DERIVATIVES

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. In the statements of cash flows, the cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities and the cash impacts of settled foreign currency derivatives are recorded as investing activities.

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. The traditional operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in commodity fuel prices and prices of electricity because their 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 uncontracted generating capacity. Further, the traditional operating companies may be exposed to market volatility in energy-related commodity prices to the extent any wholesale generating capacity is uncontracted. Gulf Power currently has long-term sales agreements for 100% of its wholesale capacity through 2015 and 57% through 2018.

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 under 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 March 31, 2014, the net volume of energy-related derivative contracts for natural gas positions for the Southern Company system, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:



	Net Purchased mmBtu	Longest Hedge Date	Longest Non-Hedge Date
	(in millions)
Southern Company	256	2018	2017
Alabama Power	65	2017	—
Georgia Power	53	2017	—
Gulf Power	83	2018	—
Mississippi Power	54	2017	—
Southern Power	1	—	2017

In addition to the volumes discussed in the above table, 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 7 million mmBtu for Southern Company, 1 million mmBtu for Alabama Power, 4 million mmBtu for Georgia Power, 1 million mmBtu for Gulf Power, and 1 million mmBtu for Southern Power.

For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to revenue and fuel expense for the next 12-month period ending March 31, 2015 are immaterial for all registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings, with any ineffectiveness recorded directly to earnings. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings, providing an offset, with any difference representing ineffectiveness.

At March 31, 2014, the following interest rate derivatives were outstanding:

Notional

Amount

Interest Rate

Received

Weighted Average Interest Rate

Paid

Hedge

Maturity Date

Fair Value
Gain (Loss)
March 31, 2014

(in millions)

Fair value hedges of existing debt

Southern Company

350

4.15%

3-month
LIBOR +
1.96%

May 2014

The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to interest expense for the next 12-month period ending March 31, 2015 are immaterial for all registrants. Southern Company and certain subsidiaries have 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 fair value hedges 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. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. 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.

During the quarter ended March 31, 2014, Mississippi Power's fair value hedge was de-designated and the related ineffectiveness was recorded as a regulatory asset and was immaterial. At March 31, 2014, the fair value of the foreign currency derivatives outstanding was immaterial.

Derivative Financial Statement Presentation and Amounts

At March 31, 2014, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



Asset Derivatives at March 31, 2014
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets	$	36	$	11	$	8	$	10	$	7
Other deferred charges and assets	4		1		—		2		1
Total derivatives designated as hedging instruments for regulatory purposes	$	40	$	12	$	8	$	12	$	8	N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets	3		—		—		—		—		$	—
Total asset derivatives	$	43	$	12	$	8	$	12	$	8	$	—



Liability Derivatives at March 31, 2014
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Liabilities from risk management activities	$	17	$	1	$	10	$	4	$	2
Other deferred credits and liabilities	26		5		6		9		6
Total liability derivatives	$	43	$	6	$	16	$	13	$	8	N/A

At December 31, 2013, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:



Asset Derivatives at December 31, 2013
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets	$	16	$	5	$	3	$	5	$	3
Other deferred charges and assets	7		2		2		2		2
Total derivatives designated as hedging instruments for regulatory purposes	$	23	$	7	$	5	$	7	$	5	N/A
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets	3		—		—		—		—		$	—
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other deferred charges and assets	1		—		—		—		—		1
Total asset derivatives	$	27	$	7	$	5	$	7	$	5	$	1



Liability Derivatives at December 31, 2013
	Fair Value
Derivative Category and Balance Sheet Location	Southern Company		Alabama Power		Georgia Power		Gulf Power		Mississippi Power		Southern Power
	(in millions)
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Liabilities from risk management activities	$	26	$	3	$	13	$	6	$	4
Other deferred credits and liabilities	29		5		8		11		6
Total derivatives designated as hedging instruments for regulatory purposes	$	55	$	8	$	21	$	17	$	10	N/A
Derivatives not designated as hedging instruments
Energy-related derivatives:
Liabilities from risk management activities	1		—		—		—		—		$	1
Total liability derivatives	$	56	$	8	$	21	$	17	$	10	$	1

All derivative instruments are measured at fair value. See Note (C) herein for additional information.

The derivative contracts of Southern Company, the traditional operating companies, and Southern Power are not subject to master netting arrangements or similar agreements and are reported gross on each registrant's financial statements. Some of these energy-related and interest rate derivative contracts contain certain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. Amounts related to energy-related derivative contracts at March 31, 2014 and December 31, 2013 are presented in the following tables. Interest rate derivatives presented in the tables above do not have amounts available for offset and are therefore excluded from the offsetting disclosure tables below.



