THE SOUTHERN COMPANY
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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
 
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                     to                     
         
Commission   Registrant, State of Incorporation,   I.R.S. Employer
File Number   Address and Telephone Number   Identification No.
1-3526
  The Southern Company   58-0690070
 
  (A Delaware Corporation)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-5000    
 
       
1-3164
  Alabama Power Company   63-0004250
 
  (An Alabama Corporation)    
 
  600 North 18th Street    
 
  Birmingham, Alabama 35291    
 
  (205) 257-1000    
 
       
1-6468
  Georgia Power Company   58-0257110
 
  (A Georgia Corporation)    
 
  241 Ralph McGill Boulevard, N.E.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-6526    
 
       
0-2429
  Gulf Power Company   59-0276810
 
  (A Florida Corporation)    
 
  One Energy Place    
 
  Pensacola, Florida 32520    
 
  (850) 444-6111    
 
       
001-11229
  Mississippi Power Company   64-0205820
 
  (A Mississippi Corporation)    
 
  2992 West Beach    
 
  Gulfport, Mississippi 39501    
 
  (228) 864-1211    
 
       
333-98553
  Southern Power Company   58-2598670
 
  (A Delaware Corporation)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-5000    

 


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     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes  þ  No  o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
                                 
    Large                   Smaller
    Accelerated   Accelerated   Non-accelerated   Reporting
Registrant   Filer   Filer   Filer   Company
The Southern Company
    X                          
Alabama Power Company
                    X          
Georgia Power Company
                    X          
Gulf Power Company
                    X          
Mississippi Power Company
                    X          
Southern Power Company
                    X          
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  o No þ (Response applicable to all registrants.)
             
    Description of   Shares Outstanding  
Registrant   Common Stock   at March 31, 2008  
The Southern Company
  Par Value $5 Per Share     767,212,302  
Alabama Power Company
  Par Value $40 Per Share     21,725,000  
Georgia Power Company
  Without Par Value     9,261,500  
Gulf Power Company
  Without Par Value     1,792,717  
Mississippi Power Company
  Without Par Value     1,121,000  
Southern Power Company
  Par Value $0.01 Per Share     1,000  
     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2008
             
        Page  
        Number  
DEFINITIONS     5  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION     7  
   
 
       
PART I — FINANCIAL INFORMATION
   
 
       
Item 1.  
Financial Statements (Unaudited)
       
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
       
           
        9  
        10  
        11  
        13  
        14  
           
        31  
        31  
        32  
        33  
        35  
           
        47  
        47  
        48  
        49  
        51  
           
        64  
        64  
        65  
        66  
        68  
           
        80  
        80  
        81  
        82  
        84  
           
        98  
        98  
        99  
        100  
        102  
        110  
Item 3.       29  
Item 4.       29  
Item 4T.       29  

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2008
             
          Page
          Number
PART II — OTHER INFORMATION
   
 
       
Item 1.         130
Item 1A.         130
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
  Inapplicable
Item 3.  
Defaults Upon Senior Securities
  Inapplicable
Item 4.  
Submission of Matters to a Vote of Security Holders
  Inapplicable
Item 5.  
Other Information
  Inapplicable
Item 6.         131
          134

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DEFINITIONS
     
Term   Meaning
2007 Retail Rate Plan
  Georgia Power’s retail rate plan for the years 2008 through 2010
Alabama Power
  Alabama Power Company
Clean Air Act
  Clean Air Act Amendments of 1990
Dalton Utilities
  The City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light and Sinking Fund Commissioners
DOE
  U.S. Department of Energy
Duke Energy
  Duke Energy Corporation
ECO Plan
  Environmental Compliance Overview Plan
EPA
  U.S. Environmental Protection Agency
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
Form 10-K
  Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power for the year ended December 31, 2007
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IGCC
  Integrated coal gasification combined cycle
IIC
  Intercompany Interchange Contract
IRC
  Internal Revenue Code of 1986, as amended
IRS
  Internal Revenue Service
KWH
  Kilowatt-hour
LIBOR
  London Interbank Offered Rate
MEAG Power
  Municipal Electric Authority of Georgia
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
MW
  Megawatt
NRC
  Nuclear Regulatory Commission
NSR
  New Source Review
OPC
  Oglethorpe Power Corporation
PEP
  Performance Evaluation Plan
Power Pool
  The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA
  Power Purchase Agreement
PSC
  Public Service Commission
Rate CNP
  Alabama Power’s certified new plant rate mechanism
Rate ECR
  Alabama Power’s energy cost recovery rate mechanism
Rate NDR
  Alabama Power’s natural disaster recovery rate mechanism
Rate RSE
  Alabama Power’s rate stabilization and equilization rate mechanism
registrants
  Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power
SCS
  Southern Company Services, Inc.
SEC
  Securities and Exchange Commission
SFAS No. 157
  FASB Statement No. 157, “Fair Value Measurement”

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DEFINITIONS
(continued)
     
     
Term   Meaning
Southern Company
  The Southern Company
Southern Company system
  Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
Southern Nuclear
  Southern Nuclear Operating Company, Inc.
Southern Power
  Southern Power Company
Stone & Webster
  Stone & Webster, Inc.
traditional operating companies
  Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Westinghouse
  Westinghouse Electric Company LLC
wholesale revenues
  revenues generated from sales for resale

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit trust contributions, financing activities, completion of construction projects, plans and estimated costs for new generation resources, impacts of adoption of new accounting rules, costs of implementing the IIC settlement with the FERC, cash flow impact of the Economic Stimulus Act of 2008 on tax payments in 2008, unrecognized tax benefits related to leveraged lease transactions, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:
  the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, implementation of the Energy Policy Act of 2005, environmental laws including regulation of water quality and emissions of sulfur, nitrogen, mercury, carbon, soot, or particulate matter and other substances, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
 
  current and future litigation, regulatory investigations, proceedings, or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, IRS audits, and Mirant matters;
 
  the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;
 
  variations in demand for electricity, including those relating to weather, the general economy, population and business growth (and declines), and the effects of energy conservation measures;
 
  available sources and costs of fuels;
 
  effects of inflation;
 
  ability to control costs;
 
  investment performance of Southern Company’s employee benefit plans;
 
  advances in technology;
 
  state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery;
 
  regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC and NRC approvals;
 
  the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;
 
  internal restructuring or other restructuring options that may be pursued;
 
  potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
 
  the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;
 
  the ability to obtain new short- and long-term contracts with neighboring utilities;
 
  the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents;
 
  interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;
 
  the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;
 
  catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts, pandemic health events such as an avian influenza, or other similar occurrences;
 
  the direct or indirect effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast;
 
  the effect of accounting pronouncements issued periodically by standard setting bodies; and
 
  other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.
Each registrant expressly disclaims any obligation to update any forward-looking statements.

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THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 3,005,614     $ 2,743,811  
Wholesale revenues
    513,662       480,699  
Other electric revenues
    130,190       121,294  
Other revenues
    33,444       62,865  
 
           
Total operating revenues
    3,682,910       3,408,669  
 
           
Operating Expenses:
               
Fuel
    1,451,943       1,316,519  
Purchased power
    92,904       64,073  
Other operations
    590,426       565,372  
Maintenance
    306,391       281,995  
Depreciation and amortization
    343,885       306,344  
Taxes other than income taxes
    189,272       183,039  
 
           
Total operating expenses
    2,974,821       2,717,342  
 
           
Operating Income
    708,089       691,327  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    40,585       20,174  
Interest income
    9,805       10,555  
Equity in income (losses) of unconsolidated subsidiaries
    328       (6,735 )
Leveraged lease income
    10,925       9,862  
Interest expense, net of amounts capitalized
    (217,109 )     (217,850 )
Preferred and preference dividends of subsidiaries
    (16,195 )     (10,129 )
Other income (expense), net
    914       (2,931 )
 
           
Total other income and (expense)
    (170,747 )     (197,054 )
 
           
Earnings Before Income Taxes
    537,342       494,273  
Income taxes
    178,138       155,584  
 
           
Consolidated Net Income
  $ 359,204     $ 338,689  
 
           
Common Stock Data:
               
Earnings per share-
               
Basic
  $ 0.47     $ 0.45  
Diluted
  $ 0.47     $ 0.45  
Average number of shares of common stock outstanding (in thousands)
               
Basic
    766,150       750,259  
Diluted
    770,322       755,352  
Cash dividends paid per share of common stock
  $ 0.4025     $ 0.3875  
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Consolidated net income
  $ 359,204     $ 338,689  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    407,690       363,903  
Deferred income taxes and investment tax credits
    (2,342 )     53,433  
Deferred revenues
    33,446       (5,583 )
Allowance for equity funds used during construction
    (40,585 )     (20,174 )
Equity in losses of unconsolidated subsidiaries
    (328 )     6,735  
Leveraged lease income
    (10,925 )     (9,862 )
Pension, postretirement, and other employee benefits
    30,916       19,992  
Stock option expense
    13,427       20,554  
Derivative fair value adjustments
    14,380       (5,932 )
Hedge settlements
    27,180       (3,923 )
Other, net
    (7,239 )     (4,475 )
Changes in certain current assets and liabilities —
               
Receivables
    188,538       161,960  
Fossil fuel stock
    (53,305 )     (63,438 )
Materials and supplies
    (22,762 )     (7,077 )
Other current assets
    (61,320 )     (63,751 )
Accounts payable
    (114,636 )     (92,238 )
Accrued taxes
    13,865       (100,356 )
Accrued compensation
    (265,386 )     (325,500 )
Other current liabilities
    10,213       (1,107 )
 
           
Net cash provided from operating activities
    520,031       261,850  
 
           
Investing Activities:
               
Property additions
    (1,012,907 )     (742,384 )
Distribution of restricted cash from pollution control bonds
    35,716        
Nuclear decommissioning trust fund purchases
    (160,752 )     (167,193 )
Nuclear decommissioning trust fund sales
    153,872       160,313  
Investment in unconsolidated subsidiaries
    (2,780 )     (11,423 )
Cost of removal, net of salvage
    (25,581 )     (22,870 )
Other
    17,191       (4,315 )
 
           
Net cash used for investing activities
    (995,241 )     (787,872 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (100,215 )     (299,583 )
Proceeds —
               
Long-term debt
    930,000       1,350,000  
Common stock
    132,107       167,509  
Redemptions —
               
Long-term debt
    (4,653 )     (405,210 )
Preferred stock
    (125,000 )      
Payment of common stock dividends
    (307,960 )     (290,292 )
Other
    (770 )     (1,759 )
 
           
Net cash provided from financing activities
    523,509       520,665  
 
           
Net Change in Cash and Cash Equivalents
    48,299       (5,357 )
Cash and Cash Equivalents at Beginning of Period
    200,550       166,846  
 
           
Cash and Cash Equivalents at End of Period
  $ 248,849     $ 161,489  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $21,800 and $12,259 capitalized for 2008 and 2007, respectively)
  $ 197,570     $ 181,712  
Income taxes (net of refunds)
  $ 3,719     $ (19,257 )
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 248,849     $ 200,550  
Restricted cash
    32,442       68,013  
Receivables —
               
Customer accounts receivable
    988,001       999,264  
Unbilled revenues
    297,251       294,487  
Under recovered regulatory clause revenues
    667,391       715,744  
Other accounts and notes receivable
    294,072       347,573  
Accumulated provision for uncollectible accounts
    (23,217 )     (22,142 )
Fossil fuel stock, at average cost
    763,886       709,823  
Materials and supplies, at average cost
    738,779       725,001  
Vacation pay
    133,926       134,806  
Prepaid expenses
    216,911       147,903  
Other
    467,709       411,210  
 
           
Total current assets
    4,826,000       4,732,232  
 
           
Property, Plant, and Equipment:
               
In service
    47,719,321       47,175,717  
Less accumulated depreciation
    17,690,685       17,412,658  
 
           
 
    30,028,636       29,763,059  
Nuclear fuel, at amortized cost
    423,370       336,129  
Construction work in progress
    3,551,358       3,227,605  
 
           
Total property, plant, and equipment
    34,003,364       33,326,793  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    1,064,197       1,131,798  
Leveraged leases
    995,400       984,441  
Other
    222,548       237,400  
 
           
Total other property and investments
    2,282,145       2,353,639  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    927,458       910,402  
Prepaid pension costs
    2,399,735       2,368,798  
Unamortized debt issuance expense
    194,831       190,700  
Unamortized loss on reacquired debt
    283,537       288,973  
Deferred under recovered regulatory clause revenues
    318,089       388,945  
Other regulatory assets
    842,186       769,226  
Other
    518,408       459,172  
 
           
Total deferred charges and other assets
    5,484,244       5,376,216  
 
           
 
               
Total Assets
  $ 46,595,753     $ 45,788,880  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholders’ Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,243,616     $ 1,177,889  
Notes payable
    1,171,242       1,271,457  
Accounts payable
    1,152,838       1,213,766  
Customer deposits
    283,786       273,800  
Accrued taxes —
               
Income taxes
    380,072       216,836  
Other
    177,480       329,895  
Accrued interest
    222,566       217,883  
Accrued vacation pay
    167,528       170,574  
Accrued compensation
    145,433       407,543  
Other
    498,050       351,017  
 
           
Total current liabilities
    5,442,611       5,630,660  
 
           
Long-term Debt
    14,887,512       14,143,114  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    5,831,898       5,838,674  
Deferred credits related to income taxes
    267,411       272,181  
Accumulated deferred investment tax credits
    473,345       479,302  
Employee benefit obligations
    1,525,566       1,492,472  
Asset retirement obligations
    1,200,297       1,200,094  
Other cost of removal obligations
    1,312,585       1,307,732  
Other regulatory liabilities
    1,649,585       1,613,004  
Other
    359,762       346,371  
 
           
Total deferred credits and other liabilities
    12,620,449       12,549,830  
 
           
Total Liabilities
    32,950,572       32,323,604  
 
           
Preferred and Preference Stock of Subsidiaries
    1,081,863       1,080,248  
 
           
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1 billion shares
               
Issued — March 31, 2008: 767,624,255 Shares;
               
— December 31, 2007: 763,502,427 Shares
               
Treasury — March 31, 2008: 411,953 Shares;
               
— December 31, 2007: 398,746 Shares
               
Par value
    3,838,068       3,817,453  
Paid-in capital
    1,587,414       1,454,288  
Treasury, at cost
    (11,799 )     (11,143 )
Retained earnings
    7,201,511       7,154,596  
Accumulated other comprehensive loss
    (51,876 )     (30,166 )
 
           
Total Common Stockholders’ Equity
    12,563,318       12,385,028  
 
           
Total Liabilities and Stockholders’ Equity
  $ 46,595,753     $ 45,788,880  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Consolidated Net Income
  $ 359,204     $ 338,689  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(13,988) and $(1,567), respectively
    (22,251 )     (2,468 )
Reclassification adjustment for amounts included in net income, net of tax of $1,778 and $1,259, respectively
    2,775       2,204  
Marketable securities:
               
Change in fair value, net of tax of $(2,137) and $818, respectively
    (3,101 )     1,307  
Pension and other post retirement benefit plans:
               
Reclassification adjustment for amounts included in net income, net of tax of $259 and $246, respectively
    411       438  
 
           
Total other comprehensive income (loss)
    (22,166 )     1,481  
 
           
COMPREHENSIVE INCOME
  $ 337,038     $ 340,170  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – and Southern Power. The traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, and manages generation assets and sells electricity at market-based rates in the wholesale market. Southern Company’s other business activities include investments in leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS – The Southern Company System – “Traditional Operating Companies,” “Southern Power,” and “Other Businesses” in Item 1 of the Form 10-K.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$20.5
  6.1
 
Southern Company’s first quarter 2008 earnings were $359.2 million ($0.47 per share) compared to $338.7 million ($0.45 per share) for the first quarter 2007. The increase in earnings for the first quarter 2008 when compared to the same period in 2007 resulted primarily from retail base rate increases at Alabama Power and Georgia Power and an increase in contributions from market-response rates to large commercial and industrial customers. The first quarter increase was partially offset by higher other operations and maintenance expenses and higher depreciation and amortization.
Retail Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$261.8   9.5
 
