DERIVATIVES

Southern Company, the traditional operating companies, and Southern Power are exposed to market risks, primarily commodity price risk, interest rate risk, and occasionally foreign currency 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. 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 gross basis.

Energy-Related Derivatives

The traditional operating companies and Southern Power enter into energy-related derivatives to hedge exposures to electricity, gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional operating companies have limited exposure to market volatility in commodity fuel prices and prices of electricity. Each of the traditional operating companies manages fuel-hedging programs, implemented per the guidelines of their respective state PSCs, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. Southern Power has limited exposure to market volatility in commodity fuel prices and prices of electricity because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.

To mitigate residual risks relative to movements in electricity prices, the traditional operating companies and Southern Power may enter into physical fixed-price or heat rate contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the traditional operating companies and Southern Power may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

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

•

Regulatory Hedges — Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the traditional operating companies' 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 the respective fuel cost recovery clauses.


•	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 and are initially deferred in OCI before being recognized in the statements of income in the same period as the hedged transactions, are reflected in earnings.


•	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 industry. 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, 2012, the net volume of energy-related derivative contracts for natural gas positions for the Southern Company system, 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 date for derivatives not designated as hedges, were as follows:



	Net Purchased mmBtu	Longest Hedge Date	Longest Non-Hedge Date
	(in millions)
Southern Company	270	2017	2017
Alabama Power	55	2017	—
Georgia Power	107	2017	—
Gulf Power	63	2017	—
Mississippi Power	36	2017	—
Southern Power	9	2012	2017

In addition to the volumes discussed in the above table, the traditional operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 7 million mmBtu for Southern Company, 1 million mmBtu for Alabama Power, 3 million mmBtu for Georgia Power, 1 million mmBtu for Gulf Power, 1 million mmBtu for Mississippi Power, and 1 million mmBtu for Southern Power.

For cash flow hedges, the amounts expected to be reclassified from OCI to revenue and fuel expense for the next 12-month period ending September 30, 2013 are immaterial for all registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings, with any ineffectiveness recorded directly to earnings. 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, providing an offset with any difference representing ineffectiveness.

At September 30, 2012, the following interest rate derivatives were outstanding:



	Notional Amount		Interest Rate Received		Interest Rate Paid			Hedge Maturity Date	Fair Value Gain (Loss) September 30, 2012
	(in millions)								(in millions)
Cash flow hedges of forecasted transactions
Alabama Power	$	300	3-month LIBOR		2.90	%	^(a)	December 2022	$	(32	)
Fair value hedges of existing debt
Southern Company	350		4.15	%	3-month LIBOR + 1.96%		^(a)	May 2014	13
Total	$	650							$	(19	)


(a)	Weighted average

The following table reflects the estimated pre-tax gains (losses) that will be reclassified from OCI to interest expense for the next 12-month period ending September 30, 2013, together with the longest date that total deferred gains and losses are expected to be amortized into earnings.



Registrant	Estimated Gain (Loss) to be Reclassified for the 12 Months Ending September 30, 2013			Total Deferred Gains (Losses) Amortized Through
	(in millions)
Southern Company	$	(16	)	2037
Alabama Power	(2		)	2035
Georgia Power	(3		)	2037
Gulf Power	(1		)	2020
Mississippi Power	(1		)	2022
Southern Power	(9		)	2016

Foreign Currency Derivatives

Southern Company and certain subsidiaries may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates arising from purchases of equipment denominated in a currency other than U.S. dollars. Derivatives related to a firm commitment in a foreign currency transaction are accounted for as fair value hedges where the derivatives' fair value gains or losses and the hedged items' fair value gains or losses are both recorded directly to earnings. Derivatives related to a forecasted transaction are accounted for as a cash flow hedge where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings. Any ineffectiveness is typically recorded directly to earnings; however, Mississippi Power has regulatory approval allowing it to defer any ineffectiveness associated with firm commitments related to the Kemper IGCC to a regulatory asset. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At September 30, 2012, the following foreign currency derivatives were outstanding:



	Notional Amount	Forward Rate		Hedge Maturity Date	Fair Value Gain (Loss) September 30, 2012^(c)
	(in millions)				(in millions)
Fair value hedges of firm commitments
Mississippi Power	EUR0.7	1.3758 Dollars per Euro		March 2014	$	—
Derivatives not designated as hedges^(b)
Mississippi Power	EUR10.5	1.2571 Dollars per Euro	^(a)	N/A	—
Total	EUR11.2				$	—


(a)	Weighted average


(b)	Derivatives are not designated as hedges due to the uncertainty of future contract payment dates.


(c)	Amounts are not material at September 30, 2012.

