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 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 net basis. See Note (C) for additional information. In the statements of cash flows, the cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. The cash impacts of settled foreign currency derivatives are classified as operating or financing activities to correspond with classification of the hedged interest or principal, respectively.

Energy-Related Derivatives

Southern Company, 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 of Southern Company Gas have limited exposure to market volatility in energy-related commodity prices. Each of the traditional electric operating companies and certain 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 is expected to continue to mitigate price volatility. The traditional electric operating companies (with respect to wholesale generating capacity), Southern Power, and Southern Company Gas 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, Southern Power, and Southern Company Gas may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted capacity is used to sell electricity and natural gas.

Southern Company Gas uses storage and transportation capacity contracts to manage market price risks. Southern Company Gas purchases natural gas for storage when the current market price paid to buy and transport natural gas plus the cost to store and finance the natural gas is less than the market price Southern Company Gas will receive in the future, resulting in a positive net operating margin. Southern Company Gas uses New York Mercantile Exchange (NYMEX) futures and over-the-counter (OTC) contracts to sell natural gas at that future price to substantially protect the operating margin ultimately realized when the stored natural gas is sold. Southern Company Gas also enters into transactions to secure transportation capacity between delivery points in order to serve its customers and various markets. Southern Company Gas uses NYMEX futures and OTC contracts to capture the price differential between the locations served by the capacity in order to substantially protect the operating margin ultimately realized when natural gas is physically flowed between the delivery points. These contracts generally meet the definition of derivatives, but are not designated as hedges for accounting purposes.

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 the statements of income.

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 electric operating companies' and Southern Company Gas' 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 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, 2016, 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 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^(*)	540	2020	2022
Alabama Power	75	2020	—
Georgia Power	148	2020	—
Gulf Power	57	2020	—
Mississippi Power	37	2020	—
Southern Power	9	2017	2016


(*)	Southern Company Gas' derivative instruments are comprised of 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 3.2 billion mmBtu and short natural gas positions of 2.9 billion mmBtu as of September 30, 2016.

In addition to the volumes discussed in the above table, the traditional electric 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 5 million mmBtu for Southern Company and Georgia Power.

For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending September 30, 2017 are immaterial for all registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may 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. 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, 2016, 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, 2016
	(in millions)							(in millions)
Cash Flow Hedges of Forecasted Debt
Gulf Power	$	80		3-month LIBOR	2.32%	December 2026		$	(6	)
Cash Flow Hedges of Existing Debt
Mississippi Power	900			1-month LIBOR	0.79%	March 2018		(1		)
Fair Value Hedges of Existing Debt
Southern Company^(a)	250			1.30%	3-month LIBOR + 0.17%	August 2017		1
Southern Company^(a)	300			2.75%	3-month LIBOR + 0.92%	June 2020		9
Georgia Power	250			5.40%	3-month LIBOR + 4.02%	June 2018		2
Georgia Power	200			4.25%	3-month LIBOR + 2.46%	December 2019		5
Georgia Power	500			1.95%	3-month LIBOR + 0.76%	December 2018		2
Derivatives not Designated as Hedges
Southern Power	65		^(b)(e)	3-month LIBOR	2.50%	October 2016	^(f)	—
Southern Power	47		^(c)(e)	3-month LIBOR	2.21%	October 2016	^(f)	—
Southern Power	65		^(d)(e)	3-month LIBOR	2.21%	November 2016	^(g)	—
Southern Company Consolidated	$	2,657						$	12


(a)	Represents the Southern Company parent entity.


(b)	Swaption at RE Tranquillity LLC. See Note 12 to the financial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information.


(c)	Swaption at RE Roserock LLC. See Note 12 to the financial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information. Subsequent to September 30, 2016, Roserock extended the maturity date of its swaption to December 31, 2016.


(d)	Swaption at RE Garland Holdings LLC. See Note 12 to the financial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information.


(e)	Amortizing notional amount.


(f)	Represents the mandatory settlement date. Settlement will be based on a 15-year amortizing swap.


(g)	Represents the mandatory settlement date. Settlement will be based on a 12-year amortizing swap.

The estimated pre-tax gains (losses) expected to be reclassified from accumulated OCI to interest expense for the next 12-month period ending September 30, 2017 are $(21) million for Southern Company and immaterial for all other registrants. Southern Company and certain subsidiaries have deferred gains and losses that are expected to be amortized into earnings through 2046.

