Derivatives

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

DERIVATIVES

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas 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. Through the sale of Sequent on July 1, 2021, Southern Company Gas' wholesale gas operations used various contracts in its commercial activities that generally meet 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 (K) under "Southern Company Gas" for information regarding Southern Company Gas' sale of Sequent.

Energy-Related Derivatives

The traditional electric operating companies, Southern Power, and Southern Company Gas 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 of operating margins 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 June 30, 2021, 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(*)	978	2030	2031
Alabama Power	73	2024	—
Georgia Power	125	2024	—
Mississippi Power	85	2025	—
Southern Power	9	2030	2022
Southern Company Gas(*)	686	2024	2031

(*)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 4.6 billion mmBtu and short natural gas positions of 3.9 billion mmBtu at June 30, 2021, which is also included in Southern Company's total volume. See Note (K) under "Southern Company Gas" for information regarding Southern Company Gas' sale of Sequent.

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 44 million mmBtu for Southern Company, which includes 11 million mmBtu for Alabama Power, 13 million mmBtu for Georgia Power, 6 million mmBtu for Mississippi Power, and 14 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 June 30, 2022 are immaterial for all Registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may 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 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 June 30, 2021, 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 June 30, 2021
	(in millions)					(in millions)
Cash Flow Hedges of Existing Debt
Mississippi Power	$	60	1-month LIBOR	0.58%	December 2021	$	—
Fair Value Hedges of Existing Debt
Southern Company parent	400		1.75%	1-month LIBOR + 0.68%	March 2028	—
Southern Company parent	1,000		3.70%	1-month LIBOR + 2.36%	April 2030	4
Southern Company Gas	500		1.75%	1-month LIBOR + 0.38%	January 2031	3
Southern Company	$	1,960				$	7

For cash flow hedge 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 June 30, 2022 total $(23) million for Southern Company and are immaterial for all other Registrants. Deferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2051 for the Southern Company parent entity, 2051 for Alabama Power, 2044 for 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. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At June 30, 2021, Southern Power had the following outstanding foreign currency derivatives designated as cash flow hedges of existing debt:

Pay Notional		Pay Rate	Receive Notional		Receive Rate	Hedge Maturity Date	Fair Value Gain (Loss) at June 30, 2021
(in millions)			(in millions)				(in millions)
$	677	2.95%	€	600	1.00%	June 2022	$	27
564		3.78%	500		1.85%	June 2026	18
$	1,241		€	1,100			$	45

The estimated pre-tax gains (losses) related to Southern Power's foreign currency derivatives expected to be reclassified from accumulated OCI to earnings for the 12-month period ending June 30, 2022 are $17 million.

Derivative Financial Statement Presentation and Amounts

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas 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 sheet 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 June 30, 2021				At December 31, 2020
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Southern Company
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	130	$	2	$	24	$	11
Other deferred charges and assets/Other deferred credits and liabilities	54		8		18		19
Total derivatives designated as hedging instruments for regulatory purposes	$	184	$	10	$	42	$	30
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	13	$	—	$	3	$	5
Other deferred charges and assets/Other deferred credits and liabilities	1		—		—		—
Interest rate derivatives:
Assets from risk management activities/Other current liabilities	17		—		20		—
Other deferred charges and assets/Other deferred credits and liabilities	—		9		—		—
Foreign currency derivatives:
Assets from risk management activities/Other current liabilities	27		10		—		23
Other deferred charges and assets/Other deferred credits and liabilities	28		—		87		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	86	$	19	$	110	$	28
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	8	$	7	$	388	$	331
Other deferred charges and assets/Other deferred credits and liabilities	—		—		270		232
Assets held for sale, current/Liabilities held for sale, current	914		990		—		—
Total derivatives not designated as hedging instruments	$	922	$	997	$	658	$	563
Gross amounts recognized	$	1,192	$	1,026	$	810	$	621
Gross amounts offset(a)	(851)		(892)		(529)		(557)
Net amounts recognized in the Balance Sheets(b)	$	341	$	134	$	281	$	64