In the first quarter 2008, retail revenues were $3.01 billion compared to $2.74 billion in the same period in 2007. Details of the change to retail revenues follow:
                 
    First Quarter
    2008
    (in millions)   % change
Retail – prior year
  $ 2,743.8          
Estimated change in —
               
Rates and pricing
    131.9       4.8  
Sales growth
    22.5       0.8  
Weather
    1.1       0.1  
Fuel and other cost recovery
    106.3       3.8  
 
Retail – current year
  $ 3,005.6       9.5 %
 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the same period in 2007 primarily as a result of retail base rate increases at Alabama Power and Georgia Power and an increase in revenues from market-response rates to large commercial and industrial customers.
Revenues attributable to changes in sales growth increased in the first quarter 2008 when compared to the same period in 2007 due to a 1.4% increase in retail KWH sales resulting primarily from a 1.1% increase in customer growth and a 1.3% increase in electricity usage among commercial customers in the first quarter 2008 as compared to the first quarter 2007. For the first quarter 2008, residential KWH sales increased 1.9%, commercial KWH sales increased 1.9%, and industrial KWH sales increased 0.6%.
Revenues resulting from changes in weather were flat due to near normal weather in the first quarters of 2008 and 2007.
Fuel and other cost recovery revenues increased $106.3 million in the first quarter 2008 when compared to the same period in 2007. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$33.0
  6.9
 
In the first quarter 2008, wholesale revenues were $513.7 million compared to $480.7 million in the same period in 2007. The increase was primarily a result of a rise in fuel revenues due to a 9.6% increase in the average unit cost of fuel per net KWH generated. Also contributing to the increase were higher revenues associated with new and existing wholesale contracts. The first quarter increase was partially offset by lower revenues from short-term opportunity sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy.
Other Electric Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$8.9   7.3
 
In the first quarter 2008, other electric revenues were $130.2 million compared to $121.3 million in the same period in 2007. The increase was primarily a result of a $3.1 million increase in revenues from co-generation facilities due to higher natural gas prices, an increase in transmission revenues of $2.8 million, and an increase in outdoor lighting revenues of $1.9 million.
Other Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(29.5)   (46.8)
 
In the first quarter 2008, other revenues were $33.4 million compared to $62.9 million in the same period in 2007. The decrease was primarily a result of a $16.5 million decrease in fuel procurement service revenues following a contract termination in February 2007, a $4.7 million decrease in telecommunication service

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenues related to lower average revenue per subscriber and fewer subscribers due to increased competition within the industry, and a $2.3 million decrease in revenues at a subsidiary that provides energy-related services.
Fuel and Purchased Power Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change  
Fuel
  $ 135.4       10.3  
Purchased power
    28.8       45.0  
         
Total fuel and purchased power expenses
  $ 164.2          
         
Fuel and purchased power expenses for the first quarter 2008 were $1.54 billion compared to $1.38 billion for the corresponding period in 2007. The increase in fuel and purchased power expenses was due to a $135.3 million net increase in the average cost of fuel and purchased power, primarily related to a 12.8% increase in the cost of coal per net KWH generated. Also contributing to the increase was a $28.9 million net increase related to total KWHs generated and purchased when compared to the same period in 2007.
Increases in fuel expense at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.
Details of Southern Company’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter   Percent
Average Cost   2008   2007   Change
    (cents per net KWH)        
Fuel
    3.07       2.80       9.6  
Purchased power
    5.60       5.10       9.8  
 
Energy purchases will vary depending on demand for energy within the Southern Company service area, the market cost of available energy as compared to the cost of Southern Company system-generated energy, and the availability of Southern Company system generation.
Other Operations and Maintenance Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change  
Other operations
  $ 25.0       4.4  
Maintenance
    24.4       8.7  
         
Total other operations and maintenance expenses
  $ 49.4          
         
In the first quarter 2008, other operations and maintenance expenses were $896.8 million compared to $847.4 million in the same period in 2007. The increase in other operations and maintenance expenses was primarily a result of a $28.0 million increase in fossil and hydro expenses due to costs incurred for scheduled outages and maintenance of fossil and hydro generating units; an $11.6 million increase in nuclear expenses due to costs incurred for scheduled outages and maintenance of nuclear generating units; and a $9.3 million increase in customer account expenses largely related to increases in records and collections expenses and meter reading expenses.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$37.6
  12.3
 
In the first quarter 2008, depreciation and amortization was $343.9 million compared to $306.3 million in the same period in 2007. The increase in depreciation and amortization resulted primarily from an increase in plant in service related to environmental, transmission, and distribution projects mainly at Alabama Power and Georgia Power.
Allowance for Equity Funds Used During Construction
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$20.4   101.2
 
In the first quarter 2008, allowance for equity funds used during construction was $40.6 million compared to $20.2 million in the same period in 2007. The increase was a result of additional investments in environmental projects mainly at Alabama Power and Georgia Power, and generation facilities at Georgia Power.
Equity in Income (Losses) of Unconsolidated Subsidiaries
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$7.0   104.9
 
In the first quarter 2008, equity in income (losses) of unconsolidated subsidiaries was $0.3 million compared to $(6.7) million for the same period in 2007. The increase in the first quarter 2008 when compared with the same period in 2007 was primarily a result of Southern Company terminating, in December 2007, its investment in synthetic fuel production facilities which had generated operating losses.
Interest Expense, Net of Amounts Capitalized
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(0.8)
  (0.3)
 
Interest expense, net of amounts capitalized, was $217.1 million in the first quarter 2008 compared to $217.9 million for the corresponding period in 2007. This decrease is primarily the result of $9.7 million related to lower average interest rates on existing variable rate debt and $9.5 million more capitalized interest in the first quarter 2008 compared to the first quarter 2007. These decreases were mostly offset by an $18.4 million increase associated with $795 million in additional debt outstanding at March 31, 2008 compared to March 31, 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preferred and Preference Dividends of Subsidiaries
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$6.1   59.9
 
Preferred and preference dividends of subsidiaries were $16.2 million for the first quarter 2008 compared to $10.1 million for the corresponding period in 2007. This increase is primarily related to the issuance of $470 million of preference stock in September and October 2007, partially offset by the redemption of $125 million of preferred stock in January 2008. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.
Income Taxes
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$22.5   14.5
 
Income taxes for the first quarter 2008 were $178.1 million compared to $155.6 million for the corresponding period in 2007. The increase was due to higher pre-tax earnings and the unavailability of net synthetic fuel tax credits in the first quarter 2008 compared to the same period in 2007.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Other major factors include profitability of the competitive wholesale supply business and federal regulatory policy (including the FERC’s market-based rate proceeding), which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form
10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Southern Company’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Global Climate Issues
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information regarding executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On April 30, 2008, the Florida legislature enacted comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation, which has not yet been signed by the Governor, also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Southern Company will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.
FERC and State PSC Matters
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have continued to experience higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $957 million at March 31, 2008 as compared to $1.1 billion at December 31, 2007. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
will have no significant effect on Southern Company’s revenues or net income but will affect cash flow. The traditional operating companies continuously monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
In February 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate effective June 1, 2008. If approved as filed, total annual fuel billings will increase by $222 million. The Georgia PSC is scheduled to rule on the request May 20, 2008. The ultimate outcome of this matter cannot be determined at this time.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was introduced to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill, passed by the legislature on April 16, 2008 and awaiting approval by the Governor, authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant.
Income Tax Matters
Leveraged Lease Transactions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Leveraged Lease Transactions” of Southern Company in Item 7 of the Form 10-K for information regarding pending litigation and proposed legislation related to the sale-in-lease-out (SILO) transactions. Also see Note 1 to the financial statements of Southern Company under “Income and Other Taxes” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K for information regarding Southern Company’s unrecognized tax benefit related to the SILO litigation. The IRS challenged Southern Company’s deductions related to three international lease transactions in connection with its audits of Southern Company’s 2000 through 2003 tax returns. Southern Company is continuing to pursue resolution of these matters; however, the ultimate outcome cannot now be determined. In accordance with the requirements of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” and FASB Staff Position No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” Southern Company will continue to evaluate the SILO transactions and the projected timing of income tax cash flows in light of Southern Company’s pending litigation, other recent court decisions involving lease-in-lease-out  and SILO transactions, and proposed legislation. As a result, it is reasonably possible that the amount of the unrecognized tax benefit could significantly change within the next 12 months. The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of the pending litigation, other court decisions, and proposed legislation, but could be significant, and potentially material.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Southern Company is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $120 million and $215 million.
Construction Projects
Integrated Coal Gasification Combined Cycle
As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to another Southern Company project that would have been located in Orlando, Florida. The Orlando project was cancelled in 2007.
In December 2006, the Mississippi PSC approved Mississippi Power’s request for accounting treatment of the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities. The Mississippi PSC gave Mississippi Power the authority to create and recognize a regulatory asset for such costs. In December 2007, Mississippi Power reported to the Mississippi PSC an updated estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At March 31, 2008, Mississippi Power had spent $25.3 million, of which $2.7 million related to land purchases capitalized. The retail portion of $16.4 million was deferred in other regulatory assets and the wholesale portion of $6.2 million was expensed. The retail portion of these costs will be charged to and remain as a regulatory asset until the Mississippi PSC determines the prudence and ultimate recovery of such costs, which decision is expected by January 2009. The balance of such regulatory asset is included in Mississippi Power’s rate base for retail ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if such legislation is signed by the Governor and if the project proceeds. See “FERC and State PSC Matters – Mississippi Base Load Construction Legislation” herein for additional information.
The final outcome of this matter cannot now be determined.
Nuclear
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Nuclear” of Southern Company in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. In March 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners must finalize their ownership percentages by July 2, 2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC certification process.
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 baseload capacity request for proposals (RFP). No other responses to the RFP were received. Georgia Power will work with the Georgia PSC’s Independent Evaluator to finalize information required for certification, including updated fossil fuel and generation technology costs, before submitting a final recommendation on August 1, 2008 for the Georgia PSC’s approval. A final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Matters
Southern Company is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Leveraged Leases.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Company plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Company after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deconsolidation. Southern Company plans to adopt SFAS No. 160 on January 1, 2009. Southern Company is currently assessing its impact, if any.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Company’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $520 million for the first quarter 2008 compared to $262 million for the first quarter 2007. The $258 million increase in cash provided from operating activities in the first quarter 2008 is primarily due to a reduction in cash outflow for tax payments of $114 million, a decrease in cash used for compensation earned of $60 million, an increase in non-cash depreciation and amortization of $44 million primarily for new plant in service, an increase in cash inflow from accounts receivable of $27 million primarily related to fuel cost recovery, and an increase of $21 million in net income.
Net cash used for investing activities totaled $995 million for the first quarter 2008, an increase of $207 million over the prior period, primarily due to property additions to utility plant. Net cash provided from financing activities totaled $524 million for the first quarter 2008 compared to $521 million for the first quarter 2007 primarily due to the issuance of new long-term debt.
Significant balance sheet changes for the first three months of the year include an increase in total property, plant, and equipment of $677 million and an increase in long-term debt, excluding amounts due within one year, of $744 million used primarily for the repayment of short-term debt, construction expenditures, and general corporate purposes.
The market price of Southern Company’s common stock at March 31, 2008 was $35.61 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $16.38 per share, representing a market-to-book ratio of 217%, compared to $38.75, $16.23, and 239%, respectively, at the end of 2007. The dividend for the first quarter 2008 was $0.4025 per share compared to $0.3875 per share in the first quarter 2007. In April 2008, the dividend was increased to $0.42 for the dividend payable in June 2008.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, other purchase commitments, and derivative obligations. Approximately $1.2 billion will be required by March 31, 2009 for maturities of long-term debt. In addition, in connection with Georgia Power’s entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL - “Construction Projects” herein, the revised estimated total construction program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
placements, or public offerings. The amount and timing of additional equity capital to be raised in 2008, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities. The traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, and short-term borrowings. However, the amount, type, and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.
Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs, to meet liquidity needs. At March 31, 2008, Southern Company and its subsidiaries had approximately $249 million of cash and cash equivalents and approximately $4.3 billion of unused credit arrangements with banks, of which $841 million expire in 2008, $185 million expire in 2009, and $3.3 billion expire in 2012. Approximately $79 million of the credit facilities expiring in 2008 allow for the execution of term loans for an additional two-year period, and $530 million contain provisions allowing one-year term loans. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the traditional operating companies. At March 31, 2008, the Southern Company system had outstanding commercial paper of $1.0 billion and short-term bank notes of $150 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Southern Company in Item 7 and Note 7 to the financial statements of Southern Company under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2008, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $298 million. At March 31, 2008, the maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $1.0 billion. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Southern Company’s operating subsidiaries are also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Southern Company’s total exposure to these types of agreements was approximately $47 million.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, the traditional operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The traditional operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.
The changes in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter
    2008
    Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 4  
Contracts realized or settled
    10  
Current period changes(a)
    148  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ 162  
 
   
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
Gains and losses on energy-related derivative contracts related to the traditional operating companies’ fuel hedging programs are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. In addition, gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. 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.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Regulatory liabilities, net
  $ 183  
Accumulated other comprehensive income
    (10 )
Net income
    (11 )
 
Total fair value gain/(loss)
  $ 162  
 
Unrealized pre-tax losses recognized in income for the three months ended March 31, 2008 for energy-related derivative contracts that are not hedges were $14.0 million and were immaterial for the three months ended March 31, 2007.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
    March 31, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in millions)
Level 1
  $     $     $  
Level 2
    162       127       35  
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ 162     $ 127     $ 35  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Company in Item 7 and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first three months of 2008, Southern Company’s subsidiaries issued $550 million of senior notes, and Southern Company issued $132 million of common stock through the Southern Investment Plan and employee and director stock plans. In addition, Georgia Power and Mississippi Power entered into long-term bank loans of $300 million and $80 million, respectively. The proceeds were primarily used to repay short-term indebtedness and to fund ongoing construction projects. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2008. During the first quarter 2008, interest rate hedges of $225 million notional amount were settled at a loss of $15.8 million related to the issuances. These losses were deferred in other comprehensive income and will be amortized to income over the original term of the hedges. See Note (F) to the Condensed Financial Statements herein for further details. Also during the first three months of 2008, Southern Company and its subsidiaries paid at maturity $5 million of long-term debt and also redeemed $125 million of preferred stock. Subsequent to March 31, 2008, Gulf Power entered into a $110 million long-term bank loan, of which $80 million was borrowed in April 2008 and $30 million is to be borrowed in June 2008, and settled an interest rate hedge with an $80 million notional amount at a loss of $5.2 million.
During the first three months of 2008, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk related to variable rate obligations. The total notional amount of these derivatives is $1.2 billion.
Also in 2008, Southern Company’s subsidiaries converted their entire $1.2 billion of obligations related to auction rate tax-exempt securities from an auction rate mode to other interest rate modes. Approximately

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$696 million of the auction rate tax-exempt securities were converted to fixed interest rate modes and approximately $553 million were converted to a daily floating rate mode.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” herein for each registrant, and Notes 1 and 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
     (a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company conducted an evaluation under the supervision and with the participation of Southern Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to Southern Company (including its consolidated subsidiaries) required to be included in periodic filings with the SEC.
     (b) Changes in internal controls.
There have been no changes in Southern Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2008 that have materially affected or are reasonably likely to materially affect Southern Company’s internal control over financial reporting.
Item 4T. Controls and Procedures.
     (a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.
     (b) Changes in internal controls.
There have been no changes in Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2008 that have materially affected or are reasonably likely to materially affect Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 1,034,254     $ 955,773  
Wholesale revenues —
               
Non-affiliates
    170,040       155,122  
Affiliates
    83,692       42,194  
Other revenues
    48,693       44,113  
 
           
Total operating revenues
    1,336,679       1,197,202  
 
           
Operating Expenses:
               
