Derivatives

12 Months Ended

Dec. 31, 2012

Southern Company, the traditional operating companies, and Southern Power are exposed to market risks, primarily commodity price risk, interest rate risk, and occasionally foreign currency risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company's policies in areas such as counterparty exposure and risk management practices. Each company's policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities and are presented on a gross basis.

Energy-Related Derivatives

The traditional operating companies and Southern Power enter into energy-related derivatives to hedge exposures to electricity, gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional operating companies have limited exposure to market volatility in commodity fuel prices and prices of electricity. Each of the traditional operating companies manages fuel hedging programs, implemented per the guidelines of their respective state PSCs, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. Southern Power has limited exposure to market volatility in commodity fuel prices and prices of electricity because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.

To mitigate residual risks relative to movements in electricity prices, the traditional operating companies and Southern Power may enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the traditional operating companies and Southern Power may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

Energy-related derivative contracts are accounted for in one of three methods:

•

Regulatory Hedges – Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the traditional operating companies' fuel hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.


•	Cash Flow Hedges – Gains and losses on energy-related derivatives designated as cash flow hedges which are mainly used to hedge anticipated purchases and sales and 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, 2012, 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 date for derivatives not designated as hedges, were as follows:



*	million British thermal units

In addition to the volumes discussed in the table above, the traditional operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 6 million mmBtu.

For cash flow hedges, the amounts expected to be reclassified from OCI to revenue and fuel expense for the next 12-month period ending December 31, 2013 are immaterial 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.

At December 31, 2012, the following interest rate derivatives were outstanding:

Notional

Amount

Interest Rate

Received

Interest

Rate Paid*

Hedge

Maturity Date

Fair Value

Gain (Loss)

December 31,

2012

(in millions)

Fair value hedges of existing debt

Southern Company

350

4.15%

3-month LIBOR + 1.96% spread

May 2014



*	Weighted Average

For the year ended December 31, 2012, the Company had realized net losses of $52 million upon termination of certain interest rate derivatives at the same time the related debt was issued. The effective portion of these losses has been deferred in OCI and is being amortized to interest expense over the life of the original interest rate derivative, reflecting the period in which the forecasted hedged transaction affects earnings. The estimated pre-tax losses that will be reclassified from OCI to interest expense for the 12-month period ending December 31, 2013 are $14 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2037.

Foreign Currency Derivatives

Southern Company and certain subsidiaries may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates arising from purchases of equipment denominated in a currency other than U.S. dollars. Derivatives related to a firm commitment in a foreign currency transaction are accounted for as a fair value hedge where the derivatives' fair value gains or losses and the hedged items' fair value gains or losses are both recorded directly to earnings. Derivatives related to a forecasted transaction are accounted for as a cash flow hedge where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings. Any ineffectiveness is recorded directly to earnings; however, Mississippi Power has regulatory approval allowing it to defer any ineffectiveness associated with firm commitments related to the Kemper IGCC to a regulatory asset. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. At December 31, 2012, the fair value of the foreign currency derivative outstanding was immaterial.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in millions)					(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:	Other current assets	$	10	$	9	Liabilities from risk management activities	$	74	$	163
	Other deferred charges and assets	13		5		Other deferred credits and liabilities	35		72
Total derivatives designated as hedging instruments for regulatory purposes		$	23	$	14		$	109	$	235
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:	Other current assets	$	—	$	—	Liabilities from risk management activities	$	—	$	1
Interest rate derivatives:	Other current assets	7		6		Liabilities from risk management activities	—		33
	Other deferred charges and assets	3		7		Other deferred credits and liabilities	—		—
Foreign currency derivatives:	Other current assets	—		—		Liabilities from risk management activities	—		1
Total derivatives designated as hedging instruments in cash flow and fair value hedges		$	10	$	13		$	—	$	35
Derivatives not designated as hedging instruments
Energy-related derivatives:	Other current assets	$	1	$	—	Liabilities from risk management activities	$	1	$	9
	Other deferred charges and assets	2		—		Other deferred credits and liabilities	1		—
Foreign currency derivatives:	Other current assets	—		2		Liabilities from risk management activities	—		2
Total derivatives not designated as hedging instruments		$	3	$	2		$	2	$	11
Total		$	36	$	29		$	111	$	281

All derivative instruments are measured at fair value. See Note 10 for additional information.

