DERIVATIVES

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas are exposed to market risks, including commodity price risk, interest rate risk, weather risk, and occasionally foreign currency 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. Southern Company Gas' wholesale gas operations use various contracts in its commercial activities that generally meet the definition of derivatives. For the traditional electric operating companies, Southern Power, and Southern Company Gas' other businesses, 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 13 for additional fair value information. In the statements of cash flows, any cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities. Any 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.

The registrants adopted ASU 2017-12 as of January 1, 2018. See Note 1 under "Recently Adopted Accounting Standards – Other" for additional information.

Energy-Related Derivatives

The traditional electric operating companies, Southern Power, and Southern Company Gas enter into energy-related derivatives to hedge exposures to electricity, natural gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional electric operating companies and the natural gas distribution utilities 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 of Southern Company Gas manage fuel-hedging programs, implemented per the guidelines of their respective state PSCs or other applicable state regulatory agencies, through the use of financial derivative contracts, which are 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 retains exposure to price changes that can, in a volatile energy market, be material and can adversely affect its results of operations.

Southern Company Gas also enters into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather. Exchange-traded options are carried at fair value, with changes reflected in operating revenues. Non-exchange-traded options are accounted for using the intrinsic value method. Changes in the intrinsic value for non-exchange-traded contracts are reflected in operating revenues.

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

•

Regulatory Hedges – Energy-related derivative contracts designated as regulatory hedges relate primarily to the traditional electric operating companies' and the 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 AOCI before being recognized in the statements of income in the same period and in the same income statement line item as the earnings effect of the hedged transactions.


•	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, 2018, the net volume of energy-related derivative contracts for natural gas positions, 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^(*)	431	2022	2029
Alabama Power	74	2022	—
Georgia Power	153	2022	—
Mississippi Power	63	2022	—
Southern Power	15	2020	—
Southern Company Gas^(*)	120	2021	2029

(*)

Southern Company Gas' derivative instruments include both long and short natural gas positions. A long position is a contract to purchase natural gas and a short position is a contract to sell natural gas. Southern Company Gas' volume represents the net of long natural gas positions of 4,159 million mmBtu and short natural gas positions of 4,039 million mmBtu at December 31, 2018, which is also included in Southern Company's total volume.

At December 31, 2018, the net volume of Southern Power's energy-related derivative contracts for power to be sold was 2 million MWHs, all of which expire by 2020.

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 natural gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 23 million mmBtu for Southern Company, which includes 4 million mmBtu for Alabama Power, 7 million mmBtu for Georgia Power, 3 million mmBtu for Mississippi Power, and 7 million mmBtu for Southern Power.

For cash flow hedges of energy-related derivatives, the estimated pre-tax gains (losses) expected to be reclassified from AOCI to earnings for the year ending December 31, 2019 are immaterial for all registrants.

Interest Rate Derivatives

Southern Company and certain subsidiaries may 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 derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and presented on the same income statement line item as the earnings effect of the hedged transactions. 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 on the same income statement line item. 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, 2018, 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, 2018
	(in millions)					(in millions)
Fair Value Hedges of Existing Debt
Southern Company^(*)	$	300	2.75%	3-month LIBOR + 0.92%	June 2020	$	(4	)
Southern Company^(*)	1,500		2.35%	1-month LIBOR + 0.87%	July 2021	(43		)
Georgia Power	200		4.25%	3-month LIBOR + 2.46%	December 2019	(2		)
Southern Company Consolidated	$	2,000				$	(49	)


(*)	Represents the Southern Company parent entity.

The estimated pre-tax gains (losses) related to interest rate derivatives expected to be reclassified from AOCI to interest expense for the year ending December 31, 2019 are $(19) million for Southern Company and immaterial for all other registrants. Deferred gains and losses related to interest rate derivatives are expected to be amortized into earnings through 2046 for the Southern Company parent entity, 2035 for Alabama Power, 2037 for Georgia Power, 2028 for Mississippi Power, and 2046 for Southern Company Gas.

