3. Derivative instruments:

Our risk management and compliance committee provides general oversight over all risk management and compliance activities, including but not limited to, commodity trading, investment portfolio management and interest rate risk management. We use commodity trading derivatives to manage our exposure to fluctuations in the market price of natural gas. To hedge the risk of rising interest rates on a portion of our anticipated long-term debt to be incurred in connection with capital expenditures, we have entered into interest rate options. We do not apply hedge accounting for any of these derivatives, but apply regulatory accounting. Consistent with our rate-making, unrealized gains or losses on our natural gas swaps and interest rate options are reflected as regulatory assets or liabilities, as appropriate.

We are exposed to credit risk as a result of entering into these hedging arrangements. Credit risk is the potential loss resulting from a counterparty's nonperformance under an agreement. We have established policies and procedures to manage credit risk through counterparty analysis, exposure calculation and monitoring, exposure limits, collateralization and certain other contractual provisions.

It is possible that volatility in commodity prices and/or interest rates could cause us to have credit risk exposures with one or more counterparties. We currently have credit risk exposure to our interest rate options counterparties. If such counterparties fail to perform their obligations, we could suffer a financial loss. However, as of December 31, 2016, all of the counterparties with transaction amounts outstanding under our hedging programs are rated investment grade by the major rating agencies or have provided a guaranty from one of their affiliates that is rated investment grade.

We have entered into International Swaps and Derivatives Association agreements with our natural gas hedge and interest rate option counterparties that mitigate credit exposure by creating contractual rights relating to creditworthiness, collateral, termination and netting (which, in certain cases, allows us to use the net value of affected transactions with the same counterparty in the event of default by the counterparty or early termination of the agreement).

Additionally, we have implemented procedures to monitor the creditworthiness of our counterparties and to evaluate nonperformance in valuing counterparty positions. We have contracted with a third party to assist in monitoring certain of our counterparties' credit standing and condition. Net liability positions are generally not adjusted as we use derivative transactions as hedges and have the ability and intent to perform under each of our contracts. In the instance of net asset positions, we consider general market conditions and the observable financial health and outlook of specific counterparties, forward looking data such as credit default swaps, when available, and historical default probabilities from credit rating agencies in evaluating the potential impact of nonperformance risk to derivative positions.

The contractual agreements contain provisions that could require us or the counterparty to post collateral or credit support. The amount of collateral or credit support that could be required is calculated as the difference between the aggregate fair value of the hedges and pre-established credit thresholds. The credit thresholds are contingent upon each party's credit ratings from the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty.

Gas hedges. Under the natural gas swap arrangements, we pay the counterparty a fixed price for specified natural gas quantities and receive a payment for such quantities based on a market price index. These payment obligations are netted, such that if the market price index is lower than the fixed price, we will make a net payment, and if the market price index is higher than the fixed price, we will receive a net payment.

At December 31, 2016 and 2015, the estimated fair value of our natural gas contracts were a net asset of $15,090,000 and a net liability of $22,848,000, respectively.

As of December 31, 2016 and 2015, neither we nor any counterparties were required to post credit support or collateral under the natural gas swap agreements. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2016 due to our credit rating being downgraded below investment grade, we would have been required to post letters of credit of approximately $62,000 with our counterparties.

The following table reflects the volume activity of our natural gas derivatives as of December 31, 2016 that is expected to settle or mature each year:


Year			Natural Gas Swaps (MMBTUs)
			(in millions)

2017			23.2
2018			20.4
2019			13.5
2020			9.0
2021			2.5

Total			68.6

Interest rate options. We are exposed to the risk of rising interest rates due to the significant amount of new long-term debt we expect to incur in connection with anticipated capital expenditures, particularly the construction of Vogtle Units No. 3 and No. 4. In fourth quarter of 2011, we purchased seventeen LIBOR swaptions at a cost of $100,000,000 with a total notional amount of approximately $2,200,000,000 to hedge the interest rates on a portion of the debt that we are incurring to finance the two additional nuclear units at Plant Vogtle. Since inception, sixteen of these swaptions having a notional amount of approximately $2,099,035,000 have expired and, as of December 31, 2016, the notional amount of our remaining swaption, which expires March 31, 2017, was approximately $80,169,000.

