Derivatives

12 Months Ended

Dec. 31, 2016

The Southern Company system is 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. 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 10 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. See Note 1 under "Financial Instruments" for additional information.

Energy-Related Derivatives

Southern Company and certain subsidiaries 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 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 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) 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 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 adjusted 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 adjusted 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 adjusted 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 adjusted 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 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 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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 500 million mmBtu for the Southern Company system, with the longest hedge date of 2020 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 of 2022 for derivatives not designated as hedges.

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 gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 9 million mmBtu.

For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending December 31, 2017 are $17 million for Southern Company.

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 December 31, 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) December 31, 2016
	(in millions)							(in millions)
Cash Flow Hedges of Forecasted Debt
	$	80		3-month LIBOR	2.32%	December 2026		$	—
Cash Flow Hedges of Existing Debt
	900			1-month LIBOR	0.79%	March 2018		3
Fair Value Hedges of Existing Debt
	250			1.30%	3-month LIBOR + 0.17%	August 2017		—
	250			5.40%	3-month LIBOR + 4.02%	June 2018		—
	500			1.95%	3-month LIBOR + 0.76%	December 2018		(2		)
	200			4.25%	3-month LIBOR + 2.46%	December 2019		1
	300			2.75%	3-month LIBOR + 0.92%	June 2020		1
	1,500			2.35%	1-month LIBOR + 0.87%	July 2021		(18		)
Derivatives not Designated as Hedges
	47		(a,b)	3-month LIBOR	2.21%	January 2017	(c)	1
Total	$	4,027						$	(14	)


(a)	Swaption at RE Roserock LLC. See Note 12 for additional information.


(b)	Amortizing notional amount.


(c)	Represents the mandatory settlement date. Settlement amount was based on a 15-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 December 31, 2017 total $(21) million. Deferred gains and losses 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 foreign 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 December 31, 2016, the following foreign currency derivatives were outstanding:



	Pay Notional		Pay Rate	Receive Notional		Receive Rate	Hedge Maturity Date	Fair Value Gain (Loss) at December 31, 2016
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
	$	677	2.95%	€	600	1.00%	June 2022	$	(34	)
	564		3.78%	500		1.85%	June 2026	(24		)
Total	$	1,241		€	1,100			$	(58	)

The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to earnings for the next 12-month period ending December 31, 2017 total $(25) million.

Derivative Financial Statement Presentation and Amounts

Southern Company and its subsidiaries enter into derivative contracts that may contain 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.

At December 31, 2016, fair value amounts of derivative assets and liabilities on the balance sheets are presented net to the extent that there are netting arrangements or similar agreements with the counterparties. At December 31, 2015, the fair value amounts of derivative instruments were presented gross on the balance sheets.

At December 31, 2016 and 2015, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	73		$	27		$	3		$	130
Other deferred charges and assets/Other deferred credits and liabilities	25			33			—			87
Total derivatives designated as hedging instruments for regulatory purposes	$	98		$	60		$	3		$	217
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	$	23		$	7		$	3		$	2
Interest rate derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	12			1			19			23
Other deferred charges and assets/Other deferred credits and liabilities	1			28			—			7
Foreign currency derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	—			25			—			—
Other deferred charges and assets/Other deferred credits and liabilities	—			33			—			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	36		$	94		$	22		$	32
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	$	489		$	483		$	1		$	1
Other deferred charges and assets/Other deferred credits and liabilities	66			81			—			—
Interest rate derivatives:
Other current assets/Liabilities from risk management activities, net of collateral	1			—			3			—
Total derivatives not designated as hedging instruments	$	556		$	564		$	4		$	1
Gross amounts recognized	$	690		$	718		$	29		$	250
Gross amounts offset^(a)	$	(462	)	$	(524	)	$	(15	)	$	(15	)
Net amounts recognized in the Balance Sheets^(b)	$	228		$	194		$	14		$	235


(a)	Gross amounts offset include cash collateral held on deposit in broker margin accounts of $62 million as of December 31, 2016.


(b)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the balance sheet.