Foreign Currency Derivatives

Southern Company and certain subsidiaries may also 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 effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time that the hedged transactions affect earnings, including currency gains or losses arising from changes in the U.S. currency exchange rates. Any ineffectiveness is recorded directly to earnings. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At September 30, 2016, 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, 2016
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
Southern Power	$	677	2.95%	€	600	1.00%	June 2022	$	(2	)
Southern Power	564		3.78%	500		1.85%	June 2026	1
Total	$	1,241		€	1,100			$	(1	)

The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to earnings for the next 12-month period ending September 30, 2017 are $(12) million for Southern Company and Southern Power.

Derivative Financial Statement Presentation and Amounts

Derivative contracts of Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are presented on a net basis in the financial statements to the extent that the contracts are subject to netting arrangements. Some of these energy-related and interest rate derivative contracts 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.

At September 30, 2016, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:



	As of September 30, 2016
Derivative Category and Balance Sheet Location	Assets		Liabilities
	(in millions)
Southern Company
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	20	$	(62	)
Other deferred charges and assets/Other deferred credits and liabilities	13		(53		)
Total derivatives designated as hedging instruments for regulatory purposes	$	33	$	(115	)
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	4	$	(6	)
Other deferred charges and assets/Other deferred credits and liabilities	—		(1		)



	As of September 30, 2016
Derivative Category and Balance Sheet Location	Assets			Liabilities
	(in millions)
Interest rate derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	8		$	(7	)
Other deferred charges and assets/Other deferred credits and liabilities	11			—
Foreign currency derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	—		$	(24	)
Other deferred charges and assets/Other deferred credits and liabilities	23			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	46		$	(38	)
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	305		$	(345	)
Other deferred charges and assets/Other deferred credits and liabilities	58			(74		)
Total derivatives not designated as hedging instruments	$	363		$	(419	)
Gross amounts of recognized assets and liabilities	$	442		$	(572	)
Gross amounts offset in the Balance Sheet^(*)	$	(283	)	$	394
Net amounts of assets and liabilities presented in the Balance Sheet	$	159		$	(178	)

Alabama Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities	$	4		$	(14	)
Other deferred charges and assets/Other deferred credits and liabilities	4			(7		)
Total derivatives designated as hedging instruments for regulatory purposes	$	8		$	(21	)
Gross amounts of recognized assets and liabilities	$	8		$	(21	)
Gross amounts offset in the Balance Sheet^(*)	$	(7	)	$	7
Net amounts of assets and liabilities presented in the Balance Sheet	$	1		$	(14	)

Georgia Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	7		$	(5	)
Other deferred charges and assets/Other deferred credits and liabilities	8			(11		)
Total derivatives designated as hedging instruments for regulatory purposes	$	15		$	(16	)
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	5		$	—
Other deferred charges and assets/Other deferred credits and liabilities	5			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	10		$	—
Gross amounts of recognized assets and liabilities	$	25		$	(16	)
Gross amounts offset in the Balance Sheet^(*)	$	(11	)	$	11
Net amounts of assets and liabilities presented in the Balance Sheet	$	14		$	(5	)



	As of September 30, 2016
Derivative Category and Balance Sheet Location	Assets			Liabilities
	(in millions)
Gulf Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities	$	1		$	(24	)
Other deferred charges and assets/Other deferred credits and liabilities	—			(27		)
Total derivatives designated as hedging instruments for regulatory purposes	$	1		$	(51	)
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Liabilities from risk management activities	$	—		$	(6	)
Gross amounts of recognized assets and liabilities	$	1		$	(57	)
Gross amounts offset in the Balance Sheet^(*)	$	(1	)	$	1
Net amounts of assets and liabilities presented in the Balance Sheet	$	—		$	(56	)

Mississippi Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	—		$	(13	)
Other deferred charges and assets/Other deferred credits and liabilities	1			(8		)
Total derivatives designated as hedging instruments for regulatory purposes	$	1		$	(21	)
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	—		$	(1	)
Gross amounts of recognized assets and liabilities	$	1		$	(22	)
Gross amounts offset in the Balance Sheet^(*)	$	(1	)	$	1
Net amounts of assets and liabilities presented in the Balance Sheet	$	—		$	(21	)

Southern Power
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	2		$	(3	)
Other deferred charges and assets/Other deferred credits and liabilities	—			—
Foreign currency derivatives:
Other current assets/Other current liabilities	$	—		$	(24	)
Other deferred charges and assets/Other deferred credits and liabilities	23			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	25		$	(27	)
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	1		$	—
Gross amounts of recognized assets and liabilities	$	26		$	(27	)
Gross amounts offset in the Balance Sheet^(*)	$	(1	)	$	1
Net amounts of assets and liabilities presented in the Balance Sheet	$	25		$	(26	)


(*)	Includes any cash/financial collateral pledged or received.