Derivative Financial Statement Presentation and Amounts

At September 30, 2012, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



Asset Derivatives at September 30, 2012
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets	$	17	$	3	$	9	$	4	$	1
Other deferred charges and assets	29		8		10		7		4
Total derivatives designated as hedging instruments for regulatory purposes	$	46	$	11	$	19	$	11	$	5	N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets	$	6	$	—	$	—	$	—	$	—	$	—
Other deferred charges and assets	7		—		—		—		—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	13	$	—	$	—	$	—	$	—	$	—
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities	$	1	$	—	$	—	$	—	$	—	$	1
Other deferred charges and assets	1		—		—		—		—		1
Total derivatives not designated as hedging instruments	$	2	$	—	$	—	$	—	$	—	$	2
Total asset derivatives	$	61	$	11	$	19	$	11	$	5	$	2



Liability Derivatives at September 30, 2012
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Liabilities from risk management activities	$	71	$	14	$	31	$	13	$	13
Other deferred credits and liabilities	38		5		15		11		7
Total derivatives designated as hedging instruments for regulatory purposes	$	109	$	19	$	46	$	24	$	20	N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Liabilities from risk management activities	$	1	$	—	$	—	$	—	$	—	$	1
Interest rate derivatives:
Liabilities from risk management activities	32		32		—		—		—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	33	$	32	$	—	$	—	$	—	$	1
Derivatives not designated as hedging instruments
Energy-related derivatives:
Liabilities from risk management activities	$	1	$	—	$	—	$	—	$	—	$	1
Total liability derivatives	$	143	$	51	$	46	$	24	$	20	$	2

All derivative instruments are measured at fair value. See Note (C) herein for additional information.

At September 30, 2012, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred on the balance sheets were as follows:



Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet
Derivative Category and Balance Sheet Location	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(71	)	$	(14	)	$	(31	)	$	(13	)	$	(13	)
Other regulatory assets, deferred	(38		)	(5		)	(15		)	(11		)	(7		)
Other regulatory liabilities, current	17			3			9			4			1
Other regulatory liabilities, deferred	29			8			—			7			4
Other deferred credits and liabilities^(a)	—			—			10			—			—
Total energy-related derivative gains (losses)	$	(63	)	$	(8	)	$	(27	)	$	(13	)	$	(15	)


(a)	Georgia Power includes Other regulatory liabilities, deferred in Other deferred credits and liabilities.

For the three and nine months ended September 30, 2012 and September 30, 2011, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments on Southern Company's statements of income were immaterial.

For the three and nine months ended September 30, 2012, the pre-tax effects of foreign currency derivatives designated as fair value hedging instruments on Southern Company's and Mississippi Power's statements of income were immaterial. For the three and nine months ended September 30, 2011, the pre-tax losses of foreign currency derivatives designated as fair value hedging instruments on Southern Company's and Mississippi Power's statements of income were $(3) million and $(2) million, respectively. The pre-tax effects of foreign currency derivatives designated as fair value hedging instruments on both Southern Company's and Mississippi Power's statements of income were offset with changes in the fair value of the purchase commitment related to equipment purchases; therefore, there was no impact on Southern Company's or Mississippi Power's statements of income.

For the three months ended September 30, 2012 and 2011, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:



Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships							Statements of Income Location	Amount
	2012			2011				2012			2011
	(in millions)							(in millions)
Southern Company
Interest rate derivatives	$	(4	)	$	(27	)	Interest expense, net of amounts capitalized	$	(4	)	$	(5	)
Alabama Power
Interest rate derivatives	$	(4	)	$	(12	)	Interest expense, net of amounts capitalized	$	—		$	—
Georgia Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Mississippi Power
Interest rate derivatives	$	—		$	(15	)	Interest expense, net of amounts capitalized	$	—		$	—
Southern Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(3	)	$	(3	)

For the nine months ended September 30, 2012 and 2011, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:



Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships							Statements of Income Location	Amount
	2012			2011				2012			2011
	(in millions)							(in millions)
Southern Company
Interest rate derivatives	$	(16	)	$	(23	)	Interest expense, net of amounts capitalized	$	(12	)	$	(10	)
Alabama Power
Interest rate derivatives	$	(15	)	$	(8	)	Interest expense, net of amounts capitalized	$	—		$	3
Georgia Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(3	)	$	(3	)
Gulf Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Mississippi Power
Interest rate derivatives	$	(1	)	$	(15	)	Interest expense, net of amounts capitalized	$	(1	)	$	—
Southern Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(8	)	$	(8	)

For the three and nine months ended September 30, 2012 and 2011, the pre-tax effects of energy-related derivatives designated as cash flow hedging instruments on the statements of income were immaterial for all registrants.

There was no material ineffectiveness recorded in earnings for any registrant for any period presented.

For Southern Power's energy-related derivatives not designated as hedging instruments, a substantial portion of the pre-tax realized and unrealized gains and losses is associated with hedging fuel price risk of certain PPA customers and has no impact on net income or on fuel expense as presented in Southern Company's and Southern Power's statements of income. As a result, for the three and nine months ended September 30, 2012 and 2011, the pre-tax effects of energy-related derivatives not designated as hedging instruments on Southern Company's and Southern Power's statements of income were immaterial.

For the three and nine months ended September 30, 2012, the pre-tax effects of foreign currency derivatives not designated as hedging instruments were recorded as regulatory assets and liabilities and were immaterial for Southern Company and Mississippi Power.

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. At September 30, 2012, the fair value of derivative liabilities with contingent features, by registrant, was as follows:



	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
					(in millions)
Derivative liabilities	$	10	$	2	$	4	$	2	$	2	$	—

At September 30, 2012, the registrants had no collateral posted with their derivative counterparties. If collateral is required, fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, is $10 million for each registrant. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. For the traditional operating companies and Southern Power, included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participant has a credit rating change to below investment grade.

Southern Company, the traditional operating companies, and Southern Power are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional operating companies, and Southern Power 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. Southern Company, the traditional operating companies, and Southern Power have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's, the traditional operating companies', and Southern Power's exposure to counterparty credit risk. Therefore, Southern Company, the traditional operating companies, and Southern Power do not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.