Fuel
    453,149       386,072  
Purchased power —
               
Non-affiliates
    11,219       4,638  
Affiliates
    88,707       72,714  
Other operations
    184,550       171,403  
Maintenance
    125,000       118,762  
Depreciation and amortization
    124,637       115,943  
Taxes other than income taxes
    75,771       72,718  
 
           
Total operating expenses
    1,063,033       942,250  
 
           
Operating Income
    273,646       254,952  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    11,304       6,586  
Interest income
    4,642       4,394  
Interest expense, net of amounts capitalized
    (68,975 )     (67,190 )
Other income (expense), net
    (7,223 )     (2,924 )
 
           
Total other income and (expense)
    (60,252 )     (59,134 )
 
           
Earnings Before Income Taxes
    213,394       195,818  
Income taxes
    73,428       72,702  
 
           
Net Income
    139,966       123,116  
Dividends on Preferred and Preference Stock
    9,866       8,182  
 
           
Net Income After Dividends on Preferred and Preference Stock
  $ 130,100     $ 114,934  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 130,100     $ 114,934  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(2,211) and $(102), respectively
    (3,637 )     (168 )
Reclassification adjustment for amounts included in net income, net of tax of $185 and $59, respectively
    305       96  
 
           
Total other comprehensive income (loss)
    (3,332 )     (72 )
 
           
COMPREHENSIVE INCOME
  $ 126,768     $ 114,862  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 139,966     $ 123,116  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    146,208       136,060  
Deferred income taxes and investment tax credits, net
    4,513       (889 )
Allowance for equity funds used during construction
    (11,304 )     (6,586 )
Pension, postretirement, and other employee benefits
    (3,995 )     (2,439 )
Stock option expense
    2,178       3,713  
Tax benefit of stock options
    347       286  
Other, net
    9,223       3,779  
Changes in certain current assets and liabilities —
               
Receivables
    62,227       43,143  
Fossil fuel stock
    (34,750 )     (21,732 )
Materials and supplies
    (7,751 )     (2,288 )
Other current assets
    (63,757 )     (45,381 )
Accounts payable
    (124,728 )     (94,769 )
Accrued taxes
    79,338       93,770  
Accrued compensation
    (64,851 )     (61,830 )
Other current liabilities
    9,358       7,811  
 
           
Net cash provided from operating activities
    142,222       175,764  
 
           
Investing Activities:
               
Property additions
    (349,684 )     (263,712 )
Investment in restricted cash from pollution control bonds
    (145 )      
Distribution of restricted cash from pollution control bonds
    19,622        
Nuclear decommissioning trust fund purchases
    (46,941 )     (73,062 )
Nuclear decommissioning trust fund sales
    46,941       73,062  
Cost of removal, net of salvage
    (8,863 )     (10,012 )
Other
    13,454       (1,863 )
 
           
Net cash used for investing activities
    (325,616 )     (275,587 )
 
           
Financing Activities:
               
Decrease in notes payable, net
          (44,875 )
Proceeds —
               
Senior notes
    300,000       200,000  
Common stock issued to parent
    150,000       70,000  
Capital contributions
    6,016        
Gross excess tax benefit of stock options
    607       741  
Redemptions —
               
Preferred stock
    (125,000 )      
Payment of preferred and preference stock dividends
    (11,275 )     (6,515 )
Payment of common stock dividends
    (122,825 )     (116,250 )
Other
    (1,684 )     (2,469 )
 
           
Net cash provided from financing activities
    195,839       100,632  
 
           
Net Change in Cash and Cash Equivalents
    12,445       809  
Cash and Cash Equivalents at Beginning of Period
    73,616       15,539  
 
           
Cash and Cash Equivalents at End of Period
  $ 86,061     $ 16,348  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $5,130 and $3,346 capitalized for 2008 and 2007, respectively)
  $ 63,324     $ 52,607  
Income taxes (net of refunds)
  $ 1,550     $ (3,250 )
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 86,061     $ 73,616  
Restricted cash
    255       19,732  
Receivables —
               
Customer accounts receivable
    353,244       357,355  
Unbilled revenues
    94,032       95,278  
Under recovered regulatory clause revenues
    204,157       232,226  
Other accounts and notes receivable
    33,326       42,745  
Affiliated companies
    90,758       61,250  
Accumulated provision for uncollectible accounts
    (9,119 )     (7,988 )
Fossil fuel stock, at average cost
    218,470       182,963  
Materials and supplies, at average cost
    295,411       287,994  
Vacation pay
    50,382       50,266  
Prepaid expenses
    97,391       72,952  
Other
    47,018       19,610  
 
           
Total current assets
    1,561,386       1,487,999  
 
           
Property, Plant, and Equipment:
               
In service
    17,033,807       16,669,142  
Less accumulated provision for depreciation
    6,046,690       5,950,373  
 
           
 
    10,987,117       10,718,769  
Nuclear fuel, at amortized cost
    175,808       137,146  
Construction work in progress
    855,363       928,182  
 
           
Total property, plant, and equipment
    12,018,288       11,784,097  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    50,293       48,664  
Nuclear decommissioning trusts, at fair value
    509,034       542,846  
Other
    31,714       31,146  
 
           
Total other property and investments
    591,041       622,656  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    351,302       347,193  
Prepaid pension costs
    1,011,680       989,085  
Deferred under recovered regulatory clause revenues
    33,459       81,650  
Other regulatory assets
    227,474       224,792  
Other
    227,969       209,153  
 
           
Total deferred charges and other assets
    1,851,884       1,851,873  
 
           
Total Assets
  $ 16,022,599     $ 15,746,625  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 410,154     $ 535,152  
Accounts payable —
               
Affiliated
    161,392       193,518  
Other
    247,832       308,177  
Customer deposits
    70,316       67,722  
Accrued taxes —
               
Income taxes
    63,655       45,958  
Other
    48,057       29,198  
Accrued interest
    55,935       55,263  
Accrued vacation pay
    42,138       42,138  
Accrued compensation
    29,060       92,385  
Other
    105,032       55,331  
 
           
Total current liabilities
    1,233,571       1,424,842  
 
           
Long-term Debt
    5,051,860       4,750,196  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,072,146       2,065,264  
Deferred credits related to income taxes
    92,789       93,709  
Accumulated deferred investment tax credits
    178,589       180,578  
Employee benefit obligations
    358,597       349,974  
Asset retirement obligations
    513,547       505,794  
Other cost of removal obligations
    617,972       613,616  
Other regulatory liabilities
    613,618       637,040  
Other
    32,784       31,417  
 
           
Total deferred credits and other liabilities
    4,480,042       4,477,392  
 
           
Total Liabilities
    10,765,473       10,652,430  
 
           
Preferred and Preference Stock
    685,127       683,512  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized - 25,000,000 shares
               
Outstanding — March 31, 2008: 21,725,000 shares
               
— December 31, 2007: 17,975,000 shares
    869,000       719,000  
Paid-in capital
    2,074,339       2,065,298  
Retained earnings
    1,636,439       1,630,832  
Accumulated other comprehensive loss
    (7,779 )     (4,447 )
 
           
Total common stockholder’s equity
    4,571,999       4,410,683  
 
           
Total Liabilities and Stockholder’s Equity
  $ 16,022,599     $ 15,746,625  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, capital expenditures, and restoration following major storms. Appropriately balancing these required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$15.2
  13.2
 
Alabama Power’s net income after dividends on preferred and preference stock for the first quarter 2008 was $130.1 million compared to $114.9 million for the corresponding period of 2007. The increase in earnings was primarily due to retail base rate increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP Environmental) in January 2008, as well as customer and demand growth. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information on Alabama Power’s rates. These increases in revenues were partially offset by increases in operations and maintenance expenses related to steam power associated with environmental mandates and scheduled outages, routine nuclear operation expenses, and depreciation and amortization resulting from additional plant-in-service.
Retail Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$78.5   8.2
 
In the first quarter 2008, retail revenues were $1.03 billion compared to $955.8 million in same period in 2007.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                 
    First Quarter
    2008
    (in millions)   % change
Retail — prior year
  $ 955.8          
Estimated change in —
               
Rates and pricing
    48.4       5.1  
Sales growth
    19.5       2.0  
Weather
    (7.4 )     (0.8 )
Fuel and other cost recovery
    18.0       1.9  
 
Retail — current year
  $ 1,034.3       8.2 %
 
Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the same period in 2007 primarily due to the Rate RSE and Rate CNP Environmental increases effective in January 2008. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth increased in the first quarter 2008 when compared to the same period in 2007. KWH energy sales to residential and commercial customers increased 2.8% and 0.7%, respectively, due to customer and demand growth which includes the effects of mild weather conditions. KWH energy sales to industrial customers increased 3.1% as a result of increased sales demand in the primary metal sector.
Revenues resulting from changes in weather decreased due to mild weather conditions in the first quarter 2008 compared to normal weather in the first quarter 2007. Milder weather reduced KWH energy sales to residential and commercial customers of 2.3% and 1.0%, respectively.
Fuel and other cost recovery revenues increased in the first quarter 2008 when compared to the same period in 2007 due to an increase in fuel costs, purchased power costs, and costs associated with PPAs certificated by the Alabama PSC. These costs were offset by a reduction in the Rate NDR customer billing rate due to the full recovery of the 2005 storm costs related to Hurricanes Dennis and Katrina. Electric rates for Alabama Power include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with Alabama Power’s natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not impact net income.
Wholesale Revenues – Non-Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$14.9
  9.6
 
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Alabama Power and Southern Company system-owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2008, wholesale revenues from non-affiliates were $170.0 million compared to $155.1 million in the

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
same period in 2007. This increase was primarily due to an 18.2% increase in price, partially offset by a 7.3% decrease in KWH sales.
Wholesale Revenues — Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$41.5   98.4
 
Wholesale revenues from affiliates will vary from period to period depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost. In the first quarter 2008, wholesale revenues from affiliates were $83.7 million compared to $42.2 million in the same period in 2007. This increase was primarily due to a 52.9% increase in price and a 29.7% increase in KWH sales.
Fuel and Purchased Power Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change
Fuel
  $ 67.1       17.4  
Purchased power - non-affiliates
    6.6       141.9  
Purchased power - affiliates
    16.0       22.0  
         
Total fuel and purchased power expenses
  $ 89.7          
         
In the first quarter 2008, total fuel and purchased power expenses were $553.1 million compared to $463.4 million in the same period in 2007. This increase was primarily due to a $75.7 million increase in the cost of energy resulting from an increase in the average cost of fuel and a $14.0 million increase related to greater KWHs purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Rate ECR.
Details of Alabama Power’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter   Percent
Average Cost   2008   2007   Change
 
    (cents per net KWH)
       
Fuel
    2.60       2.29       13.5  
Purchased power
    5.67       4.55       24.6  
 
In the first quarter 2008, fuel expense was $453.2 million compared to $386.1 million in the same period in 2007. This increase was due to a 15.5% increase in the generation from Alabama Power-owned gas fired facilities related to a 14.0% decrease in hydro generation due to a continued drought, a 15.0% increase in the average cost of coal, a 7.1% increase in natural gas prices, and a 3.8% increase in the cost of nuclear fuel.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-Affiliates
In the first quarter 2008, purchased power from non-affiliates was $11.2 million compared to $4.6 million in the same period in 2007. This increase was primarily related to a 31.6% increase in the amount of energy purchased due to the use of available lower price market purchases from non-affiliates and a 105.5% increase in price.
Energy purchases from non-affiliates will vary depending on the market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2008, purchased power from affiliates was $88.7 million compared to $72.7 million in the same period in 2007. This increase was related to a 6.2% increase in the amount of energy purchased and a 20.8% increase in price.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change
Other operations
  $ 13.1       7.7  
Maintenance
    6.2       5.3  
         
Total other operations and maintenance expenses
  $ 19.3          
         
In the first quarter 2008, other operations and maintenance expenses were $309.5 million compared to $290.2 million in the corresponding period in 2007. This increase was primarily a result of an $11.1 million increase in steam power expense associated with compliance with environmental mandates, scheduled outages, contract labor and materials cost, as well as a $4.7 million increase in nuclear production expense related to routine operations. Also contributing to the increase was a $3.0 million increase in administrative and general expenses primarily related to an increase in employee benefits.
Depreciation and Amortization
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$8.7
  7.5
 
For the first quarter 2008, depreciation and amortization was $124.6 million compared to $115.9 million in the same period in 2007. This increase was primarily due to additions to property, plant, and equipment related to environmental mandates and distribution projects.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$4.7   71.6
 
For the first quarter 2008, allowance for equity funds used during construction was $11.3 million compared to $6.6 million in the same period in 2007. This increase was principally due to increases in the amount of construction work in progress related to environmental mandates at generating facilities and transmission and distribution projects compared to the prior year.
Other Income (Expense), Net
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(4.3)   (147.0)
 
Other income (expense), net in the first quarter 2008 was $(7.2) million compared to $(2.9) million in the same period in 2007. This decrease was primarily due to a $2.1 million decrease in merchandise operating income and a $1.1 million decrease in miscellaneous non-operating income resulting from a decrease in timber sales and the discontinuation of Alabama Power’s flat-bill revenue program.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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Table of Contents

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Alabama Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Alabama PSC Matters
Retail Fuel Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Alabama Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of March 31, 2008 totaled $222.3 million as compared to $279.8 million at December 31, 2007. As a result of the Alabama PSC order, Alabama Power classified $33.5 million of the under recovered regulatory clause revenues as deferred charges and other assets in the Condensed Balance Sheet as of March 31, 2008. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of the recovery of the under recovered fuel costs.
Natural Disaster Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Natural Disaster Cost Recovery” in Item 8 of the Form 10-K for information regarding natural disaster cost recovery. At March 31, 2008, Alabama Power had accumulated a balance of $28.1 million in the target reserve for future storms, which is included in the Condensed Balance Sheet herein under “Other Regulatory Liabilities.”