The LIBOR swaptions were designed to cap our effective interest rate at a specified fixed interest rate on a specified option expiration date. This is accomplished by means of a payment of the cash settlement value our counterparties are obligated to make to us if prevailing fixed LIBOR swap rates exceed the specified fixed rate on the option expiration date. This payment would partially offset our interest costs, thereby reducing our effective interest rate. The cash settlement value is calculated based on the value of an underlying swap which we have the right, but not the obligation, to enter into, which would begin on the option expiration date and extend until 2042 and under which we would pay the specified fixed rate and receive a floating LIBOR rate. The cash settlement value would be zero if the swaption is out-of-the-money (that is, if the specified fixed rate is at or above then-current swap rates) on the expiration date. The fixed rate on the unexpired swaption we hold is 3.88%, which is 139 basis points above the corresponding LIBOR swap rate in effect as of December 31, 2016. Swaptions having notional amounts totaling $310,533,000 expired without value during the year ended December 31, 2016. The remaining swaption will expire March 31, 2017.

We paid all the premiums to purchase these LIBOR swaptions at the time we entered into these transactions. At December 31, 2016 and 2015, the fair value of these swaptions was approximately $0 and $1,010,000, respectively. To manage our credit exposure to our counterparties, we negotiated credit support provisions that require each counterparty to provide us collateral in the form of cash or securities to the extent that the value of the swaptions outstanding for that counterparty exceeds a certain threshold. The collateral thresholds can range from $0 to $10,000,000 depending on each counterparty's credit rating. As of December 31, 2016 and 2015, there were no collateral postings required of the counterparties.

We are deferring realized and unrealized gains or losses from the change in fair value of each LIBOR swaption as well as related carrying and other incidental costs in accordance with our rate-making treatment. The deferral will continue until February 2020, at which time the deferred costs from the settlement of the interest rate options will be amortized and collected in rates over the life of the $2,200,000,000 of debt that we hedged with the swaptions.

The table below reflects the fair value of derivative instruments and their effect on our consolidated balance sheets at December 31, 2016 and 2015.


	Balance Sheet Location		Fair Value

			2016		2015
			(dollars in thousands)
Not designated as hedges:
Assets
Interest rate options	Other deferred charges	$	–	$	1,010
Natural gas swaps	Other current assets	$	13,833		–
Natural gas swaps	Other deferred charges	$	3,289		–
Liabilities
Natural gas swaps	Other current liabilities	$	54	$	22,848
Natural gas swaps	Other deferred credits	$	1,977	$	–

The following table presents the realized gains and (losses) on derivative instruments recognized in margin for the year ended December 31, 2016, 2015 and 2014.


	Consolidated Statement of Revenues and Expenses Location		2016			2015			2014

			(dollars in thousands)
Not designated as hedges:
Natural Gas Swaps	Fuel	$	2,445		$	206		$	1,881
Natural Gas Swaps	Fuel		(19,697	)		(20,102	)		(1,033	)

		$	(17,252	)	$	(19,896	)	$	848

The following table presents the unrealized gains and (losses) on derivative instruments deferred on the balance sheet at December 31, 2016 and 2015.


	Consolidated Balance Sheet Location

			2016			2015
Not designated as hedges:
Natural Gas Swaps	Regulatory asset	$	(62	)	$	(22,848	)
Natural Gas Swaps	Regulatory liability		15,152
Interest Rate Options	Regulatory asset		(5,788	)		(25,915	)

Total not designated as hedges		$	9,302		$	(48,763	)

The following table presents the gross amounts of derivatives and their related offset amounts as permitted by their respective master netting agreements and obligations to return cash collateral at December 31, 2016 and 2015.


		(dollars in thousands)
		Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts offset on the Balance Sheet			Cash Collateral		Net Amounts of Assets (Liabilities) Presented on the Balance Sheet

December 31, 2016
Natural gas swaps	$	15,090		$	–		$	–	$	15,090
Natural gas swaps	$	(15,090	)	$	–		$	–	$	(15,090	)
Interest rate options	$	5,788		$	(5,788	)	$	–	$	–

December 31, 2015
Assets:
Natural gas swaps	$	(22,848	)	$	–		$	–	$	(22,848	)
Interest rate options	$	26,925		$	(25,915	)	$	–	$	1,010