At December 31, 2016 and 2015, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivatives designated as regulatory hedging instruments and deferred were as follows:



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2016			2015			Balance Sheet Location	2016		2015
		(in millions)							(in millions)
Energy-related derivatives:^(a)	Other regulatory assets, current	$	(16	)	$	(130	)	Other regulatory liabilities, current	$	56	$	3
	Other regulatory assets, deferred	(19		)	(87		)	Other regulatory liabilities, deferred	12		—
Total energy-related derivative gains (losses)^(b)		$	(35	)	$	(217	)		$	68	$	3


(a)	At December 31, 2016, the unrealized gains and losses for derivative contracts subject to netting arrangements were presented net on the balance sheet. At December 31, 2015, the unrealized gains and losses for derivative contracts were presented gross on the balance sheet.


(b)	Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $8 million as of December 31, 2016.

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effects of energy-related derivatives, interest rate derivatives, and foreign currency 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)
	Amount										Amount
Derivative Category	2016			2015			2014			Statements of Income Location	2016			2015			2014
	(in millions)										(in millions)
Energy-related derivatives	$	18		$	—		$	—		Depreciation and amortization	$	2		$	—		$	—
										Cost of natural gas	(1		)	—			—
Interest rate derivatives	(180		)	(22		)	(16		)	Interest expense, net of amounts capitalized	(18		)	(9		)	(8		)
Foreign currency derivatives	(58		)	—			—			Interest expense, net of amounts capitalized	(13		)	—			—
										Other income (expense), net^(*)	(82		)	—			—
Total	$	(220	)	$	(22	)	$	(16	)		$	(112	)	$	(9	)	$	(8	)


(*)	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 years ended December 31, 2016, 2015, and 2014, 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)
Derivative Category	Statements of Income Location	2016			2015		2014
		(in millions)
Interest rate derivatives:	Interest expense, net of amounts capitalized	$	(21	)	$	2	$	(3	)

For all years presented, 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 period presented.

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were as follows:



Derivatives Not Designated as Hedging Instruments		Unrealized Gain (Loss) Recognized in Income
		Amount
Derivative Category	Statements of Income Location	2016		2015			2014
		(in millions)
Energy-related derivatives	Wholesale electric revenues	$	2	$	(5	)	$	6
	Fuel	—		3			(4		)
	Natural gas revenues^(*)	33		—			—
	Cost of natural gas	3		—			—
Total		$	38	$	(2	)	$	2


(*)	Excludes gains (losses) recorded in cost of natural gas associated with weather derivatives of $6 million for the period ended December 31, 2016.

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effects of interest rate derivatives not designated as hedging instruments were immaterial.

Contingent Features

The Company does 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 December 31, 2016, the fair value of derivative liabilities with contingent features was immaterial. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial and include certain agreements that could require collateral in the event that one or more Southern Company system power pool participants 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 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 may be required to deposit cash into these accounts. At December 31, 2016, cash collateral held on deposit in broker margin accounts was $62 million.

Southern Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company only enters 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 has also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's exposure to counterparty credit risk. Southern Company may require counterparties to pledge additional collateral when deemed necessary. Therefore, Southern Company does not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.

Alabama Power [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, including commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. The 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 10 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.

Energy-Related Derivatives

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

•

Regulatory Hedges – Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the Company's 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 energy cost recovery clause.


•	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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 74 million mmBtu for the Company, with the longest hedge date of 2020 over which it is hedging its exposure to the variability in future cash flows for forecasted transactions.

Interest Rate Derivatives

The Company may also enter into interest rate derivatives to hedge exposure to changes in interest rates. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the 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. The derivatives employed as hedging instruments are structured to minimize ineffectiveness, which is recorded directly to earnings.

At December 31, 2016, there were no interest rate derivatives outstanding.

The estimated pre-tax losses that will be reclassified from accumulated OCI to interest expense for the 12-month period ending December 31, 2017 are $6 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2035.

Derivative Financial Statement Presentation and Amounts

The Company enters into energy-related and interest rate derivative contracts that may contain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. At December 31, 2016, fair value amounts of derivative assets and liabilities on the balance sheets are presented net to the extent that there are netting arrangements or similar agreements with the counterparties. At December 31, 2015, the fair value amounts of derivative instruments were presented gross on the balance sheets.

At December 31, 2016 and 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected on the balance sheets as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	13		$	5		$	1		$	40
Other deferred charges and assets/Other deferred credits and liabilities	7			4			—			15
Total derivatives designated as hedging instruments for regulatory purposes	$	20		$	9		$	1		$	55
Derivatives designated as hedging instruments in cash flow hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	—		$	—		$	—		$	15
Gross amounts recognized	$	20		$	9		$	1		$	70
Gross amounts offset	$	(8	)	$	(8	)	$	(1	)	$	(1	)
Net amounts recognized in the Balance Sheets^(*)	$	12		$	1		$	—		$	69


(*)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the balance sheet.

