Derivatives

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

DERIVATIVES

The Registrants are exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company's policies in areas such as counterparty exposure and risk management practices. Prior to the sale of Sequent on July 1, 2021, Southern Company Gas' wholesale gas operations used various contracts in its commercial activities that generally met the definition of derivatives. For the traditional electric operating companies, Southern Power, and Southern Company Gas' other businesses, each company's policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities and are presented on a net basis. See Note (I) for additional fair value information. In the statements of cash flows, any cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. Any cash impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with the classification of the hedged interest or principal, respectively. See Note 1 to the financial statements under "Financial Instruments" in Item 8 of the Form 10-K for additional information. See Note 15 to the financial statements under "Southern Company Gas" in Item 8 of the Form 10-K for additional information regarding the sale of Sequent.

Energy-Related Derivatives

The Subsidiary Registrants enter into energy-related derivatives to hedge exposures to electricity, natural gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities have limited exposure to market volatility in energy-related commodity prices. Each of the traditional electric operating companies and certain of the natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which are expected to continue to mitigate price volatility. The traditional electric operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in energy-related commodity prices because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional electric operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity. Southern Company Gas retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.

Southern Company Gas also enters into weather derivative contracts as economic hedges in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in operating revenues.

Energy-related derivative contracts are accounted for under one of three methods:

•Regulatory Hedges – Energy-related derivative contracts designated as regulatory hedges relate primarily to the traditional electric operating companies' and the natural gas distribution utilities' fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through an approved cost recovery mechanism.

•Cash Flow Hedges – Gains and losses on energy-related derivatives designated as cash flow hedges (which are mainly used to hedge anticipated purchases and sales) are initially deferred in accumulated OCI before being recognized in the statements of income in the same period and in the same income statement line item as the earnings effect of the hedged transactions.

•Not Designated – Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Some energy-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the electric and natural gas industries. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual price of the underlying goods being delivered.

At September 30, 2022, the net volume of energy-related derivative contracts for natural gas positions, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:

	Net Purchased mmBtu	Longest Hedge Date	Longest Non-Hedge Date
	(in millions)
Southern Company(*)	399	2030	2025
Alabama Power	105	2026	—
Georgia Power	116	2025	—
Mississippi Power	82	2027	—
Southern Power	11	2030	2023
Southern Company Gas(*)	85	2025	2025

(*)Southern Company Gas' derivative instruments include both long and short natural gas positions. A long position is a contract to purchase natural gas and a short position is a contract to sell natural gas. Southern Company Gas' volume represents the net of long natural gas positions of 95.7 million mmBtu and short natural gas positions of 10.6 million mmBtu at September 30, 2022, which is also included in Southern Company's total volume.

In addition to the volumes discussed above, the traditional electric operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess natural gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 15 million mmBtu for Southern Company, which includes 4 million mmBtu for Alabama Power, 5 million mmBtu for Georgia Power, 2 million mmBtu for Mississippi Power, and 4 million mmBtu for Southern Power.

For cash flow hedges of energy-related derivatives, the estimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to earnings for the 12-month period ending September 30, 2023 are $17 million for Southern Company, $26 million for Southern Company Gas, and immaterial for the other Registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may enter into interest rate derivatives to hedge exposure to changes in interest rates. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and presented on the same income statement line item as the earnings effect of the hedged transactions. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings on the same income statement line item. Fair value gains or losses on derivatives that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

At September 30, 2022, the following interest rate derivatives were outstanding:

	Notional Amount		Interest Rate Received	Weighted Average Interest Rate Paid	Hedge Maturity Date	Fair Value Gain (Loss) at September 30, 2022
	(in millions)					(in millions)
Cash Flow Hedges of Existing Debt
Southern Company parent	$	175	—	4.25%	September 2025	$	—
Southern Company parent	175		—	3.83%	August 2032	—
Fair Value Hedges of Existing Debt
Southern Company parent	400		1.75%	1-month LIBOR + 0.68%	March 2028	(57)
Southern Company parent	1,000		3.70%	1-month LIBOR + 2.36%	April 2030	(167)
Southern Company Gas	500		1.75%	1-month LIBOR + 0.38%	January 2031	(87)
Southern Company	$	2,250				$	(311)