At December 31, 2012 and 2011, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred on the balance sheets were as follows:



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2012			2011			Balance Sheet Location	2012		2011
		(in millions)							(in millions)
Energy-related derivatives:	Other regulatory assets, current	$	(74	)	$	(163	)	Other regulatory liabilities, current	$	10	$	9
	Other regulatory assets, deferred	(35		)	(72		)	Other regulatory liabilities, deferred	13		5
Total energy-related derivative gains (losses)		$	(109	)	$	(235	)		$	23	$	14

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of interest rate and foreign currency derivatives designated as fair value hedging instruments on the statements of income were as follows:



Derivatives in Fair Value Hedging Relationships
		Amount
Derivative Category	Statements of Income Location	2012			2011			2010
		(in millions)
Interest rate derivatives:	Interest expense	$	(3	)	$	3		$	10
Foreign currency derivatives:	Other operations and maintenance	1			(4		)	3
Total		$	(2	)	$	(1	)	$	13

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments on Southern Company's statements of income were offset by changes to the carrying value of long-term debt; there was no material impact on Southern Company's statements of income.

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of foreign currency derivatives designated as fair value hedging instruments on Southern Company's statements of income were offset by changes in the fair value of the purchase commitment related to equipment purchases; therefore, there was no material impact on Southern Company's statements of income.

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of 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	2012			2011			2010			Statements of Income Location	2012			2011			2010
	(in millions)										(in millions)
Energy-related derivatives	$	—		$	—		$	1		Fuel	$	—		$	—		$	—
Interest rate derivatives	(19		)	(28		)	(3		)	Interest expense, net of amounts capitalized	(18		)	(14		)	(25		)
Foreign currency derivatives	—			—			1			Other operations and maintenance	—			—			1
										Other income (expense), net	—			(1		)	—
Total	$	(19	)	$	(28	)	$	(1	)		$	(18	)	$	(15	)	$	(24	)

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

For the Southern Company system's energy-related derivatives not designated as hedging instruments, a substantial portion of the pre-tax realized and unrealized gains and losses is associated with hedging fuel price risk of certain PPA customers and has no impact on net income or on fuel expense as presented in the Company's statements of income. As a result, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the Company's statements of income were immaterial for any year presented.

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, 2012, the fair value of derivative liabilities with contingent features was $15 million.

At December 31, 2012, the Company had no collateral posted with its derivative counterparties. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $15 million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Included in these amounts are 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.

Alabama 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 gross basis.

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 commodity fuel prices and prices of electricity. The Company manages fuel-hedging programs, implemented per the guidelines of the Alabama PSC, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility.

To mitigate residual risks relative to movements in electricity prices, the Company may enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the Company may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

Energy-related derivative contracts are accounted for in one of three methods:

•

Regulatory Hedges – Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the 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.


•	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 and 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.

At December 31, 2012, the net volume of energy-related derivative contracts for natural gas positions for the Company, together with the longest hedge date over which it is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest date for derivatives not designated as hedges, were as follows:



	Gas
Net Purchased mmBtu*	Longest Hedge Date	Longest Non-Hedge Date
(in millions)
57	2017	—



*	mmBtu – million British thermal units

For cash flow hedges, the amounts expected to be reclassified from OCI to revenue and fuel expense for the 12-month period ending December 31, 2013 are immaterial.

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, 2012, there were no interest rate derivatives outstanding.