Energy-related derivatives not designated as hedging instruments were immaterial on the balance sheets for 2016 and 2015.

At December 31, 2016 and 2015, the pre-tax effect of unrealized derivative gains (losses) arising from energy-related derivatives designated as regulatory hedging instruments and deferred were as follows:



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2016			2015			Balance Sheet Location	2016		2015
		(in millions)							(in millions)
Energy-related derivatives:^(*)	Other regulatory assets, current	$	(1	)	$	(40	)	Other current liabilities	$	8	$	1
	Other regulatory assets, deferred	—			(15		)	Other regulatory liabilities, deferred	4		—
Total energy-related derivative gains (losses)		$	(1	)	$	(55	)		$	12	$	1


(*)	At December 31, 2016, the unrealized gains and losses for derivative contracts subject to netting arrangements were presented net on the balance sheet. At December 31, 2015, the unrealized gains and losses for derivative contracts were presented gross on the balance sheet.

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effect of interest rate derivatives designated as cash flow hedging instruments on the statements of income was 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											Amount
Derivative Category	2016			2015			2014			Statements of Income Location	2016			2015			2014
	(in millions)										(in millions)
Interest rate derivatives	$	(3	)	$	(7	)	$	(8	)	Interest expense, net of amounts capitalized	$	(6	)	$	(3	)	$	(3	)

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

The pre-tax effect of energy-related derivatives not designated as hedging instruments on the statements of income was not material for any year presented.

Contingent Features

At December 31, 2016, the fair value of derivative liabilities with contingent features, including certain agreements that could require collateral in the event that one or more Southern Company system power pool participants has a credit rating change to below investment grade because of joint and several liability features underlying these derivatives, was immaterial.

The Company maintains accounts with certain regional transmission organizations to facilitate financial derivative transactions. Based on the value of the positions in these accounts and the associated margin requirements, the Company may be required to post collateral. At December 31, 2016, the Company's collateral posted in these accounts was not material.

The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company only enters 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 Company has also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. Therefore, the Company does not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.

Georgia Power [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, primarily commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. The 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 10 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.

Energy-Related Derivatives

The Company enters 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 Company has limited exposure to market volatility in energy-related commodity prices. The Company manages a fuel-hedging program through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. At December 31, 2016 and 2015, substantially all of the Company's energy-related derivative contracts were designated as regulatory hedges and were related to the Company's fuel-hedging program. Through December 31, 2015, the Company's fuel-hedging program had a time horizon up to 24 months. Effective January 1, 2016, the Georgia PSC approved changes to the Company's hedging program allowing it to use an array of derivative instruments within a 48-month time horizon.

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

•

Regulatory Hedges – Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the Company's fuel-hedging program, 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 fuel cost recovery mechanism.


•	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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 155 million mmBtu, all of which expire by 2020, which is the longest hedge date.

In addition to the volume discussed above, the Company enters into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The expected volume of natural gas subject to such a feature is 3 million mmBtu for the Company.

Interest Rate Derivatives

The Company 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. At December 31, 2016, there were no cash flow hedges outstanding. Derivatives related to fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains and losses and the hedged items' fair value gains and losses attributable to interest rate risk are both recorded directly to earnings, providing an offset, with any differences representing ineffectiveness.

At December 31, 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) December 31, 2016
	(in millions)					(in millions)
Fair Value Hedges of Existing Debt
	$	250	5.40%	3-month LIBOR + 4.02%	June 2018	$	—
	500		1.95%	3-month LIBOR + 0.76%	December 2018	(2		)
	200		4.25%	3-month LIBOR + 2.46%	December 2019	1
Total	$	950				$	(1	)

The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to interest expense for the 12-month period ending December 31, 2017 total $4 million. Deferred gains and losses related to interest rate derivative settlements of cash flow hedges are expected to be amortized into earnings through 2037.

