowings and $14 million related to higher interest rates. See FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" and "Financing Activities" herein and Note 8 to the financial statements for additional information.

Income taxes increased $47 million, or 22.3%, in 2024 as compared to 2023. The increase was primarily due to higher pre-tax earnings. See Note 10 to the financial statements for additional information.

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Segment Information

The gas distribution operations segment 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" for additional information.

In 2024, net income increased $109 million, or 24.7%, compared to 2023. Operating revenues decreased $206 million primarily due to lower gas cost recovery, partially offset by rate increases. Gas costs recovered through natural gas revenues generally equal the amount expensed in cost of natural gas. Operating expenses decreased $390 million primarily due to a $412 million decrease in cost of natural gas as a result of lower gas prices and lower volumes sold compared to 2023 and the $88 million prior year regulatory disallowance at Nicor Gas, partially offset by higher depreciation resulting from additional assets placed in service, higher compensation and benefits expenses, and higher revenue taxes. The decrease in operating expenses also includes costs passed through directly to customers, primarily related to bad debt expense, energy efficiency programs, and revenue taxes. The decrease in net income also includes an increase of $46 million in income taxes primarily as a result of higher pre-tax earnings and an increase of $36 million in interest expense, net of amounts capitalized primarily due to higher interest rates and higher average outstanding debt. See Note 2 to the financial statements under "Southern Company Gas – Infrastructure Replacement Programs and Capital Projects – Nicor Gas" for additional information.

Gas Pipeline Investments

The gas pipeline investments segment consists primarily of joint ventures in natural gas pipeline investments including SNG and Dalton Pipeline. See Note 7 to the financial statements under "Southern Company Gas" for additional information.

The gas marketing services segment 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 2024, net income increased $11 million, or 12.1%, compared to 2023. The increase was due to a $43 million decrease in operating expenses primarily related to a decrease in cost of natural gas, partially offset by a $32 million decrease in operating revenues primarily due to lower retail margins.

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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 under "Southern Company Gas" for additional information.