For cash flow hedges of interest rate derivatives, the estimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to interest expense for the 12-month period ending September 30, 2023 are $(17) million for Southern Company and immaterial for the other Registrants. Deferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2052 for Southern Company, Alabama Power, and Georgia Power, 2028 for Mississippi Power, and 2046 for Southern Company Gas.

Foreign Currency Derivatives

Southern Company and certain subsidiaries, including Southern Power, may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates, such as that arising from the issuance of debt denominated in a currency other than U.S. dollars. Derivatives related to forecasted transactions are accounted for as cash flow hedges where the derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and on the same income statement line as the earnings effect of the hedged transactions, including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings on the same income statement line item, including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. Southern Company has elected to exclude the cross-currency basis spread from the assessment of effectiveness in the fair value hedges of its foreign currency risk and record any difference between the change in the fair value of the excluded components and the amounts recognized in earnings as a component of OCI.

At September 30, 2022, the following foreign currency derivatives were outstanding:

	Pay Notional		Pay Rate	Receive Notional		Receive Rate	Hedge Maturity Date	Fair Value Gain (Loss) at September 30, 2022
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
Southern Power	$	564	3.78%	€	500	1.85%	June 2026	$	(80)
Fair Value Hedges of Existing Debt
Southern Company parent	1,476		3.39%	1,250		1.88%	September 2027	(243)
Southern Company	$	2,040		€	1,750			$	(323)

For cash flow hedges of foreign currency derivatives, the estimated pre-tax losses expected to be reclassified from accumulated OCI to earnings for the 12-month period ending September 30, 2023 are $12 million for Southern Power.

Derivative Financial Statement Presentation and Amounts

The Registrants enter into derivative contracts that may contain certain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. Southern Company and certain subsidiaries also utilize master netting agreements to mitigate exposure to counterparty credit risk. These agreements may contain provisions that permit netting across product lines and against cash collateral. The fair value amounts of derivative assets and liabilities on the balance sheets are presented net to the extent that there are netting arrangements or similar agreements with the counterparties.

The fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:

	At September 30, 2022				At December 31, 2021
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Southern Company
Energy-related derivatives designated as hedging instruments for regulatory purposes
Assets from risk management activities/Other current liabilities	$	299	$	70	$	129	$	30
Other deferred charges and assets/Other deferred credits and liabilities	150		59		72		6
Total derivatives designated as hedging instruments for regulatory purposes	449		129		201		36
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	27		13		7		5
Other deferred charges and assets/Other deferred credits and liabilities	7		1		1		—
Interest rate derivatives:
Assets from risk management activities/Other current liabilities	—		44		19		—
Other deferred charges and assets/Other deferred credits and liabilities	—		266		—		29
Foreign currency derivatives:
Assets from risk management activities/Other current liabilities	—		37		—		39
Other deferred charges and assets/Other deferred credits and liabilities	—		285		—		40
Total derivatives designated as hedging instruments in cash flow and fair value hedges	34		646		27		113
Energy-related derivatives not designated as hedging instruments
Assets from risk management activities/Other current liabilities	19		18		9		4
Other deferred charges and assets/Other deferred credits and liabilities	2		1		1		—
Total derivatives not designated as hedging instruments	21		19		10		4
Gross amounts recognized	504		794		238		153
Gross amounts offset(a)	(113)		(128)		(25)		(28)
Net amounts recognized in the Balance Sheets(b)	$	391	$	666	$	213	$	125