Derivative Financial Statement Presentation and Amounts

At December 31, 2016 and 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	30		$	1		$	2		$	12
Other deferred charges and assets/Other deferred credits and liabilities	14			7			—			3
Total derivatives designated as hedging instruments for regulatory purposes	$	44		$	8		$	2		$	15
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	2		$	—		$	5		$	—
Other deferred charges and assets/Other deferred credits and liabilities	—			3			—			6
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	2		$	3		$	5		$	6
Gross amounts recognized	$	46		$	11		$	7		$	21
Gross amounts offset	$	(8	)	$	(8	)	$	(6	)	$	(6	)
Net amounts recognized in the Balance Sheets^(*)	$	38		$	3		$	1		$	15


(*)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the balance sheet.

Energy-related derivatives not designated as hedging instruments were immaterial on the balance sheets for 2016 and 2015.



	Unrealized Losses						Unrealized Gains
Derivative Category	Balance Sheet Location	2016		2015			Balance Sheet Location	2016		2015
		(in millions)						(in millions)
Energy-related derivatives:^(*)	Other regulatory assets, current	$	—	$	(12	)	Other regulatory liabilities, current	$	29	$	2
	Other regulatory assets, deferred	—		(3		)	Other deferred credits and liabilities	7		—
Total energy-related derivative gains (losses)		$	—	$	(15	)		$	36	$	2


(*)	At December 31, 2016, the unrealized gains and losses for energy-related derivative contracts subject to netting arrangements were presented net on the balance sheet. At December 31, 2015, the unrealized gains and losses for energy-related derivative contracts subject to netting arrangements were presented gross on the balance sheet.

For the years ended December 31, 2016, 2015, and 2014, 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)
										Amount
Derivative Category	2016		2015			2014			Statements of Income Location	2016			2015			2014
	(in millions)									(in millions)
Interest rate derivatives	$	—	$	(15	)	$	(8	)	Interest expense, net of amounts capitalized	$	(4	)	$	(3	)	$	(3	)

For the years ended December 31, 2016 and 2015, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments on the statements of income were immaterial on a gross basis for the Company. Furthermore, the pre-tax effect of interest rate derivatives designated as fair value hedging instruments on the Company's statements of income were offset by changes to the carrying value of long-term debt. The gains and losses related to interest rate derivative settlements of fair value hedges are recorded directly to earnings.

There was no material ineffectiveness recorded in earnings for any period presented. The pre-tax effect of energy-related derivatives not designated as hedging instruments on the statements of income was immaterial for all years presented.

Contingent Features

Gulf Power [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, primarily commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and may enter into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. The 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 9 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.

Energy-Related Derivatives

The Company enters 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 Company has limited exposure to market volatility in energy-related commodity prices. The Company manages fuel-hedging programs, implemented per the guidelines of the Florida PSC, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. The Florida PSC approved a stipulation and agreement that prospectively imposed a moratorium on the Company's fuel-hedging program in October 2016 through December 31, 2017. The moratorium does not have an impact on the recovery of existing hedges entered into under the previously-approved hedging program.

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 Company's 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 fuel cost recovery clause.


•	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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 51 million mmBtu for the Company, with the longest hedge date of 2020 over which it is hedging its exposure to the variability in future cash flows for forecasted transactions.

Interest Rate Derivatives

At December 31, 2016, the following interest rate derivative was outstanding:

Notional
Amount

Interest
Rate
Received

Weighted Average Interest
Rate Paid

Hedge
Maturity
Date

Fair Value
Gain (Loss)
December 31,
2016

(in millions)

Cash Flow Hedges of Forecasted Debt

3-month LIBOR

2.32%

December 2026

—

The estimated pre-tax losses that will be reclassified from accumulated OCI to interest expense for the 12-month period ending December 31, 2017 are immaterial. The Company has deferred gains and losses that are expected to be amortized into earnings through 2026.

Derivative Financial Statement Presentation and Amounts

The Company enters into energy-related and interest rate 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. At December 31, 2016, fair value amounts of derivative assets and liabilities on the balance sheets are presented net to the extent that there are netting arrangements or similar agreements with the counterparties. At December 31, 2015, the fair value amounts of derivative instruments were presented gross on the balance sheets.

At December 31, 2016 and 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets		Liabilities
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Liabilities from risk management activities	$	4		$	12		$	—	$	49
Other deferred charges and assets/Other deferred credits and liabilities	1			17			—		51
Total derivatives designated as hedging instruments for regulatory purposes	$	5		$	29		$	—	$	100
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Liabilities from risk management activities	—			—			1		—
Gross amounts recognized	$	5		$	29		$	1	$	100
Gross amounts offset	$	(4	)	$	(4	)	$	—	$	—
Net amounts recognized in the Balance Sheets^(*)	$	1		$	25		$	1	$	100


(*)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the balance sheet.