For the year ended December 31, 2012, the Company had realized net losses of $36 million upon termination of certain interest rate derivatives at the same time the related debt was issued. The effective portion of these losses has been deferred in OCI and is being amortized to interest expense over the life of the original interest rate derivative, reflecting the period in which the forecasted hedged transaction affects earnings.

The estimated pre-tax losses that will be reclassified from OCI to interest expense for the 12-month period ending December 31, 2013 are $3 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2035.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in millions)					(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:	Other current assets	$	2	$	—	Liabilities from risk management activities	$	14	$	36
	Other deferred charges and assets	3		—		Other deferred credits and liabilities	4		12
Total derivatives designated as hedging instruments for regulatory purposes		$	5	$	—		$	18	$	48
Derivatives designated as hedging instruments in cash flow hedges
Interest rate derivatives:	Other current assets	$	—	$	—	Liabilities from risk management activities	$	—	$	18
Total		$	5	$	—		$	18	$	66

All derivative instruments are measured at fair value. See Note 10 for additional information.

At December 31, 2012 and 2011, the pre-tax effect of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred on the balance sheets was as follows:



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2012			2011			Balance Sheet Location	2012		2011
		(in millions)							(in millions)
Energy-related derivatives:	Other regulatory assets, current	$	(14	)	$	(36	)	Other current liabilities	$	2	$	—
	Other regulatory assets, deferred	(4		)	(12		)	Other regulatory liabilities, deferred	3		—
Total energy-related derivative gains (losses)		$	(18	)	$	(48	)		$	5	$	—

For the years ended December 31, 2012, 2011, and 2010, 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	2012			2011			2010		Statements of Income Location	2012			2011	2010
	(in millions)									(in millions)
Interest rate derivatives	$	(18	)	$	(14	)	$	—	Interest expense, net of amounts capitalized	$	(3	)	$3	$	3

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

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effect of energy-related derivatives not designated as hedging instruments on the statements of income was not material.

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 affiliated companies. At December 31, 2012, the fair value of derivative liabilities with contingent features was $2 million.

At December 31, 2012, the Company had no collateral posted with its derivative counterparties; however, because of the joint and several liability features underlying these derivatives, the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $15 million.

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

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 gross basis.

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 commodity fuel prices and prices of electricity. The Company manages a fuel hedging program, implemented per the guidelines of the Georgia PSC, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility.

To mitigate residual risks relative to movements in gas prices, the Company may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

Energy-related derivative contracts are accounted for in one of 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.

At December 31, 2012, the net volume of energy-related derivative contracts for natural gas positions totaled 105 million mmBtu (million British thermal units), all of which expire by 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 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. 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 income.

At December 31, 2012, there were no interest rate derivatives outstanding.

The estimated pre-tax losses that will be reclassified from OCI to interest expense for the 12-month period ending December 31, 2013 are not expected to have a material impact on the Company’s financial statements. The Company has deferred gains and losses related to interest rate derivative settlements that are expected to be amortized into earnings through 2037.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in millions)					(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:	Other current assets	$	6	$	8	Liabilities from risk management activities	$	30	$	68
	Other deferred charges and assets	5		5		Other deferred credits and liabilities	15		27
Total derivatives designated as hedging instruments for regulatory purposes		$	11	$	13		$	45	$	95

All derivative instruments are measured at fair value. See Note 10 for additional information.



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2012			2011			Balance Sheet Location	2012		2011
		(in millions)							(in millions)
Energy-related derivatives:	Other regulatory assets, current	$	(30	)	$	(68	)	Other regulatory liabilities, current	$	6	$	8
	Other regulatory assets, deferred	(15		)	(27		)	Other deferred credits and liabilities	5		5
Total energy-related derivative gains (losses)		$	(45	)	$	(95	)		$	11	$	13

The pre-tax effects of gains (losses) related to interest rate derivatives designated as cash flow hedging instruments recognized in OCI were not material for any year presented. Gains (losses) reclassified from accumulated OCI into income were as follows:



Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Amount
Statements of Income Location	2012			2011			2010
	(in millions)
Interest expense, net of amounts capitalized	$	(3	)	$	(4	)	$	(16	)

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

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 affiliated companies. At December 31, 2012, the fair value of derivative liabilities with contingent features was $6 million.