	At September 30, 2022				At December 31, 2021
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Alabama Power
Energy-related derivatives designated as hedging instruments for regulatory purposes
Other current assets/Other current liabilities	$	90	$	12	$	30	$	9
Other deferred charges and assets/Other deferred credits and liabilities	57		23		25		2
Total derivatives designated as hedging instruments for regulatory purposes	147		35		55		11
Gross amounts offset	(31)		(31)		(5)		(5)
Net amounts recognized in the Balance Sheets	$	116	$	4	$	50	$	6
Georgia Power
Energy-related derivatives designated as hedging instruments for regulatory purposes
Assets from risk management activities/Other current liabilities	$	107	$	28	$	54	$	6
Other deferred charges and assets/Other deferred credits and liabilities	38		23		21		2
Total derivatives designated as hedging instruments for regulatory purposes	145		51		75		8
Energy-related derivatives not designated as hedging instruments
Other current assets/Other current liabilities	1		—		—		—
Gross amounts recognized	146		51		75		8
Gross amounts offset	(41)		(41)		(8)		(8)
Net amounts recognized in the Balance Sheets	$	105	$	10	$	67	$	—
Mississippi Power
Energy-related derivatives designated as hedging instruments for regulatory purposes
Assets from risk management activities/Other current liabilities	$	78	$	12	$	30	$	3
Other deferred charges and assets/Other deferred credits and liabilities	55		12		26		2
Total derivatives designated as hedging instruments for regulatory purposes	133		24		56		5
Gross amounts offset	(20)		(20)		(4)		(4)
Net amounts recognized in the Balance Sheets	$	113	$	4	$	52	$	1

	At September 30, 2022				At December 31, 2021
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Southern Power
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	—	$	10	$	2	$	—
Other deferred charges and assets/Other deferred credits and liabilities	5		1		1		—
Foreign currency derivatives:
Other current assets/Other current liabilities	—		12		—		16
Other deferred charges and assets/Other deferred credits and liabilities	—		68		—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	5		91		3		16
Energy-related derivatives not designated as hedging instruments
Other current assets/Other current liabilities	2		2		1		—
Gross amounts recognized	7		93		4		16
Gross amounts offset	(3)		(3)		—		—
Net amounts recognized in the Balance Sheets	$	4	$	90	$	4	$	16
Southern Company Gas
Energy-related derivatives designated as hedging instruments for regulatory purposes
Other current assets/Other current liabilities	$	24	$	17	$	15	$	12
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	26		3		5		5
Other deferred charges and assets/Other deferred credits and liabilities	3		—		—		—
Interest rate derivatives:
Other current assets/Other current liabilities	—		13		6		—
Other deferred charges and assets/Other deferred credits and liabilities	—		74		—		6
Total derivatives designated as hedging instruments in cash flow and fair value hedges	29		90		11		11
Energy-related derivatives not designated as hedging instruments
Other current assets/Other current liabilities	16		16		8		4
Other deferred charges and assets/Other deferred credits and liabilities	2		1		1		—
Total derivatives not designated as hedging instruments	18		17		9		4
Gross amounts recognized	71		124		35		27
Gross amounts offset(a)	(18)		(33)		(8)		(11)
Net amounts recognized in the Balance Sheets(b)	$	53	$	91	$	27	$	16

(a)Gross amounts offset includes cash collateral held on deposit in broker margin accounts of $15 million and $3 million at September 30, 2022 and December 31, 2021, respectively.

(b)Net amounts of derivative instruments outstanding exclude immaterial premium and intrinsic value associated with weather derivatives for all periods presented.

Energy-related derivatives not designated as hedging instruments were immaterial for Alabama Power and Mississippi Power at September 30, 2022. There were no such instruments for the traditional electric operating companies at December 31, 2021.