Energy-related derivatives not designated as hedging instruments were immaterial on the balance sheets for 2016 and 2015.



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2016			2015			Balance Sheet Location	2016		2015
		(in millions)							(in millions)
Energy-related derivatives:^(*)	Other regulatory assets, current	$	(9	)	$	(49	)	Other regulatory liabilities, current	$	1	$	—
	Other regulatory assets, deferred	(16		)	(51		)	Other regulatory liabilities, deferred	—		—
Total energy-related derivative gains (losses)		$	(25	)	$	(100	)		$	1	$	—


(*)	At December 31, 2016, the unrealized gains and losses for derivative contracts subject to netting arrangements were presented net on the balance sheet. At December 31, 2015, the unrealized gains and losses for derivative contracts were presented gross on the balance sheet.

For the years ended December 31, 2016, 2015, and 2014, 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						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	(Effective Portion)							Amount
Derivative Category	2016		2015		2014		Statements of Income Location	2016			2015			2014
	(in millions)							(in millions)
Interest rate derivatives	$	—	$	1	$	—	Interest expense, net of amounts capitalized	$	(1	)	$	(1	)	$	(1	)

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

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were not material.

Contingent Features

Mississippi Power [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, primarily commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. The 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 9 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.

Energy-Related Derivatives

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

•


•	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 operations 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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 36 million mmBtu for the Company, with the longest hedge date of 2020 over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions.

Interest Rate Derivatives

At December 31, 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)
December 31,
2016

(in millions)

Cash Flow Hedges of Existing Debt

900

1-month LIBOR

0.79%

March 2018

The estimated pre-tax losses that will be reclassified from accumulated OCI to interest expense for the next 12-month period ending December 31, 2017 are $2 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2022.

Derivative Financial Statement Presentation and Amounts

The Company enters into energy-related and interest rate 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. At December 31, 2016, fair value amounts of derivative assets and liabilities on the balance sheets are presented net to the extent that there are netting arrangements or similar agreements with counterparties. At December 31, 2015, the fair value amounts of derivative instruments were presented gross on the balance sheets.

At December 31, 2016 and 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected on the balance sheets as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets		Liabilities
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	2		$	6		$	—	$	29
Other deferred charges and assets/Other deferred credits and liabilities	2			5			—		18
Total derivatives designated as hedging instruments for regulatory purposes	$	4		$	11		$	—	$	47
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	2		$	—		$	—	$	—
Other deferred charges and assets/Other deferred credits and liabilities	1			—			—		—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	3		$	—		$	—	$	—
Gross amounts recognized	$	7		$	11		$	—	$	47
Gross amounts offset	$	(3	)	$	(3	)	$	—	$	—
Net amounts recognized in the Balance Sheets^(*)	$	4		$	8		$	—	$	47


(*)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the balance sheet.

Energy-related derivatives not designated as hedging instruments were immaterial for 2016 and 2015.



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2016			2015			Balance Sheet Location	2016		2015
		(in millions)							(in millions)
Energy-related derivatives:^(*)	Other regulatory assets, current	$	(5	)	$	(29	)	Other regulatory liabilities, current	$	1	$	—
	Other regulatory assets, deferred	(3		)	(18		)	Other regulatory liabilities, deferred	—		—
Total energy-related derivative gains (losses)		$	(8	)	$	(47	)		$	1	$	—


(*)	At December 31, 2016, the unrealized gains and losses for derivative contracts subject to netting arrangements were presented net on the balance sheet. At December 31, 2015, the unrealized gains and losses for derivative contracts were presented gross on the balance sheet.

For all years presented, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of operations were immaterial.

For the year ended December 31, 2016, the pre-tax effects of derivatives designated as cash flow hedging instruments on the statements of operations were $3 million. For the years ended December 31, 2015 and 2014, these effects were immaterial.

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

Contingent Features

Southern Power [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, primarily commodity price risk and interest rate risk, and occasionally foreign currency exchange rate risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. The 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 consolidated balance sheets as either assets or liabilities and are presented on a net basis. See Note 8 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. See Note 1 under "Financial Instruments" for additional information.