	At June 30, 2021				At December 31, 2020
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Alabama Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	31	$	1	$	7	$	2
Other deferred charges and assets/Other deferred credits and liabilities	15		2		5		5
Total derivatives designated as hedging instruments for regulatory purposes	$	46	$	3	$	12	$	7
Gross amounts recognized	$	46	$	3	$	12	$	7
Gross amounts offset	(3)		(3)		(7)		(7)
Net amounts recognized in the Balance Sheets	$	43	$	—	$	5	$	—
Georgia Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	52	$	1	$	7	$	5
Other deferred charges and assets/Other deferred credits and liabilities	21		3		8		8
Total derivatives designated as hedging instruments for regulatory purposes	$	73	$	4	$	15	$	13
Gross amounts recognized	$	73	$	4	$	15	$	13
Gross amounts offset	(4)		(4)		(12)		(12)
Net amounts recognized in the Balance Sheets	$	69	$	—	$	3	$	1
Mississippi Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	28	$	—	$	4	$	3
Other deferred charges and assets/Other deferred credits and liabilities	16		3		5		6
Total derivatives designated as hedging instruments for regulatory purposes	$	44	$	3	$	9	$	9
Gross amounts recognized	$	44	$	3	$	9	$	9
Gross amounts offset	(3)		(3)		(7)		(7)
Net amounts recognized in the Balance Sheets	$	41	$	—	$	2	$	2

	At June 30, 2021				At December 31, 2020
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	$	4	$	—	$	2	$	2
Foreign currency derivatives:
Other current assets/Other current liabilities	27		10		—		23
Other deferred charges and assets/Other deferred credits and liabilities	28		—		87		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	59	$	10	$	89	$	25
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	—	$	—	$	—	$	1
Total derivatives not designated as hedging instruments	$	—	$	—	$	—	$	1
Net amounts recognized in the Balance Sheets	$	59	$	10	$	89	$	26

	At June 30, 2021				At December 31, 2020
Derivative Category and Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
	(in millions)				(in millions)
Southern Company Gas
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	19	$	—	$	6	$	1
Other deferred charges and assets/Other deferred credits and liabilities	2		—		—		—
Total derivatives designated as hedging instruments for regulatory purposes	$	21	$	—	$	6	$	1
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	9	$	—	$	1	$	3
Other deferred charges and assets/Other deferred credits and liabilities	1		—		—		—
Interest rate derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	4		—		—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	14	$	—	$	1	$	3
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Other current liabilities	$	8	$	7	$	388	$	330
Other deferred charges and assets/Other deferred credits and liabilities	—		—		270		232
Assets held for sale, current/Liabilities held for sale, current	914		990		—		—
Total derivatives not designated as hedging instruments	$	922	$	997	$	658	$	562
Gross amounts of recognized	$	957	$	997	$	665	$	566
Gross amounts offset(a)	(841)		(882)		(503)		(531)
Net amounts recognized in the Balance Sheets(b)	$	116	$	115	$	162	$	35

(a)Gross amounts offset include cash collateral held on deposit in broker margin accounts of $41 million and $28 million at June 30, 2021 and December 31, 2020, respectively.

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

The traditional electric operating companies had immaterial energy-related derivatives not designated as hedging instruments at June 30, 2021 and no such instruments at December 31, 2020.

At June 30, 2021 and December 31, 2020, 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 June 30, 2021:
Energy-related derivatives:
Other regulatory liabilities, current	$	120	$	31	$	51	$	28	$	10
Other regulatory liabilities, deferred	46		13		18		14		1
Total energy-related derivative gains (losses)	$	166	$	44	$	69	$	42	$	11
At December 31, 2020:
Energy-related derivatives:
Other regulatory assets, deferred	$	(2)	$	—	$	(1)	$	(1)	$	—
Other regulatory liabilities, current	12		5		2		1		4
Other regulatory liabilities, deferred	2		1		1		—		—
Total energy-related derivative gains (losses)	$	12	$	6	$	2	$	—	$	4

For the three and six months ended June 30, 2021 and 2020, the pre-tax effects of cash flow hedge accounting on accumulated OCI were as follows:

