Derivatives

9 Months Ended

Sep. 30, 2011

Derivatives [Abstract]

DERIVATIVES

(H)

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.

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 electric utilities 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 electric utilities 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 in 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, 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, 2011, the net volume of energy-related derivative contracts for power and natural gas positions for the registrants, 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:

	Power						Gas
			Longest		Longest		Net		Longest		Longest
	Net Sold		Hedge		Non-Hedge		Purchased		Hedge		Non-Hedge
	MWHs		Date		Date		mmBtu		Date		Date
	(in millions)						(in millions)
Southern Company		0.3		—		2011		160		2015		2015
Alabama Power		—		—		—		31		2015		—
Georgia Power		—		—		—		66		2015		—
Gulf Power		—		—		—		26		2015		—
Mississippi Power		—		—		—		31		2015		—
Southern Power		0.3		—		2011		7		2012		2015

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 was 2.95 million mmBtu for Southern Company, 2.69 million mmBtu for Georgia Power, and was immaterial for the other registrants.

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, 2012 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, 2011, the following interest rate derivatives were outstanding:

	Notional		Interest Rate			Interest Rate			Hedge Maturity	Fair Value Gain (Loss)
	Amount		Received			Paid			Date	September 30, 2011
	(in millions)									(in millions)
Cash flow hedges of existing debt
Southern Company	$	300	3-month LIBOR + 0.40% spread				1.24	%*	October 2011	$	—
Cash flow hedges of forecasted debt
Alabama Power		300	3-month LIBOR				2.90	%*	December 2022		(12	)
Mississippi Power		150	3-month LIBOR				2.37	%*	September 2021		(4	)
Mississippi Power		150	3-month LIBOR				1.25	%*	September 2016		—
Mississippi Power		300	3-month LIBOR				2.66	%*	April 2022		(11	)
Fair value hedges of existing debt
						3-month LIBOR +
Southern Company		350		4.15	%	1.96%* spread			May 2014		16
Total	$	1,550								$	(11	)

* 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, 2012, together with the longest date that total deferred gains and losses are expected to be amortized into earnings.

	Estimated Gain (Loss)to
	be Reclassified for the			Total Deferred
	12 Months Ending			Gains (Losses)
Registrant	September 30, 2012			Amortized Through
	(in millions)
Southern Company	$	(16	)		2037
Alabama Power		—			2035
Georgia Power		(3	)		2037
Gulf Power		(1	)		2020
Mississippi Power		(1	)		2022
Southern Power		(11	)		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 recorded directly to earnings. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At September 30, 2011, the following foreign currency derivatives were outstanding:

				Fair Value Gain
	Notional	Average	Hedge	(Loss)
	Amount	Forward Rate	Maturity Date	September 30, 2011
	(in millions)			(in millions)
Fair value hedges of firm commitments
Mississippi Power	EUR28.3	1.297 Dollars per Euro	Various through March 2014	$	1

Derivative Financial Statement Presentation and Amounts

At September 30, 2011, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:

Asset Derivatives at September 30, 2011
	Fair Value
Derivative Category and Balance Sheet	Southern		Alabama		Georgia		Gulf Power		Mississippi		Southern
Location	Company		Power		Power		Power		Power		Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets	$	1	$	—	$	1	$	—	$	—
Other deferred charges and assets		1		—		1		—		—
Total derivatives designated as hedging instruments for regulatory purposes	$	2	$	—	$	2	$	—	$	—		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		10		—		—		—		—		—
Foreign currency derivatives:
Other current assets		3		—		—		—		3		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	19	$	—	$	—	$	—	$	3	$	—
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets*	$	1	$	—	$	—	$	—	$	—	$	—
Assets from risk management activities		—		—		—		—		—		1
Total derivatives not designated as hedging instruments	$	1	$	—	$	—	$	—	$	—	$	1
Total asset derivatives	$	22	$	—	$	2	$	—	$	3	$	1

* Southern Company includes “Assets from risk management activities” in “Other current assets” where applicable.

Liability Derivatives at September 30, 2011
	Fair Value
Derivative Category and Balance Sheet	Southern		Alabama		Georgia		Gulf		Mississippi		Southern
Location	Company		Power		Power		Power		Power		Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Liabilities from risk management activities	$	114	$	24	$	53	$	10	$	27
Other deferred credits and liabilities		35		5		15		7		8
Total derivatives designated as hedging instruments for regulatory purposes	$	149	$	29	$	68	$	17	$	35		N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Liabilities from risk management activities	$	15	$	—	$	—	$	—	$	15	$	—
Other deferred credits and liabilities		12		12		—		—		—		—
Foreign currency derivatives:
Liabilities from risk management activities		2		—		—		—		2		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	29	$	12	$	—	$	—	$	17	$	—
Derivatives not designated as hedging instruments
Energy-related derivatives:
Liabilities from risk management activities	$	5	$	—	$	—	$	—	$	—	$	5
Total liability derivatives	$	183	$	41	$	68	$	17	$	52	$	5

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

At September 30, 2011, the pre-tax effect of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred on the balance sheet was as follows:

Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet
Derivative Category and Balance Sheet	Southern			Alabama			Georgia			Gulf			Mississippi
Location	Company			Power			Power			Power			Power
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(114	)	$	(24	)	$	(53	)	$	(10	)	$	(27	)
Other regulatory assets, deferred		(35	)		(5	)		(15	)		(7	)		(8	)
Other regulatory liabilities, current		1			—			—			—			—
Other current liabilities*		—			—			1			—			—
Other regulatory liabilities, deferred		1			—			—			—			—
Other deferred credits and liabilities**		—			—			1			—			—
Total energy-related derivative gains (losses)	$	(147	)	$	(29	)	$	(66	)	$	(17	)	$	(35	)

*	Georgia Power includes “Other regulatory liabilities, current” in “Other current liabilities.”
**	Georgia Power includes “Other regulatory liabilities, deferred” in “Other deferred credits and liabilities.”

For the three months and nine months ended September 30, 2011, the pre-tax gains from interest rate derivatives designated as fair value hedging instruments on Southern Company’s statements of income were $5 million and $7 million, respectively. For the three months and nine months ended September 30, 2010, the pre-tax gains from interest rate derivatives designated as fair value hedging instruments on Southern Company’s statements of income were $9 million and $17 million, respectively. These amounts were offset with changes in the fair value of the hedged debt.

For the three months and nine months ended September 30, 2011, the pre-tax (losses) from 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. For each of the three months and nine months ended September 30, 2010, the pre-tax gains from foreign currency derivatives designated as fair value hedging instruments on Southern Company’s and Mississippi Power’s statements of income were $5 million. These amounts were offset with changes in the fair value of the purchase commitment related to equipment purchases; therefore, there is no impact on Southern Company’s or Mississippi Power’s statements of income.

For the three months ended September 30, 2011 and September 30, 2010, the pre-tax effect of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:

	Gain (Loss)
	Recognized in OCI						Gain (Loss) Reclassified from Accumulated OCI into
Derivatives in Cash Flow	on Derivative						Income (Effective Portion)
Hedging Relationships	(Effective Portion)						Statements of Income Location	Amount
	2011			2010				2011			2010
	(in millions)							(in millions)
Southern Company
Energy-related derivatives	$	—		$	3		Fuel	$	—		$	—
Interest rate derivatives		(27	)		(1	)	Interest expense, net of amounts capitalized		(5	)		(7	)
Total	$	(27	)	$	2			$	(5	)	$	(7	)
Alabama Power
Interest rate derivatives	$	(12	)	$	—		Interest expense, net of amounts capitalized	$	—		$	—
Georgia Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(1	)	$	(3	)
Gulf Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	—		$	—
Mississippi Power
Interest rate derivatives	$	(15	)	$	—		Interest expense, net of amounts capitalized	$	—		$	—
Southern Power
Energy-related derivatives	$	—		$	3		Fuel	$	—		$	—
Interest rate derivatives		—			—		Interest expense, net of amounts capitalized		(3	)		(3	)
Total	$	—		$	3			$	(3	)	$	(3	)

For the nine months ended September 30, 2011 and September 30, 2010, the pre-tax effect of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:

	Gain (Loss)
	Recognized in OCI						Gain (Loss) Reclassified from Accumulated OCI into
Derivatives in Cash Flow	on Derivative						Income (Effective Portion)
Hedging Relationships	(Effective Portion)						Statements of Income Location	Amount
	2011			2010				2011			2010
	(in millions)							(in millions)
Southern Company
Energy-related derivatives	$	1		$	4		Fuel	$	—		$	—
Interest rate derivatives		(23	)		(3	)	Interest expense, net of amounts capitalized		(10	)		(24	)
Total	$	(22	)	$	1			$	(10	)	$	(24	)
Alabama Power
Interest rate derivatives	$	(8	)	$	—		Interest expense, net of amounts capitalized	$	3		$	(1	)
Georgia Power
Interest rate derivatives	$	—		$	—		Interest expense, net of amounts capitalized	$	(3	)	$	(13	)
Gulf Power
Interest rate derivatives	$	—		$	(1	)	Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Mississippi Power
Interest rate derivatives	$	(15	)	$	—		Interest expense, net of amounts capitalized	$	—		$	—
Southern Power
Energy-related derivatives	$	1		$	4		Fuel	$	—		$	—
Interest rate derivatives		—			—		Interest expense, net of amounts capitalized		(8	)		(8	)
Total	$	1		$	4			$	(8	)	$	(8	)

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

For the three months and nine months ended September 30, 2011 and September 30, 2010, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were immaterial for all 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. At September 30, 2011, the fair value of derivative liabilities with contingent features, by registrant, was as follows:

	Southern		Alabama		Georgia		Gulf		Mississippi		Southern
	Company		Power		Power		Power		Power		Power
					(in millions)
Derivative liabilities	$	32	$	7	$	16	$	2	$	5	$	2

At September 30, 2011, the registrants had no collateral posted with their derivative counterparties; however, because of the joint and several liability features underlying these derivatives, the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, is $32 million for each registrant.

Currently, each of the registrants has investment grade credit ratings from the major rating agencies with respect to debt, preferred securities, preferred stock, and/or preference stock. 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 participants has a credit rating change to below investment grade.