Significant Accounting Policies and Methods of Application

Our significant accounting policies are described in Note 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. There have been no significant changes to our accounting policies during the year.

Use of Accounting Estimates

The preparation of our financial statements in conformity with GAAP requires us to use judgment and make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our estimates may involve complex situations requiring a high degree of judgment either in the application and interpretation of existing accounting literature or in the development of estimates that impact our financial statements. The most significant estimates relate to the accounting for our rate-regulated subsidiaries, goodwill and other intangible assets, derivatives and hedging activities, uncollectible accounts and other allowances for contingent losses, retirement plan benefit obligations and provisions for income taxes. We evaluate our estimates on an ongoing basis, and our actual results could differ from our estimates.

Inventories

For our regulated utilities, except Nicor Gas, natural gas inventories and the inventories we hold for Marketers in Georgia are carried at cost on a WACOG basis.

Nicor Gas’ inventory is carried at cost on a LIFO basis. Under the LIFO method, inventory decrements occurring during the year that are expected to be restored prior to year-end are charged to cost of goods sold at the estimated annual replacement cost, and the difference between this cost and the actual liquidated LIFO layer cost is recorded as a temporary LIFO liquidation on our unaudited Condensed Consolidated Balance Sheets. Interim inventory decrements that are not expected to be restored prior to year-end are charged to cost of goods sold at the actual LIFO cost of the layers liquidated. The inventory decrement as of June 30, 2016 is expected to be restored prior to year-end and the inventory decrement as of June 30, 2015 was restored prior to December 31, 2015.

Our retail operations, wholesale services and midstream operations segments carry inventory at LOCOM, where cost is determined on a WACOG basis. For the periods presented, we recorded LOCOM adjustments to cost of goods sold in the following amounts to reduce the value of our natural gas inventories to market value.



	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2016		2015		2016		2015
LOCOM adjustments	$	—	$	—	$	3	$	10

Goodwill

We perform an annual impairment test on our reporting units that contain goodwill during the fourth fiscal quarter of each year or more frequently if impairment indicators arise. The amounts of goodwill as of June 30, 2016 and 2015, and December 31, 2015 are provided in the following table.



In millions	Distribution operations		Retail operations		Midstream operations			Consolidated
Goodwill - June 30, 2015	$	1,640	$	173	$	14		$	1,827
Impairment ⁽¹⁾	—		—		(14		)	(14		)
Goodwill - December 31, 2015	1,640		173		—			1,813
Goodwill - June 30, 2016	$	1,640	$	173	$	—		$	1,813

(1) Based on the result of an interim impairment test performed as of September 30, 2015, we recorded a non-cash impairment charge of the full $14 million ($9 million, net of tax) of goodwill at midstream operations.

(Loss) Earnings per Common Share

The following table shows the calculation of our diluted shares attributable to Southern Company Gas for the periods presented as if performance units currently earned under the plan ultimately vest and as if stock options currently exercisable at prices below the average market prices are exercised.



	Three Months Ended June 30,					Six Months Ended June 30,
In millions, except per share amounts	2016			2015		2016		2015
Net (loss) income attributable to Southern Company Gas	$	(51	)	$	42	$	131	$	235
Denominator
Basic weighted average number of shares outstanding ⁽¹⁾	120.3			119.5		120.2		119.4
Effect of dilutive securities	0.2			0.3		0.3		0.3
Diluted weighted average number of shares outstanding ⁽²⁾	120.5			119.8		120.5		119.7
(Loss) earnings per common share attributable to Southern Company Gas
Basic (loss) earnings per common share	$	(0.43	)	$	0.35	$	1.09	$	1.97
Diluted (loss) earnings per common share	$	(0.43	)	$	0.35	$	1.09	$	1.96


(1)	Daily weighted average shares outstanding.


(2)	Excludes all outstanding stock options whose effect would have been anti-dilutive.

Upon completing the merger with Southern Company on July 1, 2016, all of our common shares are held, beneficially and of record, by Southern Company. As a result, earnings per common share disclosures will no longer be included in our quarterly and annual reports.

Accounting Developments

Accounting standards adopted in 2016

Effective January 1, 2016, we adopted the accounting guidance described below, none of which had a material impact on our unaudited condensed consolidated financial statements. For additional information on these accounting standards, see "Accounting Developments" in Note 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K.


•	accounting for a share-based compensation performance target that could be achieved after the requisite service period;


•	consolidation of other legal entities into our financial statements;


•	accounting for fees paid in connection with arrangements with cloud-based software providers; and


•	reducing the diversity in fair value measurements hierarchy disclosures.

Other newly issued accounting standards and updated authoritative guidance

In March 2016, the FASB issued updated authoritative guidance related to accounting for certain aspects of share-based payment transactions. The new guidance changes the income tax accounting related to the tax "windfall" or "shortfall" on share-based compensation, increases the tax withholding level allowed before triggering liability classification of the award and allows for a policy election to account for forfeitures as they occur. This guidance is effective for us beginning January 1, 2017, and early adoption is permitted. We are currently evaluating the potential impact of this new guidance.

In February 2016, the FASB issued updated authoritative guidance related to accounting for lease transactions. The new guidance will require all organizations that use leased assets, referred to as "lessees," to recognize all leases with terms of more than 12 months on the balance sheet as right of use assets and corresponding liabilities. Lessees will continue to recognize lease expense based on classification of the lease, using a straight-line expense pattern for operating leases and a front-loaded expense pattern for financing leases. The accounting for lessors is substantially equivalent to the existing guidance. It also requires additional disclosures, both qualitative and quantitative, including amount, timing, and uncertainty of cash flows arising from leases. The new guidance is effective for us beginning January 1, 2019 and must be applied using the modified retrospective approach to each prior period presented. Early adoption of this new guidance is permitted. We are currently evaluating the potential impact of this new guidance.

In January 2016, the FASB issued updated authoritative guidance related to classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning January 1, 2018, and limited early adoption is permitted. We are currently evaluating the potential impact of this new guidance, but do not anticipate that it will have a material impact on our consolidated financial statements.

In November 2015, the FASB issued updated authoritative guidance related to the balance sheet classification of deferred taxes, which requires companies to present deferred income tax assets and deferred income tax liabilities as noncurrent on a classified balance sheet instead of the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The guidance is effective for us beginning January 1, 2017, and early application is permitted either prospectively or retrospectively. We expect to adopt this new guidance in the third quarter of 2016 and have determined that this new guidance will not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued an update to authoritative guidance to simplify the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The amendments do not apply to inventories carried on a LIFO basis, which for us applies only to our Nicor Gas inventories. The guidance is effective for us beginning January 1, 2017 with prospective application, and early adoption is permitted. We are currently evaluating the potential impact of this new guidance.

In May 2014, the FASB issued an update to authoritative guidance related to revenue from contracts with customers. The update replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. In July 2015, the FASB delayed the effective date by one year and the guidance will now be effective for us beginning January 1, 2018. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. The new guidance must be applied retrospectively to each prior period presented or via a cumulative effect upon the date of initial application. We have not determined the impact of this new guidance, nor have we selected a transition method.