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Table of Contents

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Alabama Power is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $55 million and $100 million.
Other Matters
Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Alabama Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

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Table of Contents

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Power’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $142.2 million for the first quarter 2008, compared to $175.8 million for the first quarter 2007. The $33.6 million decrease in cash provided from operating activities in the first quarter 2008 is primarily due to a $30.0 million increase in cash outflow for accounts payable. Net cash used for investing activities totaled $325.6 million for the first quarter 2008 primarily due to gross property additions to utility plant of $349.7 million. These additions were primarily related to construction of transmission and distribution facilities, replacement of steam equipment, purchases of nuclear fuel, and environmental mandates. Net cash provided from financing activities totaled $195.8 million for the first quarter 2008, compared to $100.6 million for the first quarter 2007. The increase was primarily due to cash proceeds from senior notes and common stock issued in the first quarter 2008.
Significant balance sheet changes for the first quarter 2008 include an increase of $364.7 million in gross plant, primarily due to an increase in environmental-related equipment and an increase of $301.7 million in long-term debt.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, and other purchase commitments. Approximately $410.2 million will be required through March 31, 2009 for maturities of long-term debt.
Sources of Capital
Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily utilized funds from operating cash flows, unsecured debt, common stock, preferred stock, and preference stock. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power’s current liabilities sometimes exceed current assets because of Alabama Power’s debt due within one year and the periodic use of short-term debt as a funding source primarily to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama Power had at March 31, 2008 approximately $86.1 million of cash and cash equivalents, unused committed lines of credit of approximately $1.3 billion (including $582.4 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control bonds), a commercial paper program, and an extendible commercial note program. Of the unused credit facilities, $464.9 million will expire at various times in 2008 (of which $384.9 million allow for one-year term loans). The remaining $800.0 million of credit facilities expire in 2012. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $2.0 billion of short-term borrowings. At March 31, 2008, Alabama Power had no commercial paper outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.
Credit Rating Risk
Alabama Power 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to below BBB- or Baa3. Generally, collateral may be provided by cash, letter of credit, or a Southern Company guaranty. These contracts are primarily for coal purchases. At March 31, 2008, the maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $8.0 million.
Alabama Power is also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Alabama Power’s exposure related to these agreements was approximately $47 million.
Market Price Risk
Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Alabama Power has also implemented a retail fuel-hedging program at the instruction of the Alabama PSC.
The changes in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter  
    2008  
    Changes  
    Fair Value  
    (in millions)  
Contracts outstanding at the beginning of the period, assets (liabilities), net  
  $ (0.4 )
Contracts realized or settled 
    4.6  
Current period changes(a)   
    51.7  
 
Contracts outstanding at the end of the period, assets (liabilities), net  
  $ 55.9  
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gains and losses on energy-related derivative contracts related to Alabama Power’s fuel hedging program are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Certain other gains and losses on energy-related derivatives, designated as hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
     Amounts  
    (in millions)  
Regulatory liabilities, net
  $ 56.1  
Accumulated other comprehensive income
    (0.1 )
Net income
    (0.1 )
 
Total fair value gain/(loss)
  $ 55.9  
 
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
    March 31, 2008  
    Fair Value Measurements  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
   
    (in millions)
Level 1
  $     $     $  
Level 2
    55.9       45.3       10.6  
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ 55.9     $ 45.3     $ 10.6  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Alabama Power in Item 7, Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In January 2008, Alabama Power issued $300 million of Series 2007D 4.85% Senior Notes due December 15, 2012. The proceeds were used to repay short-term indebtedness and for other general corporate purposes. Additionally, Alabama Power redeemed 1,250 shares of its Flexible Money Market Class A Preferred Stock (Series 2003A), Stated Capital $100,000 Per Share ($125 million aggregate value).
In January 2008, Alabama Power also entered into $330 million notional amount of interest rate swaps related to variable rate tax-exempt debt to hedge changes in interest rates for the period February 2008 through February 2010. The weighted average fixed payment rate on these hedges is 2.49% and Alabama Power now has a total of $576 million of such hedges in place, with an overall weighted average fixed payment rate of 2.69%. See Note (F) to the Condensed Financial Statements herein for further details.
In February 2008, Alabama Power issued 3,750,000 shares of common stock to Southern Company at $40 a share ($150 million aggregate purchase price). The proceeds were used for general corporate purposes.
In March 2008, Alabama Power converted its $246.5 million obligations related to auction rate tax-exempt securities from an auction rate mode to fixed rate interest modes. With the completion of this conversion, none of the outstanding securities or obligations of Alabama Power are currently subject to an auction rate mode.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GEORGIA POWER COMPANY

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 1,575,007     $ 1,412,329  
Wholesale revenues —
               
Non-affiliates
    152,692       143,767  
Affiliates
    73,910       41,788  
Other revenues
    63,238       59,286  
 
           
Total operating revenues
    1,864,847       1,657,170  
 
           
Operating Expenses:
               
Fuel
    637,923       593,894  
Purchased power —
               
Non-affiliates
    58,031       46,093  
Affiliates
    252,935       184,542  
Other operations
    241,092       230,748  
Maintenance
    127,723       124,442  
Depreciation and amortization
    150,608       126,149  
Taxes other than income taxes
    71,286       72,341  
 
           
Total operating expenses
    1,539,598       1,378,209  
 
           
Operating Income
    325,249       278,961  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    27,757       13,179  
Interest income
    787       475  
Interest expense, net of amounts capitalized
    (86,337 )     (85,465 )
Other income (expense), net
    (3,294 )     (4,216 )
 
           
Total other income and (expense)
    (61,087 )     (76,027 )
 
           
Earnings Before Income Taxes
    264,162       202,934  
Income taxes
    83,801       70,980  
 
           
Net Income
    180,361       131,954  
Dividends on Preferred and Preference Stock
    4,345       689  
 
           
Net Income After Dividends on Preferred and Preference Stock
  $ 176,016     $ 131,265  
 
           
 
 
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 176,016     $ 131,265  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(6,043) and $(1,082), respectively
    (9,580 )     (1,714 )
Reclassification adjustment for amounts included in net income, net of tax of $206 and $(29), respectively
    327       (46 )
Marketable securities:
               
Change in fair value, net of tax of $- and $42, respectively
          65  
 
           
Total other comprehensive income (loss)
    (9,253 )     (1,695 )
 
           
COMPREHENSIVE INCOME
  $ 166,763     $ 129,570  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 180,361     $ 131,954  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    178,735       149,339  
Deferred income taxes and investment tax credits
    (5,709 )     12,709  
Deferred revenues
    35,057       (240 )
Deferred expenses — affiliates
    21,209       21,524  
Allowance for equity funds used during construction
    (27,757 )     (13,179 )
Pension, postretirement, and other employee benefits
    9,863       5,289  
Hedge settlements
    (15,816 )     (3,923 )
Other, net
    (18,819 )     (3,980 )
Changes in certain current assets and liabilities —
               
Receivables
    77,075       81,442  
Fossil fuel stock
    1,293       (14,009 )
Prepaid income taxes
    22,380       19,084  
Other current assets
    (4,041 )     (8,047 )
Accounts payable
    (44,570 )     (86,459 )
Accrued taxes
    (79,097 )     (124,431 )
Accrued compensation
    (72,174 )     (111,026 )
Other current liabilities
    22,630       35,473  
 
           
Net cash provided from operating activities
    280,620       91,520  
 
           
Investing Activities:
               
Property additions
    (517,606 )     (352,475 )
Distribution of restricted cash from pollution control bonds
    16,094        
Nuclear decommissioning trust fund purchases
    (113,811 )     (94,131 )
Nuclear decommissioning trust fund sales
    106,931       87,251  
Cost of removal, net of salvage
    (11,346 )     (8,937 )
Change in construction payables, net of joint owner portion
    8,608       379  
Other
    (11,239 )     (11,714 )
 
           
Net cash used for investing activities
    (522,369 )     (379,627 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (359,113 )     (58,951 )
Proceeds —
               
Senior notes
    250,000       250,000  
Capital contributions from parent company
    241,800       269,949  
Other long-term debt
    300,000        
Redemptions —
               
Capital leases
    (683 )     (1,841 )
Senior notes
    (417 )      
Payment of preferred and preference stock dividends
    (3,947 )     (832 )
Payment of common stock dividends
    (180,300 )     (172,475 )
Other
    (2,630 )     (1,560 )
 
           
Net cash provided from financing activities
    244,710       284,290  
 
           
Net Change in Cash and Cash Equivalents
    2,961       (3,817 )
Cash and Cash Equivalents at Beginning of Period
    15,392       16,850  
 
           
Cash and Cash Equivalents at End of Period
  $ 18,353     $ 13,033  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $11,837 and $5,251 capitalized for 2008 and 2007, respectively)
  $ 70,452     $ 64,595  
Income taxes (net of refunds)
  $ 450     $ 6,585  
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 18,353     $ 15,392  
Restricted cash
    32,185       48,279  
Receivables —
               
Customer accounts receivable
    502,523       491,389  
Unbilled revenues
    143,269       137,046  
Under recovered regulatory clause revenues
    379,394       384,538  
Other accounts and notes receivable
    89,343       147,498  
Affiliated companies
    19,717       21,699  
Accumulated provision for uncollectible accounts
    (7,686 )     (7,636 )
Fossil fuel stock, at average cost
    391,929       393,222  
Materials and supplies, at average cost
    338,008       337,652  
Vacation pay
    68,397       69,394  
Prepaid income taxes
    28,722       51,101  
Other
    109,211       55,169  
 
           
Total current assets
    2,113,365       2,144,743  
 
           
Property, Plant, and Equipment:
               
In service
    22,157,064       22,011,215  
Less accumulated provision for depreciation
    8,823,496       8,696,668  
 
           
 
    13,333,568       13,314,547  
Nuclear fuel, at amortized cost
    247,562       198,983  
Construction work in progress
    2,105,094       1,797,642  
 
           
Total property, plant, and equipment
    15,686,224       15,311,172  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    55,349       53,813  
Nuclear decommissioning trusts, at fair value
    555,163       588,952  
Other
    49,098       47,914  
 
           
Total other property and investments
    659,610       690,679  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    544,686       532,539  
Prepaid pension costs
    1,046,140       1,026,985  
Deferred under recovered regulatory clause revenues
    284,629       307,294  
Other regulatory assets
    606,326       541,014  
Other
    266,461       268,335  
 
           
Total deferred charges and other assets
    2,748,242       2,676,167  
 
           
Total Assets
  $ 21,207,441     $ 20,822,761  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 348,310     $ 198,576  
Notes payable
    356,478       715,591  
Accounts payable —
               
Affiliated
    202,150       236,332  
Other
    478,125       463,945  
Customer deposits
    177,700       171,553  
Accrued taxes —
               
Income taxes
    134,205       68,782  
Other
    87,737       219,585  
Accrued interest
    84,438       74,674  
Accrued vacation pay
    55,064       56,303  
Accrued compensation
    44,550       114,974  
Other
    167,698       103,225  
 
           
Total current liabilities
    2,136,455       2,423,540  
 
           
Long-term Debt
    6,338,121       5,937,792  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,827,668       2,850,655  
Deferred credits related to income taxes
    144,335       146,886  
Accumulated deferred investment tax credits
    265,898       269,125  
Employee benefit obligations
    697,404       678,826  
Asset retirement obligations
    653,275       663,503  
Other cost of removal obligations
    412,896       414,745  
Other regulatory liabilities
    628,981       577,642  
Other
    167,982       158,670  
 
           
Total deferred credits and other liabilities
    5,798,439       5,760,052  
 
           
Total Liabilities
    14,273,015       14,121,384  
 
           
Preferred and Preference Stock
    265,957       265,957  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 9,261,500 shares
    398,473       398,473  
Paid-in capital
    3,621,364       3,374,777  
Retained earnings
    2,671,778       2,676,063  
Accumulated other comprehensive loss
    (23,146 )     (13,893 )
 
           
Total common stockholder’s equity
    6,668,469       6,435,420  
 
           
Total Liabilities and Stockholder’s Equity
  $ 21,207,441     $ 20,822,761  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, and fuel prices. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future. In December 2007, the 2007 Retail Rate Plan, which should provide earnings stability over its three-year term, was approved. This regulatory action enables the recovery of substantial capital investments to facilitate the continued reliability of the transmission and distribution networks, continued generation and other investments as well as the recovery of increased operating costs. The 2007 Retail Rate Plan also includes a tariff specifically for the recovery of costs related to environmental controls mandated by state and federal regulations. Georgia Power filed a fuel cost recovery case with the Georgia PSC on February 29, 2008 and a final order is expected on May 20, 2008. The results of this fuel rate filing are expected to be effective June 1, 2008.
Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$44.7
    34.1  
 
Georgia Power’s net income after dividends on preferred and preference stock for the first quarter 2008 was $176.0 million compared to $131.3 million for the corresponding period in 2007. The increase was primarily attributed to higher base retail revenues resulting from the retail rate increase effective January 1, 2008.
Retail Revenues
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$162.7
    11.5  
 
In the first quarter 2008, retail revenues were $1.6 billion compared to $1.4 billion in the corresponding period in 2007.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                 
    First Quarter  
    2008  
    (in millions)     % change  
Retail – prior year
  $ 1,412.3          
Estimated change in —
               
Rates and pricing
    77.8       5.5  
Sales growth
    (0.6 )      
Weather
    8.0       0.6  
Fuel and other cost recovery
    77.5       5.4  
 
Retail – current year
  $ 1,575.0       11.5 %
 
Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the corresponding period in 2007 due to the application of new rates established in January 2008 and higher market-response rates for sales to large commercial and industrial customers.
Revenues attributable to changes in sales growth decreased in the first quarter 2008 when compared to the corresponding period for 2007. This decrease was primarily due to a slowing economy partially offset by an increase of 1.2% in retail customers. Total retail KWH sales increased 0.6% from the corresponding period in 2007. Residential KWH sales increased 1.3% and commercial KWH sales increased 2.3% but were partially offset by lower industrial KWH sales which decreased 1.9% from the corresponding period in 2007.
Revenues attributable to changes in weather increased in the first quarter 2008 when compared to the corresponding period for 2007 due to more favorable weather.
Fuel and other cost recovery revenues increased by $77.5 million in the first quarter 2008 when compared to the corresponding period for 2007 as a result of higher fuel and purchased power expenses. Georgia Power electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$8.9
    6.2  
 
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Georgia Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2008, wholesale revenues from non-affiliates were $152.7 million compared to $143.8 million in the corresponding period in 2007. This increase was primarily the result of higher energy prices due to increased fuel costs. This was partially offset by a 1.0% decrease in KWH energy sales.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Affiliates
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$32.1
    76.9  
 
Wholesale revenues from affiliated companies will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings as the energy is generally sold at marginal cost. In the first quarter 2008, wholesale revenues from affiliates were $73.9 million compared to $41.8 million for the corresponding period in 2007. The increase was a result of higher prices primarily due to higher fuel costs and a 27.3% increase in KWH sales due to the availability of lower cost Georgia Power generating resources to meet affiliate demands at various times during the first quarter 2008.
Fuel and Purchased Power Expenses
                 
    First Quarter 2008
    vs.
    First Quarter 2007
    (change in millions)   % change
Fuel
  $ 44.0       7.4  
Purchased power – non-affiliates
    11.9       25.9  
Purchased power – affiliates
    68.4       37.1  
         
Total fuel and purchased power expenses
  $ 124.3          
         
In the first quarter 2008, total fuel and purchased power expenses were $948.8 million compared to $824.5 million for the corresponding period in 2007. The increase in fuel and purchased power expenses was due to an $82.4 million increase in the average cost of fuel and purchased power and a $41.9 million increase in total KWH generated or purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s energy cost recovery clause.
Details of Georgia Power’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter   Percent
Average Cost   2008   2007   Change
    (cents per net KWH)        
Fuel
    2.84       2.62       8.4  
Purchased power
    7.32       6.60       10.9  
 
In the first quarter 2008, fuel expense was $637.9 million compared to $593.9 million for the corresponding period in 2007. The increase was the result of an 8.4% increase in the average cost of fuel per KWH generated which was primarily due to an increase in fuel commodity prices resulting from global demand pressures and increased transportation costs. The average cost of coal per KWH generated increased 12.1% as a result of increases in commodity costs and transportation costs. The average cost of oil and natural gas per KWH generated increased 11.0% primarily as a result of increases in commodity prices. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters - Retail Fuel Cost Recovery” herein for additional information.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the first quarter 2008, purchased power expense — non-affiliates was $58.0 million compared to $46.1 million for the corresponding period in 2007. This increase was primarily the result of a 23.3% volume increase in KWH purchased from available lower priced market energy alternatives as well as an increase in the average cost per KWH purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2008, purchased power from affiliates was $252.9 million compared with $184.5 million for the corresponding period in 2007. The increase was the result of a 14.1% volume increase in KWHs purchased from available lower cost resources within the Power Pool as well as an increase in the average cost of KWHs purchased.
Energy purchases from affiliated companies will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                 
    First Quarter 2008
    vs.
    First Quarter 2007
    (change in millions)   % change
Other operations
  $ 10.3       4.5  
Maintenance
    3.3       2.6  
         
Total other operations and maintenance expenses
  $ 13.6          
         
In the first quarter 2008, other operations and maintenance expenses were $368.8 million compared to $355.2 million in the corresponding period in 2007. This increase was primarily the result of timing of maintenance activities, the regulatory amortization of nuclear outages, and an increase in customer account expenses related to meter reading and records and collections activities.
Depreciation and Amortization
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$24.5
    19.4  
 
In the first quarter 2008, depreciation and amortization was $150.6 million compared to $126.1 million in the corresponding period in 2007. The increase was primarily the result of an increase in plant in service due to transmission, distribution, and environmental projects.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$14.6
    110.6  
 
In the first quarter 2008, the allowance for equity funds used during construction was $27.8 million compared with $13.2 million for the corresponding period in 2007. This increase was primarily related to increases in construction work in progress balances related to Georgia Power’s ongoing construction program, including three combined cycle units at Plant McDonough and ongoing environmental projects.
Income Taxes
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$12.8
    18.1  
 
In the first quarter 2008, income taxes were $83.8 million compared with $71.0 million for the corresponding period in 2007. This was primarily the result of increased pre-tax income, partially offset by an increase in non-taxable items, particularly the allowance for equity funds used during construction, as well as state tax credits and the federal production activities deduction. See Note (H) to the Condensed Financial Statements herein for additional information on Georgia Power’s effective tax rate.
Dividends on Preferred and Preference Stock
         
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$3.6
    530.6  
 
In the first quarter 2008, dividends on preferred and preference stock were $4.3 million compared with $0.7 million for the corresponding period in 2007. This was primarily the result of the issuance of $225 million of preference stock in the fourth quarter 2007.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of Georgia Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Georgia Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Environmental Statutes and Regulations – Air Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Georgia Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Georgia PSC Matters
Retail Fuel Cost Recovery
On February 6, 2007, the Georgia PSC approved an increase in Georgia Power’s total annual billings of approximately $383 million related to fuel cost recovery effective March 1, 2007. The order also required Georgia Power to file for a new fuel cost recovery rate no later than March 1, 2008. On February 29, 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate effective June 1, 2008. If approved as filed, total annual fuel billings will increase by $222 million. The Georgia PSC is scheduled to rule on the request May 20, 2008. The ultimate outcome of this matter cannot be determined at this time. As of March 31, 2008, Georgia Power had an under recovered fuel balance of approximately $664.0 million as compared to $691.8 million at December 31, 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL - “PSC Matters – Fuel Cost Recovery” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
regulated rates. Accordingly, any changes in the billing factor will not have a significant effect on Georgia Power’s revenues or net income, but will affect cash flow.
Nuclear
Nuclear Projects
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Nuclear – Nuclear Projects” of Georgia Power in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. In March 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners must finalize their ownership percentages by July 2, 2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC certification process.
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 baseload capacity request for proposals (RFP). No other responses to the RFP were received. Georgia Power will work with the Georgia PSC’s Independent Evaluator to finalize information required for certification, including updated fossil fuel and generation technology costs, before submitting a final recommendation on August 1, 2008 for the Georgia PSC’s approval. A final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.
 