Foreign Currency Derivatives

Southern Company and certain subsidiaries, including Southern Power, may 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 derivatives' fair value gains or losses are recorded in OCI and are reclassified into earnings at the same time and on the same income statement line as the earnings effect of the hedged transactions, including foreign currency gains or losses arising from changes in the U.S. currency exchange rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

At December 31, 2018, 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, 2018
	(in millions)			(in millions)				(in millions)
Cash Flow Hedges of Existing Debt
Southern Power	$	677	2.95%	€	600	1.00%	June 2022	$	25
Southern Power	564		3.78%	500		1.85%	June 2026	27
Total	$	1,241		€	1,100			$	52

The estimated pre-tax gains (losses) related to Southern Power's foreign currency derivatives that will be reclassified from AOCI to earnings for the year ending December 31, 2019 are $(23) million.

Derivative Financial Statement Presentation and Amounts

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas enter into 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. 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. The 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, 2018 and 2017, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:



	2018						2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Southern Company
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	8		$	23		$	10		$	43
Other deferred charges and assets/Other deferred credits and liabilities	9			26			7			24
Assets held for sale, current/Liabilities held for sale, current	—			6			—			—
Total derivatives designated as hedging instruments for regulatory purposes	$	17		$	55		$	17		$	67
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	3		$	7		$	3		$	14
Other deferred charges and assets/Other deferred credits and liabilities	1			2			—			—
Interest rate derivatives:
Other current assets/Other current liabilities	—			19			1			4
Other deferred charges and assets/Other deferred credits and liabilities	—			30			—			34
Foreign currency derivatives:
Other current assets/Other current liabilities	—			23			—			23
Other deferred charges and assets/Other deferred credits and liabilities	75			—			129			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	79		$	81		$	133		$	75
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	561		$	575		$	380		$	437
Other deferred charges and assets/Other deferred credits and liabilities	180			325			170			215
Total derivatives not designated as hedging instruments	$	741		$	900		$	550		$	652
Gross amounts recognized	$	837		$	1,036		$	700		$	794
Gross amounts offset^(a)	$	(524	)	$	(801	)	$	(405	)	$	(598	)
Net amounts recognized in the Balance Sheets^(b)	$	313		$	235		$	295		$	196



	2018						2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Alabama Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	3		$	4		$	2		$	6
Other deferred charges and assets/Other deferred credits and liabilities	3			6			2			4
Total derivatives designated as hedging instruments for regulatory purposes	$	6		$	10		$	4		$	10
Gross amounts recognized	$	6		$	10		$	4		$	10
Gross amounts offset	$	(4	)	$	(4	)	$	(4	)	$	(4	)
Net amounts recognized in the Balance Sheets	$	2		$	6		$	—		$	6

Georgia Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	2		$	8		$	2		$	9
Other deferred charges and assets/Other deferred credits and liabilities	4			13			4			10
Total derivatives designated as hedging instruments for regulatory purposes	$	6		$	21		$	6		$	19
Derivatives designated as hedging instruments in cash flow and fair value hedges
Interest rate derivatives:
Other current assets/Other current liabilities	$	—		$	2		$	—		$	4
Other deferred charges and assets/Other deferred credits and liabilities	—			—			—			1
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	—		$	2		$	—		$	5
Gross amounts recognized	$	6		$	23		$	6		$	24
Gross amounts offset	$	(6	)	$	(6	)	$	(6	)	$	(6	)
Net amounts recognized in the Balance Sheets	$	—		$	17		$	—		$	18



	2018						2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Mississippi Power
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Other current assets/Other current liabilities	$	1		$	3		$	1		$	6
Other deferred charges and assets/Other deferred credits and liabilities	2			6			1			3
Total derivatives designated as hedging instruments for regulatory purposes	$	3		$	9		$	2		$	9
Gross amounts recognized	$	3		$	9		$	3		$	9
Gross amounts offset	$	(2	)	$	(2	)	$	(2	)	$	(2	)
Net amounts recognized in the Balance Sheets	$	1		$	7		$	1		$	7

Southern Power
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Other current assets/Other current liabilities	$	3		$	6		$	3		$	11
Other deferred charges and assets/Other deferred credits and liabilities	1			2			—			—
Foreign currency derivatives:
Other current assets/Other current liabilities	—			23			—			23
Other deferred charges and assets/Other deferred credits and liabilities	75			—			129			—
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	79		$	31		$	132		$	34
Derivatives not designated as hedging instruments
Energy-related derivatives:
Other current assets/Other current liabilities	$	—		$	—		$	—		$	2
Total derivatives not designated as hedging instruments	$	—		$	—		$	—		$	2
Gross amounts recognized	$	79		$	31		$	132		$	36
Gross amounts offset	$	(3	)	$	(3	)	$	(3	)	$	(3	)
Net amounts recognized in the Balance Sheets	$	76		$	28		$	129		$	33