Derivative Contracts at March 31, 2014
	Fair Value
	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Power
	(in millions)
Assets
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet ^(a)	$	40		$	12		$	8		$	12		$	8		$	—
Gross amounts not offset in the Balance Sheet ^(b)	(33		)	(6		)	(8		)	(8		)	(5		)	—
Net energy-related derivative assets	$	7		$	6		$	—		$	4		$	3		$	—
Liabilities
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet ^(a)	$	(43	)	$	(6	)	$	(16	)	$	(13	)	$	(8	)	$	—
Gross amounts not offset in the Balance Sheet ^(b)	33			6			8			8			5			—
Net energy-related derivative liabilities	$	(10	)	$	—		$	(8	)	$	(5	)	$	(3	)	$	—

(a) None of the registrants offset fair value amounts for multiple derivative instruments executed with the same counterparty on the balance sheets; therefore, gross and net amounts of derivative assets and liabilities presented on the balance sheets are the same.

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



Derivative Contracts at December 31, 2013
	Fair Value
	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power			Southern Power
	(in millions)
Assets
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet ^(a)	$	24		$	7		$	5		$	7		$	5		$	1
Gross amounts not offset in the Balance Sheet ^(b)	(22		)	(5		)	(5		)	(6		)	(4		)	—
Net energy-related derivative assets	$	2		$	2		$	—		$	1		$	1		$	1
Liabilities
Energy-related derivatives:
Energy-related derivatives presented in the Balance Sheet ^(a)	$	56		$	8		$	21		$	17		$	10		$	1
Gross amounts not offset in the Balance Sheet ^(b)	(22		)	(5		)	(5		)	(6		)	(4		)	—
Net energy-related derivative liabilities	$	34		$	3		$	16		$	11		$	6		$	1

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

At March 31, 2014 and December 31, 2013, 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:



Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at March 31, 2014
Derivative Category and Balance Sheet Location	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(17	)	$	(1	)	$	(10	)	$	(4	)	$	(2	)
Other regulatory assets, deferred	(26		)	(5		)	(6		)	(9		)	(6		)
Other regulatory liabilities, current	36			11			8			10			7
Other regulatory liabilities, deferred	4			1			—			2			1
Total energy-related derivative gains (losses)	$	(3	)	$	6		$	(8	)	$	(1	)	$	—



Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at December 31, 2013
Derivative Category and Balance Sheet Location	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(26	)	$	(3	)	$	(13	)	$	(6	)	$	(4	)
Other regulatory assets, deferred	(29		)	(5		)	(8		)	(11		)	(6		)
Other regulatory liabilities, current	16			5			3			5			3
Other regulatory liabilities, deferred ^(a)	7			2			2			2			2
Total energy-related derivative gains (losses)	$	(32	)	$	(1	)	$	(16	)	$	(10	)	$	(5	)


(a)	Georgia Power includes Other regulatory liabilities, deferred in Other deferred credits and liabilities.

For the three months ended March 31, 2014 and 2013, the pre-tax effects of interest rate and foreign currency derivatives designated as fair value hedging instruments on the statements of income were immaterial on a gross basis for all registrants. Furthermore, the pre-tax effects of interest rate derivatives designated as fair value instruments on the statements of income were offset by changes to the carrying value of long-term debt and the pre-tax effects of foreign currency derivatives designated as fair value hedging instruments on the statements of income were offset by changes in the fair value of the purchase commitment related to equipment purchases.

For the three months ended March 31, 2014 and 2013, the pre-tax effects 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 immaterial for all registrants.

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

For the three months ended March 31, 2014 and 2013, the pre-tax effects of energy-related and foreign currency derivatives not designated as hedging instruments on the statements of income were immaterial for all registrants.

For Southern Power's energy-related derivatives not designated as hedging instruments, a substantial portion of the pre-tax realized and unrealized gains and losses was associated with hedging fuel price risk of certain PPA customers and had no impact on net income or on fuel expense as presented in Southern Company's and Southern Power's statements of income for the three months ended March 31, 2013. This third party hedging activity has been discontinued.

Contingent Features

The registrants do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries.

At March 31, 2014, the fair value of derivative liabilities with contingent features was immaterial for all registrants.

At March 31, 2014, the registrants' collateral posted with their derivative counterparties was immaterial. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $2 million and include certain agreements that could require collateral in the event that one or more Southern Company power pool participants has a credit rating change to below investment grade.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. If collateral is required, fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivatives executed with the same counterparty.

Southern Company, the traditional operating companies, and Southern Power are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional operating companies, and Southern Power only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. Southern Company, the traditional operating companies, and Southern Power have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's, the traditional operating companies', and Southern Power's exposure to counterparty credit risk. Therefore, Southern Company, the traditional operating companies, and Southern Power do not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.