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Georgia Power is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $50 million and $90 million.
Other Matters
Georgia Power is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Georgia Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
FINANCIAL CONDITION AND LIQUIDITY
Overview
 
Georgia Power’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $280.6 million for the first quarter 2008, compared to $91.5 million for the first quarter 2007. The $189.1 million increase in cash provided from operating activities in the first quarter 2008 is primarily due to higher retail operating revenues. Net cash used for investing activities totaled $522.4 million for the first quarter 2008 primarily due to gross property additions to utility plant of $538.3 million. Net cash provided from financing activities totaled $244.7 million for the first quarter 2008 compared to $284.3 million for the first quarter 2007. The decrease was primarily due to lower capital contributions from Southern Company as well as dividend payments for new preference stock issued in the fourth quarter 2007.
Significant balance sheet changes for the first three months of 2008 include a $307.5 million increase in construction work in progress and the refinancing of notes payable to other short-term and long-term forms of financing.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY - “Capital Requirements and Contractual Obligations” of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $348 million will be required through March 31, 2009 to fund maturities of long-term debt. In addition, in connection with entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL – “Nuclear- Nuclear Projects” herein, the Georgia Power Board of Directors approved revisions to Georgia Power’s capital budget of $600 million in 2009 and $700 million in 2010, for a revised estimated total construction program of $2.0 billion in 2008, $2.6 billion in 2009, and $2.5 billion in 2010. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.
Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2008 approximately $18.4 million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements with banks. Of the unused credit arrangements, $40 million expire in 2008, $185 million expire in 2009, and $1.1 billion expire in 2012.
Of the facilities that expire in 2008, all contain provisions allowing two-year term loans executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2008, Georgia Power had approximately $256 million of commercial paper and $100 million of short-term bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Georgia Power 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2008, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $514 million.
Georgia Power is also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Georgia Power and/or Alabama Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Georgia Power’s total exposure related to these types of agreements was approximately $47 million.
Market Price Risk
Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Georgia Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Georgia Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Georgia Power continues to manage a fuel-hedging program at the instruction of the Georgia PSC.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The change in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter
    2008
    Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (0.4 )
Contracts realized or settled
    5.9  
Current period changes(a)
    78.1  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ 83.6  
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
Gains and losses on energy-related derivative contracts related to Georgia Power’s fuel hedging program are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery mechanism. Certain other gains and losses on energy-related derivatives, designated as hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Regulatory liabilities, net
  $ 83.8  
Accumulated other comprehensive income
     
Net income
    (0.2 )
 
Total fair value gain/(loss)
  $ 83.6  
 
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
    March 31, 2008  
    Fair Value Measurements  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
            (in millions)          
Level 1
  $     $     $  
Level 2
    83.6       65.5       18.1  
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ 83.6     $ 65.5     $ 18.1  
 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Georgia Power in Item 7 and Notes 1 and 6 to the financial statements of Georgia Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first quarter 2008, Georgia Power issued $250 million of Series 2008A Floating Rate Senior Notes due March 17, 2010. The proceeds were used to repay a portion of its outstanding short-term indebtedness. In addition, Georgia Power entered into a $300 million long-term floating rate bank loan that bears interest based on one-month LIBOR. Proceeds were used to repay a portion of Georgia Power’s short-term indebtedness and for other corporate purposes, including Georgia Power’s continuous construction activities. Also in the first three months of 2008, Georgia Power entered into derivative transactions designed to mitigate interest rate risk related to taxable floating rate obligations. The total notional amount of these derivatives was $600 million. See Note (F) to the Condensed Financial Statements herein for further details.
Also in the first four months of 2008, Georgia Power converted its entire $819 million of obligations related to auction rate tax-exempt securities from auction rate modes to other interest rate modes. Approximately $332 million of the auction rate tax-exempt securities were converted to fixed interest rate modes and approximately $487 million were converted to daily floating rate modes. Georgia Power also entered into hedges totaling $301 million to hedge interest rate risk on tax-exempt variable rate demand notes. See Note (F) to the Condensed Financial Statements herein for further details.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GULF POWER COMPANY

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GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 227,964     $ 219,584  
Wholesale revenues —
               
Non-affiliates
    25,656       23,400  
Affiliates
    42,940       40,080  
Other revenues
    14,975       13,169  
 
           
Total operating revenues
    311,535       296,233  
 
           
Operating Expenses:
               
Fuel
    150,127       146,474  
Purchased power —
               
Non-affiliates
    3,126       1,388  
Affiliates
    8,743       7,041  
Other operations
    47,856       46,050  
Maintenance
    18,575       13,202  
Depreciation and amortization
    21,704       21,097  
Taxes other than income taxes
    20,696       20,206  
 
           
Total operating expenses
    270,827       255,458  
 
           
Operating Income
    40,708       40,775  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    1,483       379  
Interest income
    709       1,608  
Interest expense, net of amounts capitalized
    (10,996 )     (11,153 )
Other income (expense), net
    (666 )     (550 )
 
           
Total other income and (expense)
    (9,470 )     (9,716 )
 
           
Earnings Before Income Taxes
    31,238       31,059  
Income taxes
    10,157       11,371  
 
           
Net Income
    21,081       19,688  
Dividends on Preference Stock
    1,551       825  
 
           
Net Income After Dividends on Preference Stock
  $ 19,530     $ 18,863  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Net Income After Dividends on Preference Stock
  $ 19,530     $ 18,863  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(1,481) and $559, respectively
    (2,358 )     890  
Reclassification adjustment for amounts included in net income, net of tax of $54 and $84, respectively
    87       133  
 
           
Total other comprehensive income (loss)
    (2,271 )     1,023  
 
           
COMPREHENSIVE INCOME
  $ 17,259     $ 19,886  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 21,081     $ 19,688  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    22,982       22,384  
Deferred income taxes
    569       (3,997 )
Allowance for equity funds used during construction
    (1,483 )     (379 )
Pension, postretirement, and other employee benefits
    1,319       388  
Stock option expense
    408       721  
Tax benefit of stock options
    85       105  
Other, net
    428       (780 )
Changes in certain current assets and liabilities —
               
Receivables
    11,189       1,208  
Fossil fuel stock
    (13,622 )     (17,154 )
Materials and supplies
    (1,005 )     (105 )
Prepaid income taxes
          7,306  
Property damage cost recovery
    5,742       5,325  
Other current assets
    1,063       945  
Accounts payable
    (1,437 )     2,078  
Accrued taxes
    6,094       6,885  
Accrued compensation
    (9,847 )     (12,345 )
Other current liabilities
    6,230       1,089  
 
           
Net cash provided from operating activities
    49,796       33,362  
 
           
Investing Activities:
               
Property additions
    (76,305 )     (43,526 )
Cost of removal, net of salvage
    (3,583 )     (2,755 )
Construction payables
    1,014       (7,287 )
Other
    (54 )     (80 )
 
           
Net cash used for investing activities
    (78,928 )     (53,648 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (21,413 )     (42,232 )
Proceeds —
               
Common stock issued to parent
          80,000  
Gross excess tax benefit of stock options
    194       218  
Capital contributions from parent company
    72,106        
Payment of preference stock dividends
    (1,406 )     (825 )
Payment of common stock dividends
    (20,425 )     (18,525 )
Other
    (271 )     (122 )
 
           
Net cash provided from financing activities
    28,785       18,514  
 
           
Net Change in Cash and Cash Equivalents
    (347 )     (1,772 )
Cash and Cash Equivalents at Beginning of Period
    5,348       7,526  
 
           
Cash and Cash Equivalents at End of Period
  $ 5,001     $ 5,754  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $654 and $167 capitalized for 2008 and 2007, respectively)
  $ 8,241     $ 8,826  
Income taxes (net of refunds)
  $ 1,200     $ 264  
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 5,001     $ 5,348  
Receivables —
               
Customer accounts receivable
    55,601       63,227  
Unbilled revenues
    37,151       39,000  
Under recovered regulatory clause revenues
    57,673       58,435  
Other accounts and notes receivable
    5,494       7,162  
Affiliated companies
    28,264       19,377  
Accumulated provision for uncollectible accounts
    (1,584 )     (1,711 )
Fossil fuel stock, at average cost
    84,633       71,012  
Materials and supplies, at average cost
    39,592       45,763  
Property damage cost recovery
    11,968       18,585  
Other regulatory assets
    8,229       10,220  
Other
    24,218       14,878  
 
           
Total current assets
    356,240       351,296  
 
           
Property, Plant, and Equipment:
               
In service
    2,701,587       2,678,952  
Less accumulated provision for depreciation
    948,345       931,968  
 
           
 
    1,753,242       1,746,984  
Construction work in progress
    197,338       150,870  
 
           
Total property, plant, and equipment
    1,950,580       1,897,854  
 
           
Other Property and Investments
    4,618       4,563  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    19,405       17,847  
Prepaid pension costs
    108,450       107,151  
Other regulatory assets
    96,429       97,492  
Other
    34,775       22,784  
 
           
Total deferred charges and other assets
    259,059       245,274  
 
           
Total Assets
  $ 2,570,497     $ 2,498,987  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Notes payable
  $ 23,212     $ 44,625  
Accounts payable —
               
Affiliated
    44,834       39,375  
Other
    59,389       56,823  
Customer deposits
    25,824       24,885  
Accrued taxes —
               
Income taxes
    35,741       30,026  
Other
    9,851       10,577  
Accrued interest
    10,115       7,698  
Accrued compensation
    5,249       15,096  
Other regulatory liabilities
    20,106       6,027  
Other
    30,705       32,023  
 
           
Total current liabilities
    265,026       267,155  
 
           
Long-term Debt
    740,159       740,050  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    240,921       240,101  
Accumulated deferred investment tax credits
    12,555       12,988  
Employee benefit obligations
    75,971       74,021  
Other cost of removal obligations
    172,975       172,876  
Other regulatory liabilities
    85,292       82,741  
Other
    80,047       79,802  
 
           
Total deferred credits and other liabilities
    667,761       662,529  
 
           
Total Liabilities
    1,672,946       1,669,734  
 
           
Preference Stock
    97,998       97,998  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized — 20,000,000 shares
               
Outstanding — 1,792,717 shares
    118,060       118,060  
Paid-in capital
    507,787       435,008  
Retained earnings
    179,776       181,986  
Accumulated other comprehensive loss
    (6,070 )     (3,799 )
 
           
Total common stockholder’s equity
    799,553       731,255  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,570,497     $ 2,498,987  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration costs. Appropriately balancing required costs and capital environmental expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preference stock. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$0.6
  3.5
 
Gulf Power’s net income after dividends on preference stock for the first quarter 2008 was $19.5 million compared to $18.9 million for the corresponding period in 2007. The increase in the first quarter 2008 over the corresponding period in 2007 was primarily due to improved sales growth, more favorable weather, and increased allowance for equity funds used during construction, partially offset by higher operations and maintenance expenses due to scheduled maintenance at generation facilities.
Retail Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$8.4   3.8
 
In the first quarter 2008, retail revenues were $228.0 million compared to $219.6 million in the corresponding period in 2007.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                 
    First Quarter  
    2008  
    (in millions)     % change  
Retail – prior year
  $ 219.6          
Estimated change in —
               
Rates and pricing
    1.4       0.6  
Sales growth
    2.3       1.1  
Weather
    1.2       0.5  
Fuel and other cost recovery
    3.5       1.6  
 
Retail – current year
  $ 228.0       3.8 %
 
Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the same period of 2007 primarily due to cost recovery provisions for energy conservation costs and environmental compliance costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected costs including any true-up amount from prior periods, and approved rates are implemented each January. These recovery provisions include related expenses and a return on average net investment. See Note 1 to the financial statements of Gulf Power under “Revenues” and Note 3 to the financial statements of Gulf Power under “Environmental Remediation” and “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth increased in the first quarter 2008 when compared to the same period in 2007. KWH energy sales to residential and commercial customers increased 1.5% and 2.4% respectively, due to customer growth. KWH energy sales to industrial customers increased 4.6% as a result of decreased customer cogeneration due to higher cost of natural gas.
Revenues attributable to changes in weather increased in the first quarter 2008 when compared to the corresponding period for 2007 due to more favorable weather.
Fuel and other cost recovery revenues increased in the first quarter 2008 when compared to the corresponding period for 2007 primarily due to higher fuel and purchased power expenses. Fuel and other cost recovery revenues include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, and revenues related to the recovery of storm damage restoration costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected fuel and purchased power costs including any true-up amount from prior periods, and approved rates are implemented each January. The recovery provisions generally equal the related expenses and have no material effect on net income. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” and “Property Damage Reserve” and Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Non-Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$2.3
  9.6
 
Wholesale revenues from non-affiliates are predominantly unit power sales under long-term contracts to other Florida utilities. Revenues from these contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment under the contracts. Energy is generally sold at variable cost.
In the first quarter 2008, wholesale revenues from non-affiliates were $25.7 million compared to $23.4 million in the corresponding period in 2007. The increase was primarily a result of higher revenues associated with new and existing territorial wholesale contracts and higher energy revenues from unit power sales contracts caused by increased Southern Company system fuel costs.
Wholesale Revenues – Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$2.8   7.1
 
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
In the first quarter 2008, wholesale revenues from affiliates were $42.9 million compared to $40.1 million in the corresponding period in 2007. The increase was primarily a result of higher Power Pool interchange energy rates produced by rising fuel costs, partially offset by decreased KWH sales.
Other Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$1.8   13.7
 
In the first quarter 2008, other revenues were $15.0 million compared to $13.2 million in the same period in 2007. The increase was primarily a result of other energy services, other transmission services, and other wholesale energy rates. The increased revenues from other energy services did not have a material impact on earnings since they were offset by associated expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                 
  First Quarter 2008
vs.
First Quarter 2007
 
    (change in millions)     % change  
Fuel
  $ 3.7       2.5  
Purchased power-non-affiliates
    1.7       125.2  
Purchased power-affiliates
    1.7       24.2  
         