Energy-Related Derivatives

The Company enters into energy-related derivatives to hedge exposures to electricity, gas, and other fuel price changes. The Company has limited exposure to market volatility in energy-related commodity prices because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the Company has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of uncontracted generating capacity.

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


•	Cash Flow Hedges – Gains and losses on energy-related derivatives designated as cash flow hedges which are used to hedge anticipated purchases and sales and are initially deferred in OCI before being recognized in the consolidated 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 consolidated 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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 27 million mmBtu, all of which expire in 2017, which is the longest hedge date. At December 31, 2016, the net volume of energy-related derivative contracts for power positions was 6.1 million MWs, all of which expire in 2017, which is the longest hedge date.

In addition to the volume discussed above, the Company enters 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 3 million mmBtu.

For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending December 31, 2017 is $14 million.

Interest Rate Derivatives

At December 31, 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)
December 31,
2016

(in millions)

Derivatives not Designated as Hedges

(a.b)

3-month LIBOR

2.21%

January 2017

(c)


(a)	Swaption at RE Roserock LLC.


(b)	Amortizing notional amount.


(c)	Represents the mandatory settlement date. Settlement amount was based on a 15-year amortizing swap.

The Company does not have any deferred gains and losses in AOCI related to past cash flow hedges that are expected to be amortized into earnings through 2017. As such, the Company does not expect any pre-tax gains (losses) to be reclassified from AOCI to interest expense for the 12-month period ending December 31, 2017.

Foreign Currency Derivatives

The Company 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 foreign 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 December 31, 2016, the following foreign currency derivatives were outstanding:



	Pay Notional		Pay Rate	Receive Notional		Receive Rate	Hedge Maturity Date	Fair Value Gain (Loss) at December 31, 2016
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
	$	677	2.95%	€	600	1.00%	June 2022	$	(34	)
	564		3.78%	500		1.85%	June 2026	(24		)
Total	$	1,241		€	1,100			$	(58	)

The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to earnings for the next 12-month period ending December 31, 2017 total $(25) million.

Derivative Financial Statement Presentation and Amounts

The Company enters into energy-related and interest rate derivative contracts that may contain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. At December 31, 2016, fair value amounts of derivative assets and liabilities on the consolidated balance sheets are presented net to the extent that there are netting arrangements or similar agreements with counterparties. At December 31, 2015, the fair value amounts of derivative instruments were presented gross on the consolidated balance sheets.

At December 31, 2016 and 2015, the fair value of energy-related, interest rate, and foreign currency derivatives reflected in the consolidated balance sheets is as follows:



	2016						2015
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	18		$	4		$	3		$	2
Foreign currency derivatives:
Other current assets/Other current liabilities	—			25			—			—
Other deferred charges and assets/Other deferred credits and liabilities	—			33			—			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	18		$	62		$	3		$	2
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	3		$	1		$	1		$	1
Interest rate derivatives:
Other current assets/Other current liabilities	1			—			3			—
Total derivatives not designated as hedging instruments	$	4		$	1		$	4		$	1
Gross amounts of recognized assets and liabilities	$	22		$	63		$	7		$	3
Gross amounts offset	$	(5	)	$	(5	)	$	(1	)	$	(1	)
Net amounts of assets and liabilities ^(*)	$	17		$	58		$	6		$	2


(*)	At December 31, 2015, the fair value amounts for derivative contracts subject to netting arrangements were presented gross on the consolidated balance sheet.

For the years ended December 31, 2016, 2015, and 2014, the pre-tax effects of energy-related, interest rate, and foreign currency derivatives designated as cash flow hedging instruments on the consolidated 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 AOCI into Income (Effective Portion)
Derivative Category	2016			2015		2014		Statements of Income Location	2016			2015			2014
	(in millions)								(in millions)
Energy-related derivatives	$	14		$	—	$	—	Amortization	$	2		$	—		$	—
Interest rate derivatives	—			—		—		Interest expense, net of amounts capitalized	(1		)	(1		)	(1		)
Foreign currency derivatives	(58		)	—		—		Interest expense, net of amounts capitalized	(13		)	—			—
								Other income (expense), net	(82		)	—			—
Total	$	(44	)	$	—	$	—		$	(94	)	$	(1	)	$	(1	)

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

The pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments on the Company's consolidated statements of income were not material for any year presented.