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 gross basis.

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 commodity fuel prices and prices of electricity. 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.

Energy-related derivative contracts are accounted for in 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 fuel 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.



Gas
Net Purchased mmBtu*	Longest Hedge Date	Longest Non-Hedge Date
(in thousands)
70,510	2017	—



*	mmBtu — million British thermal units

Interest Rate Derivatives

At December 31, 2012, there were no interest rate derivatives outstanding.

The estimated pre-tax losses that will be reclassified from OCI to interest expense for the 12-month period ending December 31, 2013 are $0.8 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2020.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in thousands)					(in thousands)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:	Other current assets	$	1,293	$	154	Liabilities from risk management activities	$	16,529	$	22,786
	Other deferred charges and assets	3,065		44		Other deferred credits and liabilities	10,583		18,197
Total derivatives designated as hedging instruments for regulatory purposes		$	4,358	$	198		$	27,112	$	40,983
Derivatives not designated as hedging instruments
Energy-related derivatives:	Other current assets	$	—	$	—	Liabilities from risk management activities	$	—	$	—
Total		$	4,358	$	198		$	27,112	$	40,983

All derivative instruments are measured at fair value. See Note 9 for additional information.



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2012			2011			Balance Sheet Location	2012		2011
		(in thousands)							(in thousands)
Energy-related derivatives:	Other regulatory assets, current	$	(16,529	)	$	(22,786	)	Other regulatory liabilities, current	$	1,293	$	154
	Other regulatory assets, deferred	(10,583		)	(18,197		)	Other regulatory liabilities, deferred	3,065		44
Total energy-related derivative gains (losses)		$	(27,112	)	$	(40,983	)		$	4,358	$	198

For the years ended December 31, 2012, 2011, and 2010, 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	Gain (Loss) Recognized in OCI on Derivative							Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Relationships	(Effective Portion)								Amount
Derivative Category	2012		2011		2010			Statements of Income Location	2012			2011			2010
	(in thousands)								(in thousands)
Interest rate derivatives	$	—	$	—	$	(1,405	)	Interest expense, net of amounts capitalized	$	(933	)	$	(933	)	$	(974	)

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

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were not material.

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 affiliated companies. At December 31, 2012, the fair value of derivative liabilities with contingent features was $4 million.

Mississippi 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 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 gross basis.

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 commodity fuel prices and prices of electricity. The Company manages fuel hedging programs, implemented per the guidelines of the Mississippi PSC, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility.

To mitigate residual risks relative to movements in electricity prices, the Company may enter into physical fixed-price or heat rate contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the Company may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

Energy-related derivative contracts are accounted for in one of three methods:

•


•	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 and 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.



Gas
Net Purchased mmBtu*	Longest Hedge Date	Longest Non-Hedge Date
(in millions)
38	2017	—



*	mmBtu — million British thermal units

For cash flow hedges, the amounts expected to be reclassified from OCI to revenue and fuel expense for the next 12-month period ending December 31, 2013 are immaterial.

Foreign Currency Derivatives

The Company may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates arising from purchases of equipment denominated in a currency other than U.S. dollars. Derivatives related to a firm commitment in a foreign currency transaction are accounted for as a fair value hedge where the derivatives' fair value gains or losses and the hedged items' fair value gains or losses are both recorded directly to earnings. Derivatives related to a forecasted transaction are accounted for as a cash flow hedge where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings. Any ineffectiveness is typically recorded directly to earnings, however, the Company has regulatory approval allowing it to defer any ineffectiveness associated with firm commitments related to the Kemper IGCC to a regulatory asset. During the year ended December 31, 2011, certain fair value hedges were de-designated and subsequently settled in 2012. The ineffectiveness related to the de-designated hedges was recorded as a regulatory asset and was immaterial to the Company. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At December 31, 2012, the following foreign currency derivatives were outstanding:



	Notional Amount	Forward Rate	Hedge Maturity Date	Fair Value Gain (Loss) December 31, 2012
	(in thousands)			(in thousands)
Fair value hedges of firm commitments
	EUR735	1.3758 Dollars per Euro	March 2014	$(37)

Interest Rate Derivatives

At December 31, 2012, there were no interest rate derivatives outstanding.