Total fuel and purchased power expenses
  $ 7.1          
         
In the first quarter 2008, total fuel and purchased power expenses were $162.0 million compared to $154.9 million for the corresponding period in 2007. The increase in fuel and purchased power expenses was due to a $16.8 million increase in the average cost of fuel and purchased power, partially offset by a $9.7 million decrease in total KWH generated or purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery clause.
Details of Gulf Power’s cost of generation and purchased power are as follows:
                         
    First Quarter     First Quarter     Percent  
Average Cost   2008     2007     Change  
    (cents per net KWH)          
Fuel
    3.8       3.5       9.2  
Purchased power
    6.7       4.4       51.9  
 
In the first quarter 2008, fuel expense was $150.1 million compared to $146.4 million in the same period in 2007. This increase was due to a $12.8 million increase in the average cost of fuel, partially offset by a $9.1 million decrease related to total KWHs generated. The average cost of fuel increased primarily due to coal purchased in the spot market at higher prices. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Fuel Cost Recovery” herein for additional information.
Non- affiliates
In the first quarter 2008, purchased power from non-affiliates was $3.1 million compared to $1.4 million in the same period in 2007. The increase was due to a $2.0 million increase resulting from the higher average cost per net KWH, partially offset by a $0.3 million decrease in total KWHs purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2008, purchased power from affiliates was $8.7 million compared with $7.0 million for the corresponding period in 2007. The increase was primarily the result of a $1.4 million increase resulting from the higher average cost per net KWH and a $0.3 million increase in total KWHs purchased.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Energy purchases from affiliated companies will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                 
  First Quarter 2008
vs.
First Quarter 2007
 
    (change in millions)     % change  
Other operations
  $ 1.8       3.9  
Maintenance
    5.4       40.7  
         
Total other operations and maintenance expenses
  $ 7.2          
         
In the first quarter 2008, other operations and maintenance expenses were $66.4 million compared to $59.2 million in the same period in 2007. The increase was primarily due to a $3.9 million increase in scheduled maintenance at generation facilities and a $1.3 million increase in distribution contract labor costs.
Allowance for Equity Funds Used During Construction
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$1.1
  291.3
 
In the first quarter 2008, the allowance for equity funds used during construction was $1.5 million compared to $0.4 million for the corresponding period in 2007. This increase was primarily due to an increase in construction of environmental control projects.
Interest Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(0.9)   (55.9)
 
In the first quarter 2008, interest income was $0.7 million compared to $1.6 million in the same period in 2007. The decrease was primarily a result of decreases in the fuel under recovered balance and the property damage reserve balance.
Income Taxes
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(1.2)   (10.7)
 
In the first quarter 2008, income taxes were $10.2 million compared to $11.4 million when compared to the same period in 2007. The decrease was primarily a result of an increase in the federal production activities deduction and the tax benefit associated with an increase in allowance for equity funds used during construction. See Note (H) to the Condensed Financial Statements herein for additional information.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of Gulf Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include Gulf Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Gulf Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Climate Issues
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Gulf Power in Item 7 of the Form 10-K for additional information regarding executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On April 30, 2008, the Florida legislature enacted comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation, which has not yet been signed by the Governor, also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Gulf Power will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.
FERC and Florida PSC Matters
Retail Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent years, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel revenue over or under recovery exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate if an adjustment to the fuel cost recovery factor is being requested. Under recovered fuel costs at March 31, 2008 totaled $55.8 million, compared to $56.6 million at December 31, 2007, and are included in under recovered regulatory clause revenues on Gulf Power’s Condensed Balance Sheets herein. Fuel cost recovery revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any change in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but would affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” in Item 8 of the Form 10-K for additional information.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Gulf Power is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $7 million and $12 million.
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. Gulf Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types,

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Gulf Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Gulf Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Power’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $49.8 million for the first quarter 2008, compared to $33.4 million for the first quarter 2007. The $16.4 million increase in cash provided from operating activities in the first quarter 2008 was primarily due to an increase in cash flows from customer account receivables and other current liabilities. Net cash used for investing activities totaled $78.9 million for the first quarter 2008 primarily due to gross property additions to utility plant of $75.5 million. These additions were primarily related to installation of equipment to comply with environmental requirements. Net cash provided from financing activities totaled $28.8 million for the first quarter 2008, compared to $18.5 million for the first quarter 2007. The $10.3 million increase in cash provided from financing activities in the first quarter 2008 was primarily due to a $72.1 million capital contribution from Southern Company in 2008 and a $20.8 million increase in cash flows related to notes payable, partially offset by an $80 million common stock issuance to Southern Company in 2007.
Significant balance sheet changes for the first three months of 2008 include a net increase of $52.7 million in property, plant, and equipment, primarily related to environmental projects, a $13.2 million change in energy-related derivative contracts, and the sale of a turbine rotor assembly to Southern Power for $9.4 million.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
description of Gulf Power’s capital requirements for its construction program, maturities of long-term debt, leases, derivative obligations, preference stock dividends, purchase commitments, and trust funding requirements. Gulf Power had no maturities or redemptions of long-term debt in the first quarter 2008. At March 31, 2008 Gulf Power had no scheduled maturities of long-term debt through March 31, 2009.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Gulf Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.
Gulf Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies Gulf Power had at March 31, 2008 approximately $5 million of cash and cash equivalents and $125 million of unused committed lines of credit with banks. All credit agreements expire in 2008 and $100 million contain provisions allowing one-year term loans executable at expiration. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2008, Gulf Power had $19.4 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Gulf Power 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2008, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $23.1 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $46.3 million.
Gulf Power, along with all members of the Power Pool, is party to certain energy-related derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Gulf Power’s total exposure to these types of agreements was approximately $47 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power has also implemented a fuel-hedging program with the approval of the Florida PSC.
The changes in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter
    2008
    Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (0.2 )
Contracts realized or settled
    1.3  
Current period changes(a)
    13.0  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ 14.1  
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
Gains and losses on energy-related derivative contracts related to Gulf Power’s fuel hedging program are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clause. Certain other gains and losses on energy-related derivatives, designated as hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Regulatory liabilities, net
  $ 14.1  
Accumulated other comprehensive income
     
Net income
     
 
Total fair value gain/(loss)
  $ 14.1  
 
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
            March 31, 2008          
    Fair Value Measurements  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
            (in millions)          
Level 1
  $     $     $  
Level 2
    14.1       10.9       3.2  
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ 14.1     $ 10.9     $ 3.2  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 and Notes 1 and 6 to the financial statements of Gulf Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Gulf Power did not issue or redeem any long-term securities in the first three months of 2008. In April 2008, Gulf Power entered into a $110 million term loan agreement that bears interest based on one-month LIBOR and borrowed $80 million under such agreement. Proceeds were used to repay a portion of Gulf Power’s short-term indebtedness and for other general corporate purposes, including Gulf Power’s continuous construction activities. In connection with the term loan agreement, Gulf Power terminated $80 million of derivative transactions at a loss of $5.2 million. Gulf Power plans to borrow the remaining $30 million under the term loan agreement in June 2008.
Also in 2008, Gulf Power converted its entire $141 million of obligations related to auction rate tax-exempt securities from an auction rate mode to other interest rate modes. Approximately $75 million of the auction rate tax-exempt securities were converted to fixed interest rate modes and approximately $66 million were converted to a daily floating rate mode.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm-recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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MISSISSIPPI POWER COMPANY

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 168,389     $ 156,124  
Wholesale revenues —
               
Non-affiliates
    84,806       77,294  
Affiliates
    28,379       18,915  
Other revenues
    3,842       4,493  
 
           
Total operating revenues
    285,416       256,826  
 
           
Operating Expenses:
               
Fuel
    130,116       121,759  
Purchased power —
               
Non-affiliates
    2,255       954  
Affiliates
    25,998       12,424  
Other operations
    46,685       43,847  
Maintenance
    18,088       13,947  
Depreciation and amortization
    17,997       14,228  
Taxes other than income taxes
    15,565       12,843  
 
           
Total operating expenses
    256,704       220,002  
 
           
Operating Income
    28,712       36,824  
Other Income and (Expense):
               
Interest income
    409       575  
Interest expense, net of amounts capitalized
    (4,440 )     (5,072 )
Other income (expense), net
    1,618       (128 )
 
           
Total other income and (expense)
    (2,413 )     (4,625 )
 
           
Earnings Before Income Taxes
    26,299       32,199  
Income taxes
    9,694       12,130  
 
           
Net Income
    16,605       20,069  
Dividends on Preferred Stock
    433       433  
 
           
Net Income After Dividends on Preferred Stock
  $ 16,172     $ 19,636  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 16,172     $ 19,636  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(1,310) and $(362), respectively
    (2,114 )     (584 )
 
           
COMPREHENSIVE INCOME
  $ 14,058     $ 19,052  
 
           
     The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 16,605     $ 20,069  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    18,555       16,949  
Deferred income taxes and investment tax credits, net
    (4,498 )     9,224  
Plant Daniel capacity
          (1,415 )
Pension, postretirement, and other employee benefits
    1,606       2,680  
Stock option expense
    458       711  
Tax benefit of stock options
    80       71  
Other, net
    (4,875 )     (4,151 )
Changes in certain current assets and liabilities —
               
Receivables
    (4,769 )     11,469  
Fossil fuel stock
    (3,852 )     (10,693 )
Materials and supplies
    (12,769 )     (532 )
Prepaid income taxes
    4,304       18,301  
Other current assets
    1,775       803  
Hurricane Katrina accounts payable
          (1,588 )
Other accounts payable
    8,247       (9,578 )
Accrued taxes
    (21,608 )     (28,308 )
Accrued compensation
    (15,825 )     (17,828 )
Other current liabilities
    2,109       459  
 
           
Net cash provided from (used for) operating activities
    (14,457 )     6,643  
 
           
Investing Activities:
               
Property additions
    (25,984 )     (23,545 )
Cost of removal, net of salvage
    (151 )     (420 )
Construction payables
    2,410       (2,926 )
Other
    (564 )     (50 )
 
           
Net cash used for investing activities
    (24,289 )     (26,941 )
 
           
Financing Activities:
               
Increase in notes payable, net
    1,850       35,354  
Proceeds —
               
Capital contributions
    1,180       (3 )
Gross excess tax benefit of stock options
    215       178  
Other long-term debt
    80,000        
Payment of preferred stock dividends
    (433 )     (433 )
Payment of common stock dividends
    (17,100 )     (16,825 )
 
           
Net cash provided from financing activities
    65,712       18,271  
 
           
Net Change in Cash and Cash Equivalents
    26,966       (2,027 )
Cash and Cash Equivalents at Beginning of Period
    4,827       4,214  
 
           
Cash and Cash Equivalents at End of Period
  $ 31,793     $ 2,187  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $29 and $0 capitalized for 2008 and 2007, respectively)
  $ 3,847     $ 5,183  
Income taxes (net of refunds)
  $ (35 )   $ (21,559 )
     The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 31,793     $ 4,827  
Receivables —
               
Customer accounts receivable
    39,052       43,946  
Unbilled revenues
    22,799       23,163  
Under recovered regulatory clause revenues
    26,167       40,545  
Other accounts and notes receivable
    7,288       5,895  
Affiliated companies
    34,849       11,838  
Accumulated provision for uncollectible accounts
    (785 )     (924 )
Fossil fuel stock, at average cost
    51,318       47,466  
Materials and supplies, at average cost
    40,209       27,440  
Assets from risk management activities
    27,157       3,756  
Other regulatory assets
    28,339       32,234  
Other
    16,631       14,666  
 
           
Total current assets
    324,817       254,852  
 
           
Property, Plant, and Equipment:
               
In service
    2,146,326       2,130,835  
Less accumulated provision for depreciation
    893,209       880,148  
 
           
 
    1,253,117       1,250,687  
Construction work in progress
    60,742       50,015  
 
           
Total property, plant, and equipment
    1,313,859       1,300,702  
 
           
Other Property and Investments
    9,305       9,556  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    8,721       8,867  
Prepaid pension costs
    65,883       66,099  
Other regulatory assets
    68,298       62,746  
Other
    28,476       24,843  
 
           
Total deferred charges and other assets
    171,378       162,555  
 
           
Total Assets
  $ 1,819,359     $ 1,727,665  
 
           
     The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 41,161     $ 1,138  
Notes payable
    11,793       9,944  
Accounts payable —
               
Affiliated
    36,001       40,394  
Other
    76,440       60,758  
Customer deposits
    9,947       9,640  
Accrued taxes —
               
Income taxes
    10,671        
Other
    16,578       48,853  
Accrued interest
    2,998       2,713  
Accrued compensation
    6,140       21,965  
Other regulatory liabilities
    34,458       11,082  
Other
    25,176       23,882  
 
           
Total current liabilities
    271,363       230,369  
 
           
Long-term Debt
    321,671       281,963  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    207,769       206,818  
Deferred credits related to income taxes
    14,915       15,156  
Accumulated deferred investment tax credits
    14,967       15,254  
Employee benefit obligations
    90,591       88,300  
Other cost of removal obligations
    93,201       90,485  
Other regulatory liabilities
    122,706       119,458  
Other
    36,679       33,252  
 
           
Total deferred credits and other liabilities
    580,828       568,723  
 
           
Total Liabilities
    1,173,862       1,081,055  
 
           
Preferred Stock
    32,780       32,780  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value —
               
Authorized - 1,130,000 shares
               
Outstanding - 1,121,000 shares
    37,691       37,691  
Paid-in capital
    316,253       314,324  
Retained earnings
    260,314       261,242  
Accumulated other comprehensive income (loss)
    (1,541 )     573  
 
           
Total common stockholder’s equity
    612,717       613,830  
 
           
Total Liabilities and Stockholder’s Equity
  $ 1,819,359     $ 1,727,665  
 
           
     The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and major storm restoration. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Mississippi Power for the foreseeable future.
Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power’s long-term financial success is dependent upon how well it satisfies its customers’ needs, Mississippi Power’s retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power’s allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(3.5)
  (17.6)
 
Mississippi Power’s net income after dividends on preferred stock for the first quarter 2008 was $16.2 million compared to $19.6 million for the corresponding period in 2007. The decrease was primarily a result of a $5.8 million increase in non-fuel related expenses, a $2.5 million increase in depreciation and amortization primarily due to the amortization of regulatory items, a $1.0 million increase in regulatory liability for System Restoration Rider (SRR), and a $0.8 million increase in taxes other than income primarily due to franchise taxes, partially offset by a $3.5 million increase in territorial base revenues primarily due to a retail base rate increase effective January 2008 and a $1.6 million increase in other income and expense. For additional information on SRR, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – System Restoration Rider” of Mississippi Power in Item 7 of the Form 10-K.
Retail Revenues
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$12.3   7.9
 
In the first quarter 2008, retail revenues were $168.4 million compared to $156.1 million in the same period in 2007.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
                 
    First Quarter
    2008
 
    (in millions)   % change
Retail – prior year
  $ 156.1          
Estimated change in —
               
Rates and pricing
    4.3       2.7  
Sales growth
    1.4       0.9  
Weather
    (0.7 )     (0.4 )
Fuel and other cost recovery
    7.3       4.7  
 
Retail – current year
  $ 168.4       7.9 %
 
Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the same period of 2007 due to a base rate increase effective January 2008 of $3.5 million and an increase in the ECO Plan rate effective April 2007 of $1.8 million. These increases were partially offset by retail revenue reductions of approximately $1.0 million related to SRR revenues.
Revenues attributable to changes in sales growth increased in the first quarter 2008 when compared to the same period in 2007 due to 3.3%, 2.1%, and 0.6% increases in KWH sales to residential, commercial, and industrial customers, respectively.
Revenues resulting from changes in weather were minimal because temperatures were essentially the same during the first quarter of 2008 compared to the first quarter of 2007.
Fuel and other cost recovery revenues increased in the first quarter of 2008 when compared to the same period in 2007 primarily as a result of higher fuel and purchased power expenses. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$7.5
  9.7
 