At December 31, 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



Asset Derivatives at December 31, 2015
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets	$	3	$	1	$	2	$	—	$	—
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets	$	3	$	—	$	—	$	—	$	3
Interest rate derivatives:
Other current assets	19		—		5		1		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	22	$	—	$	5	$	1	$	3
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets	$	1	$	—	$	—	$	—	$	1
Interest rate derivatives:
Other current assets	3		—		—		—		3
Total derivatives not designated as hedging instruments	$	4	$	—	$	—	$	—	$	4
Total asset derivatives	$	29	$	1	$	7	$	1	$	7



Liability Derivatives at December 31, 2015
	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^(*)	$	130	$	40	$	12	$	49	$	29
Other deferred credits and liabilities	87		15		3		51		18
Total derivatives designated as hedging instruments for regulatory purposes	$	217	$	55	$	15	$	100	$	47	N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Liabilities from risk management activities^(*)	$	2	$	—	$	—	$	—	$	—	$	2
Interest rate derivatives:
Liabilities from risk management activities	23		15		—		—		—		—
Other deferred credits and liabilities	7		—		6		—		—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	32	$	15	$	6	$	—	$	—	$	2
Derivatives not designated as hedging instruments
Energy-related derivatives:
Liabilities from risk management activities^(*)	$	1	$	—	$	—	$	—	$	—	$	1
Total liability derivatives	$	250	$	70	$	21	$	100	$	47	$	3


(*)	Georgia Power, Mississippi Power, and Southern Power include current liabilities related to derivatives in other current liabilities.

In 2015, the derivative contracts of Southern Company, the traditional electric operating companies, and Southern Power are reported gross on each registrant's financial statements. Some of these energy-related and interest rate derivative contracts 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. Amounts related to energy-related derivative contracts and interest rate derivative contracts at December 31, 2015 are presented in the following table:



Derivative Contracts at December 31, 2015
	Fair Value
	Southern Company			Alabama Power			Georgia Power			Gulf Power		Mississippi Power		Southern Power
	(in millions)
Assets
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet^(a)	$	7		$	1		$	2		$	—	$	—	$	4
Gross amounts not offset in the Balance Sheet^(b)	(6		)	(1		)	(2		)	—		—		(1		)
Net energy-related derivative assets	$	1		$	—		$	—		$	—	$	—	$	3
Interest rate derivatives:
Interest rate derivatives presented in the Balance Sheet^(a)	$	22		$	—		$	5		$	1	$	—	$	3
Gross amounts not offset in the Balance Sheet^(b)	(9		)	—			(4		)	—		—		—
Net interest rate derivative assets	$	13		$	—		$	1		$	1	$	—	$	3
Liabilities
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet^(a)	$	220		$	55		$	15		$	100	$	47	$	3
Gross amounts not offset in the Balance Sheet^(b)	(6		)	(1		)	(2		)	—		—		(1		)
Net energy-related derivative liabilities	$	214		$	54		$	13		$	100	$	47	$	2
Interest rate derivatives:
Interest rate derivatives presented in the Balance Sheet^(a)	$	30		$	15		$	6		$	—	$	—	$	—
Gross amounts not offset in the Balance Sheet^(b)	(9		)	—			(4		)	—		—		—
Net interest rate derivative liabilities	$	21		$	15		$	2		$	—	$	—	$	—


(a)	As of December 31, 2015, none of the registrants offset fair value amounts for multiple derivative instruments executed with the same counterparty in the balance sheets; therefore, gross and net amounts of derivative assets and liabilities presented in the balance sheets are the same.


(b)	Includes gross amounts subject to netting terms that are not offset in the balance sheets and any cash/financial collateral pledged or received.

At September 30, 2016 and December 31, 2015, 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 at September 30, 2016
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	$	(52	)	$	(10	)	$	(2	)	$	(24	)	$	(13	)
Other regulatory assets, deferred	(42		)	(4		)	(4		)	(26		)	(8		)
Other regulatory liabilities, current^(a)	8			1			4			—			—
Other regulatory liabilities, deferred^(b)	1			—			1			—			—
Total energy-related derivative gains (losses)	$	(85	)	$	(13	)	$	(1	)	$	(50	)	$	(21	)


(a)	Georgia Power includes other regulatory liabilities, current in other current liabilities.


(b)	Georgia Power includes other regulatory liabilities, deferred in other deferred credits and liabilities.



Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2015
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	$	(130	)	$	(40	)	$	(12	)	$	(49	)	$	(29	)
Other regulatory assets, deferred	(87		)	(15		)	(3		)	(51		)	(18		)
Other regulatory liabilities, current^(*)	3			1			2			—			—
Total energy-related derivative gains (losses)	$	(214	)	$	(54	)	$	(13	)	$	(100	)	$	(47	)


(*)	Georgia Power includes other regulatory liabilities, current in other current liabilities.

For the three months ended September 30, 2016 and 2015, the pre-tax effects of energy-related derivatives, interest rate derivatives, and foreign currency derivatives designated as cash flow hedging instruments 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
	2016			2015				2016			2015
	(in millions)							(in millions)
Southern Company
Energy-related derivatives	$	—		$	—		Amortization	$	1		$	—
Interest rate derivatives	(6		)	(28		)	Interest expense, net of amounts capitalized	(6		)	(2		)
Foreign currency derivatives	37			—			Interest expense, net of amounts capitalized	(6		)	—
							Other income (expense), net^(*)	7			—
Total	$	31		$	(28	)		$	(4	)	$	(2	)
Alabama Power
Interest rate derivatives	$	—		$	(10	)	Interest expense, net of amounts capitalized	$	(2	)	$	(1	)
Georgia Power
Interest rate derivatives	$	—		$	(18	)	Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Southern Power
Energy-related derivatives	$	—		$	—		Amortization	$	1		$	—
Foreign currency derivatives	37			—			Interest expense, net of amounts capitalized	(6		)	—
							Other income (expense), net^(*)	7			—
Total	$	37		$	—			$	2		$	—


(*)	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 nine months ended September 30, 2016 and 2015, the pre-tax effects of energy-related derivatives, interest rate derivatives, and foreign currency derivatives designated as cash flow hedging instruments recognized in OCI and those reclassified from accumulated OCI into earnings 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
	2016			2015				2016			2015
	(in millions)							(in millions)
Southern Company
Energy-related derivatives	$	(1	)	$	—		Amortization	$	1		$	—
Interest rate derivatives	(189		)	(26		)	Interest expense, net of amounts capitalized	(13		)	(7		)
Foreign currency derivatives	(1		)	—			Interest expense, net of amounts capitalized	(7		)	—
							Other income (expense), net^(*)	(13		)	—
Total	$	(191	)	$	(26	)		$	(32	)	$	(7	)
Alabama Power
Interest rate derivatives	$	(3	)	$	(9	)	Interest expense, net of amounts capitalized	$	(5	)	$	(2	)
Georgia Power
Interest rate derivatives	$	—		$	(17	)	Interest expense, net of amounts capitalized	$	(3	)	$	(3	)
Gulf Power
Interest rate derivatives	$	(7	)	$	—		Interest expense, net of amounts capitalized	$	—		$	—
Mississippi Power
Interest rate derivatives	$	(1	)	$	—		Interest expense, net of amounts capitalized	$	(1	)	$	(1	)
Southern Power
Energy-related derivatives	$	(1	)	$	—		Amortization	$	1		$	—
Interest rate derivatives	—			—			Interest expense, net of amounts capitalized	(1		)	(1		)
Foreign currency derivatives	(1		)	—			Interest expense, net of amounts capitalized	(7		)	—
							Other income (expense), net^(*)	(13		)	—
Total	$	(2	)	$	—			$	(20	)	$	(1	)


(*)	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, 2016 and 2015, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were as follows:



Derivatives in Fair Value Hedging Relationships
		Gain (Loss)
		Three Months Ended September 30,					Nine Months Ended September 30,
Derivative Category	Statements of Income Location	2016			2015		2016		2015
		(in millions)					(in millions)
Southern Company
Interest rate derivatives:	Interest expense, net of amounts capitalized	$	(9	)	$	15	$	15	$	19
Georgia Power
Interest rate derivatives:	Interest expense, net of amounts capitalized	$	(5	)	$	7	$	10	$	9

For the three and nine months ended September 30, 2016 and 2015, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were offset by changes to the carrying value of long-term debt.

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

For the three and nine months ended September 30, 2016 and 2015, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were immaterial for all 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 September 30, 2016, Southern Company had $111 million of collateral posted with derivative counterparties. The amount of collateral posted with the derivative counterparties for all other registrants was immaterial.

At September 30, 2016, the fair value of derivative liabilities with contingent features was $22 million for all registrants. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $22 million for all registrants and include certain agreements that could require collateral in the event that one or more Southern Company power pool participants or Southern Company has a credit rating change to below investment grade.

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.

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas 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 electric operating companies, Southern Power, and Southern Company Gas 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 electric operating companies', Southern Power's, and Southern Company Gas' exposure to counterparty credit risk. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary. Therefore, Southern Company, the traditional electric operating companies, and Southern Power do not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.