	2018						2017
Derivative Category and Balance Sheet Location	Assets			Liabilities			Assets			Liabilities
	(in millions)
Southern Company Gas
Derivatives designated as hedging instruments for regulatory purposes
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	2		$	8		$	5		$	8
Other deferred charges and assets/Other deferred credits and liabilities	—			1			—			—
Total derivatives designated as hedging instruments for regulatory purposes	$	2		$	9		$	5		$	8
Derivatives designated as hedging instruments in cash flow and fair value hedges
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	—		$	1		$	—		$	3
Total derivatives designated as hedging instruments in cash flow and fair value hedges	$	—		$	1		$	—		$	3
Derivatives not designated as hedging instruments
Energy-related derivatives:
Assets from risk management activities/Liabilities from risk management activities-current	$	559		$	574		$	379		$	434
Other deferred charges and assets/Other deferred credits and liabilities	180			325			170			215
Total derivatives not designated as hedging instruments	$	739		$	899		$	549		$	649
Gross amounts recognized	$	741		$	909		$	554		$	660
Gross amounts offset^(a)	$	(508	)	$	(785	)	$	(390	)	$	(583	)
Net amounts recognized in the Balance Sheets ^(b)	$	233		$	124		$	164		$	77


(a)	Gross amounts offset include cash collateral held on deposit in broker margin accounts of $277 million and $193 million at December 31, 2018 and 2017, respectively.


(b)	Net amounts of derivative instruments outstanding exclude premium and intrinsic value associated with weather derivatives of $8 million and $11 million at December 31, 2018 and 2017, respectively.

Energy-related derivatives not designated as hedging instruments were immaterial for Alabama Power, Georgia Power, Mississippi Power, and Southern Power at December 31, 2018 and 2017.

At December 31, 2018 and 2017, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:



Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2018
Derivative Category and Balance Sheet Location	Southern Company			Alabama Power			Georgia Power			Mississippi Power			Southern Company Gas
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(19	)	$	(3	)	$	(6	)	$	(2	)	$	(8	)
Other regulatory assets, deferred	(16		)	(3		)	(9		)	(4		)	—
Assets held for sale, current	(6		)	—			—			—			—
Other regulatory liabilities, current	1			—			—			—			1
Total energy-related derivative gains (losses)	$	(40	)	$	(6	)	$	(15	)	$	(6	)	$	(7	)



Regulatory Hedge Unrealized Gain (Loss) Recognized in the Balance Sheet at December 31, 2017
Derivative Category and Balance Sheet Location	Southern Company^(*)			Alabama Power			Georgia Power			Mississippi Power			Southern Company Gas^(*)
	(in millions)
Energy-related derivatives:
Other regulatory assets, current	$	(34	)	$	(4	)	$	(7	)	$	(5	)	$	(4	)
Other regulatory assets, deferred	(18		)	(3		)	(6		)	(2		)	—
Other regulatory liabilities, current	7			1			—			—			7
Other regulatory liabilities, deferred	1			—			—			—			—
Total energy-related derivative gains (losses)	$	(44	)	$	(6	)	$	(13	)	$	(7	)	$	3


(*)	Fair value gains and losses recorded in regulatory assets and liabilities include cash collateral held on deposit in broker margin accounts of $6 million at December 31, 2017.

For the years ended December 31, 2018, 2017, and 2016, the pre-tax effects of cash flow hedge accounting on AOCI for the applicable registrants were as follows:



Gain (Loss) Recognized in OCI on Derivative	2018			2017			2016
	(in millions)
Southern Company
Energy-related derivatives	$	17		$	(47	)	$	18
Interest rate derivatives	(1		)	(2		)	(180		)
Foreign currency derivatives	(78		)	140			(58		)
Total	$	(62	)	$	91		$	(220	)
Southern Power
Energy-related derivatives	$	10		$	(38	)	$	14
Foreign currency derivatives	(78		)	140			(58		)
Total	$	(68	)	$	102		$	(44	)