At September 30, 2022 and December 31, 2021, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:

Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Mississippi Power		Southern Company Gas
	(in millions)
At September 30, 2022:
Energy-related derivatives:
Other regulatory assets, current	$	(17)	$	(2)	$	(8)	$	(3)	$	(4)
Other regulatory assets, deferred	(6)		(2)		(3)		(1)		—
Other regulatory liabilities, current	246		80		87		69		10
Other regulatory liabilities, deferred	98		36		18		44		—
Total energy-related derivative gains (losses)	$	321	$	112	$	94	$	109	$	6
At December 31, 2021:
Energy-related derivatives:
Other regulatory assets, current	$	(17)	$	(6)	$	—	$	—	$	(11)
Other regulatory liabilities, current	107		28		48		27		4
Other regulatory liabilities, deferred	65		22		19		24		—
Total energy-related derivative gains (losses)	$	155	$	44	$	67	$	51	$	(7)

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of cash flow and fair value hedge accounting on accumulated OCI were as follows:

Gain (Loss) Recognized in OCI on Derivative	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(in millions)				(in millions)
Southern Company
Cash flow hedges:
Energy-related derivatives	$	11	$	38	$	51	$	59
Interest rate derivatives	6		5		36		7
Foreign currency derivatives	(35)		(36)		(137)		(79)
Fair value hedges(*):
Foreign currency derivatives	20		(4)		18		(4)
Total	$	2	$	3	$	(32)	$	(17)
Georgia Power
Interest rate derivatives	$	—	$	—	$	31	$	—
Southern Power
Cash flow hedges:
Energy-related derivatives	$	(11)	$	8	$	(4)	$	16
Foreign currency derivatives	(35)		(36)		(137)		(79)
Total	$	(46)	$	(28)	$	(141)	$	(63)
Southern Company Gas
Cash flow hedges:
Energy-related derivatives	$	22	$	30	$	55	$	43
Interest rate derivatives	5		—		—		—
Total	$	27	$	30	$	55	$	43

(*)Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in OCI.

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments on accumulated OCI were immaterial for the other Registrants.

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of cash flow and fair value hedge accounting on income were as follows:

Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(in millions)				(in millions)
Southern Company
Total cost of natural gas	$	294	$	129	$	1,840	$	943
Gain (loss) on energy-related cash flow hedges(a)	9		2		28		—
Total depreciation and amortization	922		896		2,728		2,658
Gain (loss) on energy-related cash flow hedges(a)	(1)		3		5		6
Total interest expense, net of amounts capitalized	(511)		(451)		(1,461)		(1,352)
Gain (loss) on interest rate cash flow hedges(a)	(7)		(7)		(19)		(20)
Gain (loss) on foreign currency cash flow hedges(a)	(3)		(6)		(16)		(18)
Gain (loss) on interest rate fair value hedges(b)	(102)		(4)		(300)		(16)
Total other income (expense), net	132		131		414		290
Gain (loss) on foreign currency cash flow hedges(a)(c)	(32)		(34)		(129)		(76)
Gain (loss) on foreign currency fair value hedges	(59)		(32)		(180)		(32)
Amount excluded from effectiveness testing recognized in earnings	(21)		4		(17)		4
Southern Power
Total depreciation and amortization	$	133	$	132	$	384	$	383
Gain (loss) on energy-related cash flow hedges(a)	(1)		3		5		6
Total interest expense, net of amounts capitalized	(32)		(36)		(105)		(111)
Gain (loss) on foreign currency cash flow hedges(a)	(3)		(6)		(16)		(18)
Total other income (expense), net	3		2		5		10
Gain (loss) on foreign currency cash flow hedges(a)(c)	(32)		(34)		(129)		(76)
Southern Company Gas
Total cost of natural gas	$	294	$	129	$	1,840	$	943
Gain (loss) on energy-related cash flow hedges(a)	9		2		28		—
Total interest expense, net of amounts capitalized	(65)		(57)		(187)		(175)
Gain (loss) on interest rate cash flow hedges(a)	(2)		(1)		(3)		(2)
Gain (loss) on interest rate fair value hedges(b)	(30)		—		(87)		2

(a)Reclassified from accumulated OCI into earnings.

(b)For fair value hedges, changes in the fair value of the derivative contracts are generally equal to changes in the fair value of the underlying debt and have no material impact on income.