For the year ended December 31, 2012, the Company had realized net losses of $16.0 million upon termination of certain interest rate derivatives at the same time the related debt was issued. The effective portion of these losses has been deferred in OCI and is being amortized to interest expense over the life of the original interest rate derivative, reflecting the period in which the forecasted hedged transaction affects earnings.

The estimated pre-tax losses that will be reclassified from OCI to interest expense for the 12-month period ending December 31, 2013 are $1.4 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2022.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives, foreign currency derivatives, and interest rate derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in thousands)					(in thousands)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:	Other current assets	$	638	$	125	Liabilities from risk management activities	$	13,116	$	36,455
	Other deferred charges and assets	1,881		37		Other deferred credits and liabilities	6,330		14,697
Total derivatives designated as hedging instruments for regulatory purposes		$	2,519	$	162		$	19,446	$	51,152
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:	Other current assets	$	—	$	—	Liabilities from risk management activities	$	—	$	—
Interest rate derivatives:	Other current assets	—		—		Liabilities from risk management activities	—		15,208
Foreign currency derivatives:	Other current assets	—		19		Liabilities from risk management activities	—		625
	Other deferred charges and assets	—		—		Other deferred credits and liabilities	37		46
Total derivatives designated as hedging instruments in cash flow and fair value hedges		$	—	$	19		$	37	$	15,879
Derivatives not designated as hedging instruments
Energy-related derivatives:	Other current assets	$	—	$	—	Liabilities from risk management activities	$	—	$	—
Foreign currency derivatives:	Other current assets	—		1,507		Liabilities from risk management activities	—		1,839
Total derivatives not designated as hedging instruments		$	—	$	1,507		$	—	$	1,839
Total		$	2,519	$	1,688		$	19,483	$	68,870

All derivative instruments are measured at fair value. See Note 9 for additional information.



	Unrealized Losses							Unrealized Gains
Derivative Category	Balance Sheet Location	2012			2011			Balance Sheet Location	2012		2011
		(in thousands)							(in thousands)
Energy-related derivatives:	Other regulatory assets, current	$	(13,116	)	$	(36,455	)	Other regulatory liabilities, current	$	638	$	125
	Other regulatory assets, deferred	(6,330		)	(14,697		)	Other regulatory liabilities, deferred	1,881		37
Total energy-related derivative gains (losses)		$	(19,446	)	$	(51,152	)		$	2,519	$	162

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of 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)
Derivatives in Cash Flow Hedging Relationships										Amount
Derivative Category	2012			2011			2010		Statements of Income Location	2012			2011		2010
	(in thousands)									(in thousands)
Energy-related derivatives	$	—		$	(3	)	$	3	Fuel	$	—		$	—	$	—
Interest rate derivatives	(774		)	(14,361		)	—		Interest Expense	(1,073		)	48		—
Total	$	(774	)	$	(14,364	)	$	3		$	(1,073	)	$	48	$	—

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

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were immaterial. For the year ended December 31, 2012, the pre-tax effect of foreign currency derivatives not designated as hedging instruments was recorded as a regulatory asset and was immaterial to the Company.

For the years ended December 31, 2012 and 2011, the pre-tax effects of foreign currency derivatives designated as fair value hedging instruments, which include a pre-tax loss associated with de-designated hedges prior to de-designation, on the Company's statements of income were a $0.6 million gain and $3.6 million loss, respectively. For the year ended December 31, 2010, the pre-tax gain was $3.3 million. These amounts were offset by changes in the fair value of the purchase commitment related to equipment purchases. Therefore, there is no impact on the Company's statements of income.