	Successor								Predecessor
Gain (Loss) Recognized in OCI on Derivative	Year Ended December 31, 2018		Year Ended December 31, 2017			July 1, 2016 through December 31, 2016			January 1, 2016 through June 30, 2016
	(in millions)								(in millions)
Southern Company Gas
Energy-related derivatives	$	7	$	(9	)	$	2		$	—
Interest rate derivatives	—		—			(5		)	(64		)
Total	$	7	$	(9	)	$	(3	)	$	(64	)

For all years presented, the pre-tax effects of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on AOCI were immaterial for the other registrants. In addition, for the years ended December 31, 2017 and 2016, there was no material ineffectiveness recorded in earnings for any registrant. Upon the adoption of ASU 2017-12, beginning in 2018, ineffectiveness was no longer separately measured and recorded in earnings. See Note 1 for additional information.

The pre-tax effects of cash flow and fair value hedge accounting on income for the years ended December 31, 2018, 2017, and 2016 were as follows:



Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships	2018			2017			2016
	(in millions)
Southern Company
Total cost of natural gas	$	1,539		$	1,601		$	613
Gain (loss) on energy-related cash flow hedges^(a)	2			(2		)	(1		)
Total depreciation and amortization	3,131			3,010			2,502
Gain (loss) on energy-related cash flow hedges^(a)	7			(16		)	2
Total interest expense, net of amounts capitalized	(1,842		)	(1,694		)	(1,317		)
Gain (loss) on interest rate cash flow hedges^(a)	(21		)	(21		)	(18		)
Gain (loss) on foreign currency cash flow hedges^(a)	(24		)	(23		)	(13		)
Gain (loss) on interest rate fair value hedges^(b)	(12		)	(22		)	(21		)
Total other income (expense), net	114			163			50
Gain (loss) on foreign currency cash flow hedges^(a)(c)	(60		)	160			(82		)
Alabama Power
Total interest expense, net of amounts capitalized	$	(323	)	$	(305	)	$	(302	)
Gain (loss) on interest rate cash flow hedges^(a)	(6		)	(6		)	(6		)
Georgia Power
Total interest expense, net of amounts capitalized	$	(397	)	$	(419	)	$	(388	)
Gain (loss) on interest rate cash flow hedges^(a)	(4		)	(4		)	(4		)
Gain (loss) on interest rate fair value hedges^(b)	2			(3		)	(1		)
Mississippi Power
Total interest expense, net of amounts capitalized	$	(76	)	$	(42	)	$	(74	)
Gain (loss) on interest rate cash flow hedges^(a)	(2		)	(2		)	3
Southern Power
Total depreciation and amortization	$	493		$	503		$	352
Gain (loss) on energy-related cash flow hedges^(a)	7			(17		)	2
Total interest expense, net of amounts capitalized	(183		)	(191		)	(117		)
Gain (loss) on foreign currency cash flow hedges^(a)	(24		)	(23		)	(13		)
Total other income (expense), net	23			1			6
Gain (loss) on foreign currency cash flow hedges^(a)(c)	(60		)	159			(82		)


(a)	Reclassified from AOCI into earnings.


(b)	For fair value hedges, changes in the fair value of the derivative contracts are generally equal to changes in the fair value of the underlying debt and have no material impact on income.


(c)	The reclassification from AOCI 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.



	Successor								Predecessor
Location and Amount of Gain (Loss) Recognized in Income on Cash Flow and Fair Value Hedging Relationships	Year Ended December 31, 2018		Year Ended December 31, 2017			July 1, 2016 through December 31, 2016			January 1, 2016 through June 30, 2016
	(in millions)								(in millions)
Southern Company Gas
Total cost of natural gas	$	1,539	$	1,601		$	613		$	755
Gain (loss) on energy-related cash flow hedges^(*)	2		(2		)	(1		)	(1		)


(*)	Amounts reflect gains or losses on cash flow hedges that were reclassified from AOCI into earnings.

The pre-tax effects of cash flow hedge accounting on income for interest rate derivatives were immaterial for all other registrants for all years presented.