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Mississippi Power and Southern Company system-owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2008, wholesale revenues to non-affiliates were $84.8 million compared to $77.3 million in the same period in 2007. The increase was due to increased revenues from customers outside Mississippi Power’s service territory of $4.7 million and increased revenues from customers inside Mississippi Power’s service territory of $2.8 million. The $4.7 million increase in revenues from customers outside Mississippi Power’s service territory was primarily due to a $4.3 million increase associated with higher prices, a $0.3 million increase associated with increased sales, and a $0.1 million increase in capacity revenues. The $2.8 million increase in revenues from customers inside Mississippi Power’s service territory is due to a $3.5 million increase in fuel costs, partially offset by lower demand by customers of approximately $0.7 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$9.5   50.0
 
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost. In the first quarter 2008, wholesale revenues from affiliates were $28.4 million compared to $18.9 million in the same period in 2007. The increase was primarily due to a $9.4 million increase in energy revenues, of which $9.2 million was associated with higher fuel prices and $0.2 million was associated with increased sales. Capacity revenues increased $0.1 million.
Fuel and Purchased Power Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change
Fuel
  $ 8.4       6.9  
Purchased power-non-affiliates
    1.3       136.4  
Purchased power-affiliates
    13.6       109.3  
         
Total fuel and purchased power expenses
  $ 23.3          
         
In the first quarter 2008, total fuel and purchased power expenses were $158.4 million compared to $135.1 million in the same period in 2007. The increase in fuel and purchased power expenses was primarily due to a $22.1 million increase in the cost of fuel and purchased power and a $1.1 million increase related to total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Mississippi Power’s fuel cost recovery clauses.
Details of Mississippi Power’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter   Percent
Average Cost   2008   2007   Change
    (cents per net KWH)        
Fuel
    3.91       3.56       9.8 %
Purchased power
    5.40       3.37       60.2 %
 
In the first quarter 2008, fuel expense was $130.1 million compared to $121.7 million in the same period in 2007. The increase was primarily due to an $11.5 million increase in the price of coal, gas, transportation, and emission allowances, partially offset by a $3.1 million decrease in generation from Mississippi Power-owned facilities due to availability of lower cost affiliate purchased power.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the first quarter 2008, purchased power expense from non-affiliates was $2.3 million compared to $1.0 million in the same period in 2007. The increase was primarily the result of a 115.5% increase in the average cost of purchased power per KWH and a 9.7% increase in KWH volume purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2008, purchased power from affiliates was $26.0 million compared to $12.4 million in the same period in 2007. The increase was primarily due to a 50.7% increase in the average cost of purchased power per KWH as well as a 38.8% increase in KWH volume purchased primarily due to reduced generation resulting in more purchased power needed to meet the gap between generation and demand, and more sales outside the Southern Company system.
Energy purchases from affiliated companies will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)     % change
Other operations
  $ 2.8       6.5  
Maintenance
    4.1       29.7  
         
Total other operations and maintenance expenses
  $ 6.9          
         
In the first quarter 2008, other operations and maintenance expenses were $64.7 million compared to $57.8 million in the same period in 2007. The increase in other operations expense was primarily due to a $1.8 million increase in generation construction screening. The increase in maintenance expense for the first quarter 2008 was primarily due to a $1.8 million increase in distribution maintenance, a $1.0 million increase in expenses due to changes in environmental projects, a $0.9 million increase in production scheduled maintenance expenses, and a $0.6 million increase in company labor expenses across all functions.
Depreciation and Amortization
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$3.8
  26.5
 
In the first quarter 2008, depreciation and amortization was $18.0 million compared to $14.2 million in the same period in 2007. The increase was primarily due to a $1.4 million increase in amortization related to a regulatory liability recorded in 2003 in connection with the Mississippi PSC’s accounting order on Plant Daniel capacity, a $1.1 million increase in amortization of environmental costs related to the approved ECO Plan, a $0.6 million increase for amortization of certain reliability-related maintenance costs deferred in 2007 in accordance with a Mississippi PSC order, and a $0.4 million increase in depreciation expense for transmission

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and distribution expenditures. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
Taxes Other Than Income Taxes
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$2.7   21.2
 
In the first quarter 2008, taxes other than income taxes were $15.6 million compared to $12.8 million in the same period in 2007. The increase was primarily due to a $1.9 million increase in ad valorem taxes, a $0.3 million increase in municipal franchise taxes, a $0.2 million increase in corporate franchise taxes, and a $0.3 million increase in payroll taxes. The retail portion of the increase in ad valorem taxes is recoverable under Mississippi Power’s ad valorem tax cost recovery clause and, therefore, does not affect net income. The increase in municipal franchise taxes is directly related to the increase in total retail revenues.
Total Other Income and (Expense)
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$2.2   47.8
 
In the first quarter 2008, total other income and (expense) was $(2.4) million compared to $(4.6) million in the same period in 2007. The change was primarily the result of amounts collected from a customer for construction of a substation project, which had a tax effect of $1.1 million, a $0.6 million decrease in interest expense related to short-term indebtedness, and a $0.3 million increase due to mark to market gains on energy-related derivative positions.
Income Taxes
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(2.4)   (20.1)
 
In the first quarter 2008, income taxes were $9.7 million compared to $12.1 million in the same period in 2007. The change of $2.4 million was primarily due to a decrease in pre-tax income.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of Mississippi Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include Mississippi Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Mississippi Power’s service area in the aftermath of Hurricane Katrina. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form 10-K.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Mississippi Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Mississippi Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Mississippi PSC Matters
Retail Regulatory Matters
Environmental Compliance Overview Plan
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s annual environmental filing with the Mississippi PSC. On February 1, 2008, Mississippi Power filed with the Mississippi PSC its annual ECO Plan evaluation for 2008. Mississippi Power requested an 18 cent per 1,000 KWH decrease for retail customers.
Since the filing of the ECO Plan evaluation on February 1, 2008, the regulations addressing mercury emissions were altered by a decision issued by the U.S. Court of Appeals for the D.C. Circuit in State of New Jersey v. Environmental Protection Agency on February 8, 2008. On April 7, 2008, Mississippi Power filed with the Mississippi PSC a supplemental ECO Plan evaluation in which the projects included in the ECO Plan

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
evaluation on February 1, 2008 being undertaken primarily for mercury control were removed. In this supplemental ECO filing, Mississippi Power changed the request to a 15 cent per 1,000 KWH decrease for retail residential customers. Hearings with the Mississippi PSC are expected to be held in May 2008. The outcome of the 2008 supplemental ECO Plan filing cannot now be determined.
Performance Evaluation Plan
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Performance Evaluation Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s base rates. In a May 2004 order establishing Mississippi Power’s forward-looking rate schedule PEP, the Mississippi PSC ordered that the Mississippi Public Utility Staff and Mississippi Power review the operations of the PEP in 2007. By mutual agreement, this review was deferred and will occur in 2008.
In December 2007, Mississippi Power submitted its annual PEP filing for 2008, which resulted in a rate increase of 1.983% or $15.5 million annually, effective January 2008. In March 2008, Mississippi Power submitted its annual PEP lookback filing for 2007, which recommended no surcharge or refund. The filing is under review by the Mississippi Public Utility Staff; therefore, the ultimate outcome of this filing cannot now be determined.
Fuel Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Mississippi Power in Item 7 of the Form 10-K for information regarding Mississippi Power’s fuel cost recovery. At March 31, 2008, the under recovered balance of fuel recorded in Mississippi Power’s Condensed Balance Sheets herein was $26.2 million compared to $40.5 million at December 31, 2007. Mississippi Power’s operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, changes to the billing factor will have no significant effect on Mississippi Power’s revenues or net income but will affect cash flow.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was introduced to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill, passed by the legislature on April 16, 2008 and awaiting approval by the Governor, authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kemper County Integrated Coal Gasification Combined Cycle
As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to another Southern Company project that would have been located in Orlando, Florida. The Orlando project was cancelled in 2007.
In December 2006, the Mississippi PSC approved Mississippi Power’s request for accounting treatment of the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities. The Mississippi PSC gave Mississippi Power the authority to create and recognize a regulatory asset for such costs. In December 2007, Mississippi Power reported to the Mississippi PSC an updated estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At March 31, 2008, Mississippi Power had spent $25.3 million, of which $2.7 million related to land purchases capitalized. The retail portion of $16.4 million was deferred in other regulatory assets and the wholesale portion of $6.2 million was expensed. The retail portion of these costs will be charged to and remain as a regulatory asset until the Mississippi PSC determines the prudence and ultimate recovery of such costs, which decision is expected by January 2009. The balance of such regulatory asset is included in Mississippi Power’s rate base for retail ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if such legislation is signed by the Governor and if the project proceeds. See “Mississippi Base Load Construction Legislation” herein for additional information.
The final outcome of this matter cannot now be determined.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Mississippi Power is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $6 million and $9 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Matters
Mississippi Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Mississippi Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Plant Daniel Operating Lease.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Mississippi Power’s financial condition remained stable at March 31, 2008. Net cash used for operating activities totaled $14.5 million for the first quarter 2008, compared to $6.6 million net cash provided from operating activities for the first quarter 2007. The $21.1 million increase in net cash used for operating activities in the first quarter 2008 was primarily due to an increase in prepaid income taxes in the amount of $14.0 million primarily as a result of the receipt of a tax refund in the first quarter 2007. Also, contributing to the increase in the use of funds was an increase in materials and supplies of $12.2 million primarily due to 2008 project delays. These increases in cash used for operating activities were partially offset by increases in fuel inventory of $6.8 million. The change in net cash used for investing activities was not material. Net cash provided from financing activities totaled $65.7 million for the first quarter 2008, compared to $18.3 million for the first quarter 2007. The $47.4 million increase in net cash provided from financing activities was primarily due to the $80 million long-term bank loan made to Mississippi Power on March 5, 2008, offset by short-term borrowings in the first quarter 2007 of approximately $35 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant balance sheet changes for the first three months of 2008 include an increase in cash and cash equivalents of $27.0 million as well as an increase in long-term debt of $80.0 million due to a long-term bank loan made to Mississippi Power on March 5, 2008 which was offset by a $40.0 million reclassification of a senior note that will mature in March 2009. Receivables from affiliated companies also increased by $23.0 million primarily due to an increase in sales to affiliate companies in accordance with the IIC. There is also an increase in current assets from risk management activities of $23.4 million primarily due to mark to market gains on energy-related derivative positions.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments, derivative obligations, preferred stock dividends, and trust funding requirements. Approximately $41 million will be required through March 31, 2009 for maturities of long-term debt.
Sources of Capital
Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Mississippi Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Mississippi Power in Item 7 of the Form 10-K for additional information.
Mississippi Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Mississippi Power had at March 31, 2008 approximately $32 million of cash and cash equivalents and $181 million of unused committed credit arrangements with banks. All of these facilities expire in 2008. Approximately $39 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2008, Mississippi Power had $11.8 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Mississippi Power in Item 7 and Note 7 to the financial statements of Mississippi Power under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Mississippi Power 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to below BBB- or Baa3. These contracts are primarily for electricity sales and coal purchases. At March 31, 2008, the maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $8 million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Mississippi Power, along with all members of the Power Pool, is party to certain energy-related derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Mississippi Power’s total exposure to these types of agreements was approximately $47 million.
Market Price Risk
Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Mississippi Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Mississippi Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Mississippi Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power has also implemented retail fuel-hedging programs at the instruction of the Mississippi PSC and wholesale fuel-hedging programs under agreements with wholesale customers.
The fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter
    2008
       Changes
    Fair Value
      (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net  
  $ 1.9  
Contracts realized or settled 
    0.6  
Current period changes(a)   
    24.7  
 
Contracts outstanding at the end of the period, assets (liabilities), net  
  $ 27.2  
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gains and losses on energy-related derivative contracts related to Mississippi Power’s fuel hedging program are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the energy cost management clause. Certain other gains and losses on energy-related derivatives, designated as hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
     Amounts
    (in millions)
Regulatory liabilities, net
  $ 29.6  
Accumulated other comprehensive income
    (2.5 )
Net income
    0.1  
 
Total fair value gain/(loss)
  $ 27.2  
 
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
            March 31, 2008        
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   1-3 Years
            (in millions)        
Level 1
  $     $     $  
Level 2
    27.2       23.5       3.7  
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ 27.2     $ 23.5     $ 3.7  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Mississippi Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Mississippi Power in Item 7 and Notes 1 and 6 to the financial statements of Mississippi Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
On March 5, 2008, Mississippi Power entered into an $80.0 million long-term bank loan that bears interest based on one-month LIBOR. Proceeds were used to repay a portion of Mississippi Power’s short-term indebtedness and for other corporate purposes, including Mississippi Power’s continuous construction activities.
Also in 2008, Mississippi Power converted its entire $42.6 million of obligations related to auction rate tax-exempt securities from an auction rate mode to a fixed rate mode.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm restoration costs, Mississippi Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Revenues:
               
Wholesale revenues —
               
Non-affiliates
  $ 80,469     $ 81,117  
Affiliates
    133,493       109,502  
Other revenues
    1,570       1,873  
 
           
Total operating revenues
    215,532       192,492  
 
           
Operating Expenses:
               
Fuel
    36,047       27,366  
Purchased power —
               
Non-affiliates
    16,556       11,030  
Affiliates
    50,708       31,287  
Other operations
    26,199       20,889  
Maintenance
    8,832       5,298  
Depreciation and amortization
    19,987       18,394  
Taxes other than income taxes
    4,542       3,711  
 
           
Total operating expenses
    162,871       117,975  
 
           
Operating Income
    52,661       74,517  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (19,357 )     (20,894 )
Other income (expense), net
    12,580       (82 )
 
           
Total other income and (expense)
    (6,777 )     (20,976 )
 
           
Earnings Before Income Taxes
    45,884       53,541  
Income taxes
    16,909       21,505  
 
           
Net Income
  $ 28,975     $ 32,036  
 
           
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Net Income
  $ 28,975     $ 32,036  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value, net of tax of $(2,944) and $(580), respectively
    (4,562 )     (891 )
Reclassification adjustment for amounts included in net income, net of tax of $1,342 and $1,156, respectively
    2,074       2,037  
 
           
Total other comprehensive income (loss)
    (2,488 )     1,146  
 
           
COMPREHENSIVE INCOME
  $ 26,487     $ 33,182  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 28,975     $ 32,036  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    24,016       22,086  
Deferred income taxes and investment tax credits, net
    11,067       20,953  
Deferred revenues
    (26,767 )     (27,924 )
Mark-to-market adjustments
    14,406       410  
Accumulated billings on construction contract
    18,737       15,098  
Accumulated costs on construction contract
    (18,630 )     (4,408 )
Gain on sale of property
    (6,029 )      
Other, net
    1,662       517  
Changes in certain current assets and liabilities —
               
Receivables
    (2,356 )     5,399  
Fossil fuel stock
    (2,375 )     149  
Materials and supplies
    (155 )     (650 )
Other current assets
    (214 )     80  
Accounts payable
    (5,719 )     (3,065 )
Accrued taxes
    8,356       (2,961 )
Accrued interest
    (12,210 )     (12,067 )
Other current liabilities
    (2,881 )      
 
           
Net cash provided from operating activities
    29,883       45,653  
 
           
Investing Activities:
               
Property additions
    (30,003 )     (45,852 )
Sale of property
    4,999        
Change in construction payables, net
    4,853       5,104  
Other
    (725 )      
 
           
Net cash used for investing activities
    (20,876 )     (40,748 )
 
           
Financing Activities:
               
Increase in notes payable, net
    13,720       21,380  
Proceeds — Capital contributions
    897       (3 )
Payment of common stock dividends
    (23,625 )     (22,450 )
Other
          (23 )
 
           
Net cash used for financing activities
    (9,008 )     (1,096 )
 
           
Net Change in Cash and Cash Equivalents
    (1 )     3,809  
Cash and Cash Equivalents at Beginning of Period
    5       29,929  
 
           
Cash and Cash Equivalents at End of Period
  $ 4     $ 33,738  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $4,142 and $3,409 capitalized for 2008 and 2007, respectively)
  $ 27,717     $ 29,293  
Income taxes (net of refunds)
  $ 495     $ 6,948  
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 4     $ 5  
Receivables —
               