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 affiliated companies. At December 31, 2012, the fair value of derivative liabilities with contingent features was $2.9 million.

Southern Power [Member]

Derivative [Line Items]

DERIVATIVES

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 commodity fuel prices and prices of electricity 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 sales of uncontracted generating capacity.

To mitigate residual risks relative to movements in electricity prices, the Company enters into physical fixed-price or heat rate contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the Company may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

Energy-related derivative contracts are accounted for in one of 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 AOCI 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.

At December 31, 2012, the net volume of energy-related derivative contracts for natural gas positions totaled 5.0 million mmBtu (million British thermal units), all of which expire by 2017, which is the longest non-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 immaterial.

Interest Rate Derivatives

The Company may also enter into interest rate derivatives from time to time 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 AOCI 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, 2012, there were no interest rate derivatives outstanding.

The estimated pre-tax loss that will be reclassified from AOCI to interest expense for the 12-month period ending December 31, 2013 is $6.5 million. The Company has deferred gains and losses that are expected to be amortized into earnings through 2016.

Derivative Financial Statement Presentation and Amounts

At December 31, 2012 and 2011, the fair value of energy-related derivatives was reflected in the balance sheets as follows:



	Asset Derivatives					Liability Derivatives
Derivative Category	Balance Sheet Location	2012		2011		Balance Sheet Location	2012		2011
		(in millions)					(in millions)
Derivatives designated as hedging instruments in cash flow hedges
Energy-related derivatives:	Assets from risk management activities	$	—	$	—	Liabilities from risk management activities	$	—	$	0.8
	Other deferred charges and assets – non-affiliated	—		—		Other deferred credits and liabilities – non-affiliated	—		—
Total derivatives designated as hedging instruments in cash flow hedges		$	—	$	—		$	—	$	0.8
Derivatives not designated as hedging instruments
Energy-related derivatives:	Assets from risk management activities	$	0.4	$	0.2	Liabilities from risk management activities	$	0.7	$	8.8
	Other deferred charges and assets – non-affiliated	1.7		0.4		Other deferred credits and liabilities – non-affiliated	0.6		0.2
Total derivatives not designated as hedging instruments		$	2.1	$	0.6		$	1.3	$	9.0
Total		$	2.1	$	0.6		$	1.3	$	9.8

All derivative instruments are measured at fair value. See Note 8 for additional information.

For the years ended December 31, 2012, 2011, and 2010, the pre-tax effects of energy-related derivatives and 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 AOCI on Derivative (Effective Portion)							Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships									Amount
Derivative Category	2012			2011		2010		Statements of Income Location	2012			2011			2010
	(in millions)								(in millions)
Energy-related derivatives	$	(0.2	)	$	0.1	$	1.5	Depreciation and amortization	$	0.4		$	0.4		$	0.4
Interest rate derivatives	—			—		—		Interest expense, net of amounts capitalized	(10.5		)	(11.4		)	(10.8		)
								Other income (expense), net	—			(1.0		)	—
Total	$	(0.2	)	$	0.1	$	1.5		$	(10.1	)	$	(12.0	)	$	(10.4	)

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

For the Company's energy-related derivatives not designated as hedging instruments, a substantial portion of the pre-tax realized and unrealized gains and losses is associated with hedging fuel price risk of certain PPA customers and has no impact on net income or on fuel expense as presented in the Company's statements of income. As a result, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the Company's statements of income were immaterial for the years ended December 31, 2012, 2011, and 2010.

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 affiliated companies. At December 31, 2012, the fair value of derivative liabilities with contingent features was immaterial.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. The Company participates in certain agreements that could require collateral in the event that one or more power pool participants has a credit rating change to below investment grade.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

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+ Details

Net
Purchased
mmBtu*

Longest
Hedge
Date

Longest
Non-Hedge
Date

(in millions)

Southern Company