At December 31, 2018 and 2017, the following amounts were recorded on the balance sheets related to cumulative basis adjustments for fair value hedges:



	Carrying Amount of the Hedged Item						Cumulative Amount of Fair Value Hedging Adjustment included in Carrying Amount of the Hedged Item
Balance Sheet Location of Hedged Items	At December 31, 2018			At December 31, 2017			At December 31, 2018		At December 31, 2017
	(in millions)						(in millions)
Southern Company
Securities due within one year	$	(498	)	$	(746	)	$	2	$	3
Long-term debt	(2,052		)	(2,553		)	41		35

Georgia Power
Securities due within one year	$	(498	)	$	(746	)	$	2	$	3
Long-term debt	—			(498		)	—		1

The pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income for the years ended December 31, 2018, 2017, and 2016 for the applicable registrants were as follows:



		Gain (Loss)
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	2018			2017			2016
		(in millions)
Southern Company
Energy-related derivatives	Natural gas revenues^(*)	$	(122	)	$	(80	)	$	33
	Cost of natural gas	(6		)	(2		)	3
	Wholesale electric revenues	2			(4		)	2
Total derivatives in non-designated hedging relationships		$	(126	)	$	(86	)	$	38


(*)	Excludes the impact of weather derivatives recorded in natural gas revenues of $5 million, $23 million, and $6 million for the years ended December 31, 2018, 2017, and 2016, respectively, as they are accounted for based on intrinsic value rather than fair value.



		Gain (Loss)
		Successor								Predecessor
Derivatives in Non-Designated Hedging Relationships	Statements of Income Location	For the Year Ended December 31, 2018			For the Year Ended December 31, 2017			July 1, 2016 through December 31, 2016		January 1, 2016 through June 30, 2016
					(in millions)					(in millions)
Southern Company Gas
Energy-related derivatives	Natural gas revenues^(*)	$	(122	)	$	(80	)	$	33	$	(1	)
	Cost of natural gas	(6		)	(2		)	3		(62		)
Total derivatives in non-designated hedging relationships		$	(128	)	$	(82	)	$	36	$	(63	)

(*)

Excludes the impact of weather derivatives recorded in natural gas revenues of $5 million and $23 million for the successor years ended December 31, 2018 and 2017, respectively, $6 million for the successor period of July 1, 2016 through December 31, 2016, and $3 million for the predecessor period of January 1, 2016 through June 30, 2016, as they are accounted for based on intrinsic value rather than fair value.

The pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were immaterial for all other registrants for all years presented.

Contingent Features

Southern Company, the traditional electric operating companies, Southern Power, and Southern Company Gas do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. At December 31, 2018, the registrants had no collateral posted with derivative counterparties to satisfy these arrangements.

For the registrants with interest rate derivatives at December 31, 2018, the fair value of interest rate derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, was immaterial. At December 31, 2018, the fair value of energy-related derivative liabilities with contingent features and the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were immaterial for all registrants. The maximum potential collateral requirements arising from the credit-risk-related contingent features for the traditional electric operating companies and Southern Power 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. Following the sale of Gulf Power to NextEra Energy, Gulf Power is continuing to participate in the Southern Company power pool for a defined transition period that, subject to certain potential adjustments, is scheduled to end on January 1, 2024.

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.

Alabama Power and Southern Power maintain 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, Alabama Power and Southern Power may be required to post collateral. At December 31, 2018, cash collateral posted in these accounts was immaterial. Southern Company Gas 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 Gas may be required to deposit cash into these accounts. At December 31, 2018, cash collateral held on deposit in broker margin accounts was $277 million.

The registrants are exposed to losses related to financial instruments in the event of counterparties' nonperformance. The registrants 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. The registrants have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate their exposure to counterparty credit risk. Prior to entering into a physical transaction, Southern Company Gas 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. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.

In addition, Southern Company Gas conducts credit evaluations and obtains appropriate internal approvals for the 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, Southern Company Gas requires credit enhancements by way of a guaranty, cash deposit, or letter of credit for transaction counterparties that do not have investment grade ratings.

Southern Company Gas also utilizes master netting agreements whenever possible to mitigate exposure to counterparty credit risk. When Southern Company Gas 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 Southern Company Gas' credit risk. Southern Company Gas also uses other netting agreements with certain counterparties with whom it conducts significant transactions. Master netting agreements enable Southern Company Gas to net certain assets and liabilities by counterparty. Southern Company Gas also nets across product lines and against cash collateral provided the master netting and cash collateral agreements include such provisions. Southern Company Gas may require counterparties to pledge additional collateral when deemed necessary.

The registrants do not anticipate a material adverse effect on their respective financial statements as a result of counterparty nonperformance.