Contingent Features

Southern Company Gas [Member]

Derivative [Line Items]

DERIVATIVES

The Company is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. To manage the volatility attributable to these exposures, the Company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and risk management practices. Wholesale gas operations use various contracts in its commercial activities that generally meet the definition of derivatives. For other businesses, the Company's policy is that derivatives are to be used primarily for hedging purposes. In both cases, the Company 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 9 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.

Energy-Related Derivatives

The Company enters into energy-related derivatives to hedge exposures to natural gas price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, gas distribution operations has limited exposure to market volatility in prices of natural gas. The Company manages fuel-hedging programs, implemented per the guidelines of the natural gas distribution utilities' respective state regulatory agencies, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. However, the Company retains exposure to price changes that can, in a volatile energy market, be extremely material and can adversely affect the Company.

The Company also enters into weather derivative contracts as economic hedges of adjusted 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 Company's fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in the cost of natural gas as the underlying natural gas is used in operations and ultimately recovered through the respective 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 other 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 in the period of change.

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 natural gas 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 December 31, 2016, the net volume of energy-related derivative contracts for natural gas positions totaled 157 million mmBtu for the Company, together with the longest hedge date of 2018 over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date of 2022 for derivatives not designated as hedges.

For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending December 31, 2017 are immaterial.

Interest Rate Derivatives

The Company 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.

In January 2015, the Company executed $800 million in notional value of 10-year and 30-year fixed-rate forward-starting interest rate swaps to hedge potential interest rate volatility prior to its issuances of long-term debt in the fourth quarter 2015 and during 2016. The Company designated the forward-starting interest rate swaps, which were settled in conjunction with the debt issuances, as cash flow hedges. The Company settled $200 million of these interest rate swaps in November 2015 for an immaterial loss, $400 million upon pricing the senior notes in May 2016 at a loss of $26 million, and the remaining $200 million upon pricing the senior notes in September 2016 at a loss of $35 million. Due to the application of acquisition accounting, only $5 million of the pre-tax loss incurred and deferred in the successor period will be amortized to interest expense through 2046, which is immaterial on an annual basis.

Derivative Financial Statement Presentation and Amounts

The derivative contracts of the Company are subject to master netting arrangements or similar agreements and are reported net in the 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.

At December 31, 2016 and 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected in the consolidated balance sheets as follows:



		Asset Derivatives							Liability Derivatives
		Successor			Predecessor				Successor			Predecessor
Derivative Category	Balance Sheet Location	December 31, 2016			December 31, 2015			Balance Sheet Location	December 31, 2016			December 31, 2015
		(in millions)			(in millions)				(in millions)			(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
	Assets from risk management activities – current	$	24		$	10		Liabilities from risk management activities – current	$	3		$	28
	Other deferred charges and assets	1			—			Other deferred credits and liabilities	—			2
Total derivatives designated as hedging instruments for regulatory purposes		$	25		$	10			$	3		$	30
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
	Assets from risk management activities – current	$	4		$	3		Liabilities from risk management activities – current	$	3		$	5
	Other deferred charges and assets	—			—			Other deferred credits and liabilities	—			2
Interest rate derivatives:
	Assets from risk management activities – current	—			9			Liabilities from risk management activities – current	—			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges		$	4		$	12			$	3		$	7
Derivatives not designated as hedging instruments
Energy-related derivatives:
	Assets from risk management activities – current	$	486		$	741		Liabilities from risk management activities – current	$	482		$	644
	Other deferred charges and assets	66			179			Other deferred credits and liabilities	81			185
Total derivatives not designated as hedging instruments		$	552		$	920			$	563		$	829
Gross amounts of recognized assets and liabilities^(a)(b)		$	581		$	942			$	569		$	866
Gross amounts offset in the Balance Sheet		$	(435	)	$	(724	)		$	(497	)	$	(820	)
Net amounts of derivatives assets and liabilities, presented in the Balance Sheet^(c)		$	146		$	218			$	72		$	46


(a)	The gross amounts of recognized assets and liabilities are netted on the balance sheets to the extent that there were netting arrangements with the counterparties.


(b)	The gross amounts of recognized assets and liabilities do not include cash collateral held on deposit in broker margin accounts of $62 million as of December 31, 2016 and $96 million as of December 31, 2015.


(c)	As of December 31, 2016 and 2015, letters of credit from counterparties offset an immaterial portion of these assets under master netting arrangements.