(c)The reclassification from accumulated OCI into other income (expense), net completely offsets currency gains and losses arising from changes in the U.S. currency exchange rates used to record the euro-denominated notes.

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of cash flow hedge accounting on income for interest rate derivatives were immaterial for Alabama Power, Georgia Power, and Mississippi Power.

At September 30, 2022 and December 31, 2021, the following amounts were recorded on the balance sheets related to cumulative basis adjustments for fair value hedges:

	Carrying Amount of the Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment included in Carrying Amount of the Hedged Item
Balance Sheet Location of Hedged Items	At September 30, 2022		At December 31, 2021		At September 30, 2022		At December 31, 2021
	(in millions)				(in millions)
Southern Company
Long-term debt	$	(2,788)	$	(3,280)	$	306	$	9
Southern Company Gas
Long-term debt	$	(411)	$	(493)	$	86	$	2

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income of Southern Company and Southern Company Gas were as follows:

		Gain (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	2022		2021		2022		2021
		(in millions)				(in millions)
Energy-related derivatives:	Natural gas revenues(*)	$	3	$	(2)	$	(10)	$	(122)
	Cost of natural gas	(2)		20		(7)		36
Total derivatives in non-designated hedging relationships		$	1	$	18	$	(17)	$	(86)

(*)Excludes immaterial gains (losses) recorded in natural gas revenues associated with weather derivatives for all periods presented.

For the three and nine months ended September 30, 2022 and 2021, the pre-tax effects of energy-related derivatives not designated as hedging instruments were immaterial for the other Registrants.

Contingent Features

The Registrants do 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 derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. At September 30, 2022, the Registrants had no collateral posted with derivative counterparties to satisfy these arrangements.

For Southern Company and Southern Power, the fair value of interest rate derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $156 million and $38 million, respectively at September 30, 2022. For the traditional electric operating companies and Southern Power, energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial at September 30, 2022. The maximum potential collateral requirements arising from the credit-risk-related contingent features for the traditional electric operating companies and Southern Power include certain agreements that could require collateral in the event that one or more Southern Company power pool participants has a credit rating change to below investment grade. Following the sale of Gulf Power to NextEra Energy, Inc., Gulf Power continued participating in the Southern Company power pool through July 13, 2022.

Alabama Power and Southern Power maintain accounts with certain regional transmission organizations to facilitate financial derivative transactions and they may be required to post collateral based on the value of the positions in these accounts and the associated margin requirements. At September 30, 2022, cash collateral posted in these accounts was immaterial. Southern Company Gas maintains accounts with brokers or the clearing houses of certain exchanges to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, Southern Company Gas may be required to deposit cash into these accounts. At September 30, 2022, cash collateral held on deposit in broker margin accounts was $15 million.

The Registrants are exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Registrants only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. The Registrants have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate their exposure to counterparty credit risk.

Southern Company Gas uses established credit policies to determine and monitor the creditworthiness of counterparties, including requirements to post collateral or other credit security, as well as the quality of pledged collateral. Collateral or credit security is most often in the form of cash or letters of credit from an investment-grade financial institution, but may also include cash or U.S. government securities held by a trustee. Prior to entering a physical transaction, Southern Company Gas assigns its counterparties an internal credit rating and credit limit based on the counterparties' Moody's, S&P, and Fitch ratings, commercially available credit reports, and audited financial statements. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.

Southern Company Gas utilizes netting agreements whenever possible to mitigate exposure to counterparty credit risk. Netting agreements enable Southern Company Gas to net certain assets and liabilities by counterparty across product lines and against cash collateral, provided the netting and cash collateral agreements include such provisions. While the amounts due from, or owed to, counterparties are settled net, they are recorded on a gross basis on the balance sheet as energy marketing receivables and energy marketing payables.

The Registrants do not anticipate a material adverse effect on their respective financial statements as a result of counterparty nonperformance.