Gain (Loss) Recognized in OCI on Derivative	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(in millions)				(in millions)
Southern Company
Energy-related derivatives	$	16	$	(2)	$	20	$	(6)
Interest rate derivatives	(1)		(1)		2		(28)
Foreign currency derivatives	4		17		(43)		(65)
Total	$	19	$	14	$	(21)	$	(99)
Southern Power
Energy-related derivatives	$	5	$	(2)	$	8	$	(2)
Foreign currency derivatives	4		17		(43)		(65)
Total	$	9	$	15	$	(35)	$	(67)
Southern Company Gas
Energy-related derivatives	$	11	$	—	$	12	$	(4)
Interest rate derivatives	—		(1)		—		(25)
Total	$	11	$	(1)	$	12	$	(29)

For the three and six months ended June 30, 2021 and 2020, the pre-tax effects of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on accumulated OCI were immaterial for the other Registrants.

For the three and six months ended June 30, 2021 and 2020, 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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(in millions)				(in millions)
Southern Company
Total cost of natural gas	$	231	$	144	$	814	$	583
Gain (loss) on energy-related cash flow hedges(a)	1		(1)		(2)		(8)
Total depreciation and amortization	891		873		1,762		1,730
Gain (loss) on energy-related cash flow hedges(a)	1		(1)		4		(2)
Total interest expense, net of amounts capitalized	(450)		(444)		(901)		(900)
Gain (loss) on interest rate cash flow hedges(a)	(7)		(6)		(14)		(13)
Gain (loss) on foreign currency cash flow hedges(a)	(6)		(6)		(12)		(12)
Gain (loss) on interest rate fair value hedges(b)	(3)		1		(12)		30
Total other income (expense), net	108		101		167		204
Gain (loss) on foreign currency cash flow hedges(a)(c)	17		27		(43)		(4)
Southern Power
Total depreciation and amortization	$	132	$	121	$	251	$	239
Gain (loss) on energy-related cash flow hedges(a)	1		(1)		4		(2)
Total interest expense, net of amounts capitalized	(37)		(38)		(75)		(77)
Gain (loss) on foreign currency cash flow hedges(a)	(6)		(6)		(12)		(12)
Total other income (expense), net	1		1		8		4
Gain (loss) on foreign currency cash flow hedges(a)(c)	17		27		(43)		(4)

(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 six months ended June 30, 2021 and 2020, the pre-tax effects of cash flow and fair value hedge accounting on income for energy-related derivatives and interest rate derivatives were immaterial for the traditional electric operating companies and Southern Company Gas.

At June 30, 2021 and December 31, 2020, 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 June 30, 2021		At December 31, 2020		At June 30, 2021		At December 31, 2020
	(in millions)				(in millions)
Southern Company
Securities due within one year	$	—	$	(1,509)	$	—	$	(10)
Long-term debt	(1,883)		—		—		—
Southern Company Gas
Long-term debt	$	(492)	$	—	$	3	$	—

For the three and six months ended June 30, 2021 and 2020, 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 June 30,				Six Months Ended June 30,
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	2021		2020		2021		2020
		(in millions)				(in millions)
Energy-related derivatives:	Natural gas revenues(*)	$	(103)	$	14	$	(120)	$	84
	Cost of natural gas	9		5		16		13
Total derivatives in non-designated hedging relationships		$	(94)	$	19	$	(104)	$	97

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

For the three and six months ended June 30, 2021 and 2020, the pre-tax effects of energy-related derivatives not designated as hedging instruments were immaterial for all other Registrants.

Contingent Features

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas 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 June 30, 2021, the Registrants had no collateral posted with derivative counterparties to satisfy these arrangements.

At June 30, 2021, the Registrants had no interest rate derivative liabilities with contingent features. At June 30, 2021, the fair value of Southern Company Gas' 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 June 30, 2021, the other Registrants had no energy-related derivative liabilities with contingent features. 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 is continuing to participate in the Southern Company power pool for a defined transition period that, subject to certain potential adjustments, is scheduled to end on January 1, 2024.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. 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.

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 June 30, 2021, 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 June 30, 2021, cash collateral held on deposit in broker margin accounts was $41 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.