		Unrealized Losses							Unrealized Gains
		Successor			Predecessor				Successor		Predecessor
Derivative Category	Balance Sheet Location	December 31, 2016			December 31, 2015			Balance Sheet Location	December 31, 2016		December 31, 2015
		(in millions)			(in millions)				(in millions)		(in millions)
Energy-related derivatives:
	Other regulatory assets, current	$	(1	)	$	(15	)	Other regulatory liabilities, current	$	17	$	15
	Other regulatory assets, deferred	—			(2		)	Other regulatory liabilities, deferred	1		—
Total energy-related derivative gains (losses)^(*)		$	(1	)	$	(17	)		$	18	$	15


(*)	Fair value gains and losses included in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $8 million as of December 31, 2016 and $19 million as of December 31, 2015.

For the successor period of July 1, 2016 through December 31, 2016 and the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, the pre-tax effect of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments recognized in OCI and those reclassified from accumulated OCI into earnings were as follows:



	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)							Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Successor			Predecessor				Successor			Predecessor
Derivatives in Cash Flow Hedging Relationships	July 1, 2016 through December 31, 2016			January 1, 2016 through June 30, 2016			Statements of Income Location	July 1, 2016 through December 31, 2016			January 1, 2016 through June 30, 2016
	(in millions)			(in millions)				(in millions)			(in millions)
Energy-related derivatives	$	2		$	—		Cost of natural gas	$	(1	)	$	(1	)
Interest rate derivatives	(5		)	(64		)	Interest expense, net of amounts capitalized	—			—
Total derivatives in cash flow hedging relationships	$	(3	)	$	(64	)		$	(1	)	$	(1	)



	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Predecessor						Predecessor
Derivatives in Cash Flow Hedging Relationships	2015		2014			Statements of Income Location	2015			2014
	(in millions)						(in millions)
Energy-related derivatives	$	3	$	(8	)	Cost of natural gas	$	(10	)	$	4
						Other operations and maintenance	(1		)	1
Interest rate derivatives	—		—			Interest expense, net of amounts capitalized	2			—
Total derivatives in cash flow hedging relationships	$	3	$	(8	)		$	(9	)	$	5

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

For the successor period of July 1, 2016 through December 31, 2016 and the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments on the statements of income were as follows:



		Gain (Loss)
		Successor		Predecessor
		July 1, 2016 through December 31,		January 1, 2016 through June 30,			Years Ended December 31,
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	2016		2016			2015			2014
		(in millions)		(in millions)
Energy-related derivatives	Natural gas revenues^(*)	$	33	$	(1	)	$	56		$	149
	Cost of natural gas	3		(62		)	(6		)	(7		)
Total derivatives in non-designated hedging relationships		$	36	$	(63	)	$	50		$	142


(*)	Excludes gains (losses) recorded in cost of natural gas associated with weather derivatives of $6 million for the successor periods of July 1, 2016 through December 31, 2016 and $3 million, $12 million, and $(7) million for the predecessor periods of January 1, 2016 through June 30, 2016 and the years ended December 31, 2015 and 2014, respectively.

Contingent Features

At December 31, 2016, the fair value of derivative liabilities with contingent features was $5 million and the maximum potential collateral requirements arising from the credit-risk-related contingent features was $9 million.

Generally, collateral may be provided by a 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.

The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. Prior to entering into a physical transaction, the Company assigns physical wholesale 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. The Company may require counterparties to pledge additional collateral when deemed necessary. Credit evaluations are conducted and appropriate internal approvals are obtained for a counterparty's line of credit before any transaction with the counterparty is executed. In most cases, the counterparty must have an investment grade rating, which includes a minimum long-term debt rating of Baa3 from Moody's and BBB- from S&P. Generally, the Company requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.

The Company also utilizes master netting agreements whenever possible to mitigate exposure to counterparty credit risk. When the Company is engaged in more than one outstanding derivative transaction with the same counterparty and it also has a legally enforceable netting agreement with that counterparty, the "net" mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty and a reasonable measure of the Company's credit risk. The Company also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Master netting agreements enable the Company to net certain assets and liabilities by counterparty. The Company also nets across product lines and against cash collateral, provided the master netting and cash collateral agreements include such provisions. The Company may require counterparties to pledge additional collateral when deemed necessary. Therefore, the Company does not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

+ References

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+ Details