Customer accounts receivable
    21,952       19,100  
Other accounts receivable
    816       1,025  
Affiliated companies
    26,794       27,004  
Fossil fuel stock, at average cost
    17,535       15,160  
Materials and supplies, at average cost
    19,439       19,284  
Prepaid service agreements — current
    14,379       14,233  
Other prepaid expenses
    5,223       2,840  
Assets from risk management activities
    27,973       16,079  
Other
          4,226  
 
           
Total current assets
    134,115       118,956  
 
           
Property, Plant, and Equipment:
               
In service
    2,534,640       2,534,507  
Less accumulated provision for depreciation
    300,378       280,962  
 
           
 
    2,234,262       2,253,545  
Construction work in progress
    305,532       283,084  
 
           
Total property, plant, and equipment
    2,539,794       2,536,629  
 
           
Deferred Charges and Other Assets:
               
Prepaid long-term service agreements
    92,528       87,058  
Other—
               
Affiliated
    4,060       4,138  
Other
    21,904       21,993  
 
           
Total deferred charges and other assets
    118,492       113,189  
 
           
Total Assets
  $ 2,792,401     $ 2,768,774  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Notes payable
  $ 63,468     $ 49,748  
Accounts payable —
               
Affiliated
    58,206       48,475  
Other
    11,106       20,322  
Accrued taxes —
               
Income taxes
          392  
Other
    6,388       2,658  
Accrued interest
    17,958       30,168  
Liabilities from risk management activities
    46,051       12,639  
Billings in excess of cost on construction contract
    36,491       36,384  
Other
    1,416       9,523  
 
           
Total current liabilities
    241,084       210,309  
 
           
Long-term Debt
    1,297,163       1,297,099  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    154,699       138,123  
Deferred capacity revenues — Affiliated
    8,586       34,801  
Other—
               
Affiliated
    7,494       7,754  
Other
    2,410       2,801  
 
           
Total deferred credits and other liabilities
    173,189       183,479  
 
           
Total Liabilities
    1,711,436       1,690,887  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
               
Authorized — 1,000,000 shares
               
Outstanding — 1,000 shares
           
Paid-in capital
    859,362       858,466  
Retained earnings
    257,801       253,131  
Accumulated other comprehensive loss
    (36,198 )     (33,710 )
 
           
Total common stockholder’s equity
    1,080,965       1,077,887  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,792,401     $ 2,768,774  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2008 vs. FIRST QUARTER 2007
OVERVIEW
Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation assets and sell electricity at market-based prices in the southeastern wholesale market. Southern Power continues to execute its regional strategy through a combination of acquiring and constructing new power plants and by entering into PPAs with investor owned utilities, independent power producers, municipalities, and electric cooperatives.
To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on several key performance indicators. These indicators include peak season equivalent forced outage rate (EFOR), and net income. EFOR defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(3.0)
  (9.6)
   
Southern Power’s net income for the first quarter 2008 was $29.0 million compared to $32.0 million for the corresponding period of 2007. This decrease was primarily due to mark to market losses on forward sales of uncontracted generating capacity, transmission service and tariff penalties incurred during the first quarter 2008, and increased depreciation expense associated with the implementation of a new depreciation study. These unfavorable impacts were partially offset by a gain on the sale of an undeveloped tract of land and the receipt of a fee for participating in an asset auction during the first quarter 2008.
Wholesale Revenues – Affiliates and Wholesale Revenues – Non-Affiliates
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$23.3   12.2
   
Wholesale revenues for the first quarter 2008 were $214.0 million compared to $190.6 million for the corresponding period of 2007. Wholesale energy sales to non-affiliates will vary depending on the energy demand of those customers and their generation capacity, as well as the market cost of available energy compared to the cost of Southern Power. Energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. Sales to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as approved by the FERC. Wholesale revenues from non-affiliates decreased $0.6 million during the period, primarily due to two offsetting factors. The first is a mark to market loss of $28.3 million on forward sales of uncontracted generating capacity arising from an increase in forward market prices. Secondly, offsetting this loss were increases of $27.7 million in short-term market energy revenues,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased energy revenues due to higher natural gas prices, and revenues from Plant Oleander Unit 5. Wholesale revenues from affiliates increased $24.0 million during the period, primarily due to increased demand under existing PPAs with affiliates due to favorable weather within the Southern Company service territory.
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information.
Fuel and Purchased Power Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)   % change
Fuel
  $ 8.7       31.7  
Purchased power – non-affiliates
    5.5       50.1  
Purchased power – affiliates
    19.4       62.1  
           
Total fuel and purchased power expenses
  $ 33.6          
           
In the first quarter 2008, total fuel and purchased power expenses were $103.3 million compared to $69.7 million for the corresponding period in 2007. These increases were primarily due to increased generation and purchases of $19 million in order to meet the higher energy sales as well as higher fuel and purchased power costs of $28.6 million due to an increase in the average cost of fuel and purchased power. Mark to market gains of $13.9 million on forward natural gas derivatives and forward power purchases offset a portion of these increases.
Other Operations and Maintenance Expenses
                 
    First Quarter 2008
vs.
First Quarter 2007
    (change in millions)   % change
Other operations
  $ 5.3       25.4  
Maintenance
    3.5       66.7  
           
Total other operations and maintenance expenses
  $ 8.8          
           
In the first quarter 2008, other operations and maintenance expenses were $35.0 million compared to $26.2 million in the same period in 2007. This increase was primarily due to transmission service and tariff penalties of $3.6 million, timing of plant maintenance activities of $3.1 million, and general and administrative expenses of $2.1 million due to implementation of the FERC separation order.
Depreciation and Amortization
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$1.6
  8.7
   
In the first quarter 2008, depreciation and amortization was $20.0 million compared to $18.4 million for the corresponding period in 2007. This increase was primarily due to completion of Plant Oleander Unit 5 and higher depreciation rates implemented in January 2008. See Note (J) to the Condensed Financial Statements herein for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense), Net
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$12.7   N/M
   
 
N/M   – Not Meaningful
In the first quarter 2008, other income (expense), net was $12.6 million as compared to $(0.1) million for the corresponding period in 2007. This change was primarily due to a $6.0 million gain on the sale of an undeveloped tract of land and a $6.4 million fee received for participating in an asset auction. Southern Power was not the successful bidder in the auction.
Income Taxes
     
First Quarter 2008 vs. First Quarter 2007
(change in millions)   % change
$(4.6)   (21.4)
   
In the first quarter 2008, income taxes were $16.9 million compared to $21.5 million for the corresponding period in 2007. This decrease was primarily due to a decrease in earnings before taxes resulting in lower income tax expense of $3.1 million. Also contributing to the variance was a decrease of $1.5 million due to the federal production activities deduction.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. A number of factors affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale energy business. These factors include the ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in this market. The level of future earnings depends on numerous factors, including regulatory matters (such as those related to affiliate contracts), sales, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.
Construction Projects
Plant Franklin Unit 3
Southern Power restarted construction activities on Plant Franklin Unit 3 in 2006, with an expected completion date in June 2008. The total cost is expected to be approximately $304.4 million, of which $294.2 million had been spent as of March 31, 2008. The expected capacity of this unit is 621 MW and will be used to provide annual capacity for a PPA with Constellation Energy Group, Inc. from 2009 through 2015.
Environmental Matters
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Power in Item 7 of the Form 10-K for information on the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
development by federal and state environmental regulatory agencies of additional control strategies for emission of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, or other environmental and health concerns could also affect earnings. While Southern Power’s PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes cannot be determined at this time.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such potential litigation against Southern Power and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements Southern Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from any such proceedings would have a material adverse effect on Southern Power’s financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS - ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition, Normal Sale and Non-Derivative Transactions, Cash Flow Hedge Transactions, Mark-to-Market Transactions, Percentage of Completion, Asset Impairments, Acquisition Accounting, and Contingent Obligations.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Power plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Power after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Southern Power plans to adopt SFAS No. 160 on January 1, 2009 and is currently assessing its impact, if any.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Power’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $29.9 million for the first quarter 2008, compared to $45.7 million for the first quarter 2007. The $15.8 million decrease in cash provided from operating activities in the first quarter 2008 is primarily due to costs incurred on the construction of the combined cycle unit for the Orlando Utilities Commission. Net cash used for investing activities totaled $20.9 million for the first quarter 2008, compared to $40.7 million for the first quarter 2007. This decrease is primarily due to a reduction in capital expenditures as Plant Oleander Unit 5 was completed in December 2007 and the gasifier portion of the IGCC project was terminated in November 2007. Net cash used for financing activities totaled $9.0 million for the first quarter 2008, compared to $1.1 million for the first quarter 2007. This increase is primarily due to a reduction of outstanding commercial paper and an increase in dividends paid to Southern Company. Southern Power paid dividends to Southern Company of $23.6 million in the first quarter 2008.
Significant balance sheet changes for the first quarter 2008 include increases in assets and liabilities for Southern Power’s risk management activities due to increases in the forward market prices for power and natural gas. Other asset changes include the completion of the sale of land that was held for sale at December 31, 2007. Other liability changes include a reduction in other current liabilities due to

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payment of IGCC termination costs of $ 2.6 million and a reduction of deferred capacity revenues due to seasonality.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Power in Item 7 of the Form 10-K for a description of Southern Power’s capital requirements for its construction program, maturing debt, interest, leases, derivative obligations, purchase commitments, and long-term service agreements.
Sources of Capital
Southern Power may use operating cash flows, external funds, or equity capital from Southern Company to finance any new projects, acquisitions, and ongoing capital requirements. Southern Power expects to generate external funds from the issuance of unsecured senior debt and commercial paper or utilization of credit arrangements from banks. However, the amount, type, and timing of any financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Power in Item 7 of the Form 10-K for additional information.
Southern Power’s current liabilities frequently exceed current assets due to the use of short-term indebtedness as a funding source, as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet liquidity and capital resource requirements, Southern Power had at March 31, 2008 approximately $400 million in committed credit arrangements with banks that expire in 2012. Borrowings of $50 million under these arrangements were outstanding as of March 31, 2008. Proceeds from these credit arrangements may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program.
Southern Power’s commercial paper program is used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes. At March 31, 2008, there was $13.5 million of commercial paper outstanding.
Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Southern Power 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 contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2 or to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2008, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $271 million. At March 31, 2008, the maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $463 million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
In addition, Southern Power is party to a PPA that could require collateral, but not accelerated payment, in the event of a downgrade to Southern Power’s credit rating to below BBB- or Baa3. The amount of

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
collateral required would depend upon actual losses, if any, resulting from a credit downgrade, limited to Southern Power’s remaining obligations under the contract.
Southern Power, along with the other members of the Power Pool, is also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Southern Power’s total exposure to these types of agreements was approximately $47 million.
Market Price Risk
Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Southern Power is exposed to market risks, including changes in interest rates, certain energy-related commodity prices, and, occasionally, currency exchange rates. To manage the volatility attributable to these exposures, Southern Power nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Power’s policies in areas such as counterparty exposure and hedging practices. Southern Power’s policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis.
Because energy from Southern Power’s facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is generally limited. However, during 2008, Southern Power is exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.
The change in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:
         
    First Quarter
    2008
    Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 3.4  
Contracts realized or settled
    (2.9 )
Current period changes(a)
    (19.1 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (18.6 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. 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.
The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Accumulated other comprehensive income
  $ (7.5 )
Net income
    (11.1 )
 
Total fair value gain/(loss)
  $ (18.6 )
 
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2008 for energy-related derivative contracts that are not hedges were $14.4 million and will continue to be marked to market until the settlement date. These amounts were immaterial for the three months ended March 31, 2007.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2008 are as follows:
                         
    March 31, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in millions)
Level 1
  $     $     $  
Level 2
    (18.6 )     (18.0 )     (0.6 )
Level 3
                 
 
Fair value of contracts outstanding at end of period
  $ (18.6 )   $ (18.0 )   $ (0.6 )
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Power in Item 7 and Notes 1 and 6 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Southern Power did not issue or redeem any long-term securities during the three months ended March 31, 2008.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
     
Registrant   Applicable Notes
Southern Company
  A, B, C, D, E, F, G, H, I, K
 
   
Alabama Power
  A, B, C, F, G, H, I
 
   
Georgia Power
  A, B, C, D, F, G, H, I
 
   
Gulf Power
  A, B, C, F, G, H
 
   
Mississippi Power
  A, B, C, D, F, G, H
 
   
Southern Power
  A, B, C, F, H, J

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
  (A)   INTRODUCTION
 
      The condensed quarterly financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2007 have been derived from the audited financial statements of each registrant. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 2008 and 2007. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the latest Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.
 
      Certain prior period amounts have been reclassified to conform to current period presentation. Where applicable, each company’s statement of income for the first quarter 2007 was modified to report “Interest expense to affiliate trusts” together with “Interest expense, net of amounts capitalized.” Southern Company’s statement of cash flows for the prior period was modified within the operating activities section to present separate line items for “Derivative fair value adjustments” and “Deferred revenues” previously included in “Other, net.” Within the investing activities section, “Proceeds from property sales” was combined into “Other.”
 
      Alabama Power’s statement of cash flows for the first quarter 2007 was modified within the operating activities section to combine “Deferred expenses – affiliates” into “Other, net.”
 
      Georgia Power’s statement of cash flows for the prior period was modified within the operating activities section to present a separate line item for “Deferred revenues” previously included in “Other, net.” Additionally, the line items “Stock option expense” and “Tax benefit of stock options” were combined into “Other, net” and “Material and supplies” was combined into “Other current assets.” In the financing activities section, “Gross excess tax benefit of stock options” was combined into “Other.”
 
      Gulf Power modified its statement of income for the three months ended March 31, 2007 to report a separate line item for “Allowance for funds used during construction” previously included in “Other income and expense, net.” In conjunction with such modification, Gulf Power modified its statement of cash flows within the operating activities section to present a separate line item for “Allowance for equity funds used during construction” previously included in “Other, net.”

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Due to the relative significance of the amount reported at March 31, 2008 associated with “Assets from risk management activities,” the balance sheet at December 31, 2007 of Mississippi Power was modified to report the amount for that line item previously included in “Other.” In conjunction with this modification, the balance sheet amount reported by Mississippi Power at December 31, 2007 for “Prepaid income taxes” was combined into “Other.”
 
      Southern Power’s statement of cash flows for the prior period was modified within the operating activities section to present a separate line item for “Mark to market adjustments” previously included in “Other, net.” Within the financing activities section, a modification was made to report “Proceeds – Capital contributions” which was previously included in “Other.”
 
      These reclassifications had no effect on total assets, net income, cash flows, or earnings per share.
 
      In the first quarter 2008, Gulf Power sold a turbine rotor assembly to Southern Power for $9.4 million. These transactions were eliminated in consolidation for Southern Company.
 
  (B)   CONTINGENCIES AND REGULATORY MATTERS
 
      See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.
 
      General Litigation Matters
 
      Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, each registrant’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against the registrants and any of their subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of each registrant in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on such registrant’s financial statements.
 
      Mirant Matters
 
      Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the United States and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity.
 
      Mirant Bankruptcy
 
      In July 2003, Mirant and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. The Bankruptcy Court entered an order confirming Mirant’s plan of reorganization in December 2005, and Mirant announced that this plan became effective in January 2006. As part of the plan, Mirant transferred substantially all of its assets and its restructured debt to a new corporation that adopted the name Mirant Corporation (Reorganized Mirant).

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Southern Company has certain contingent liabilities associated with guarantees of contractual commitments made by Mirant’s subsidiaries discussed under “Guarantees” in Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K and with various lawsuits related to Mirant discussed below. Also, Southern Company has joint and several liability with Mirant regarding the joint consolidated federal income tax returns through 2001, as discussed in Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K. In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern Company paid approximately $39 million in additional tax and interest related to Mirant tax items and filed a claim in Mirant’s bankruptcy case for that amount. Through December 2007, Southern Company received from the IRS approximately $36 million in refunds related to Mirant. Southern Company believes it has a right to recoup the $39 million tax payment owed by Mirant from such tax refunds. As a result, Southern Company intends to retain the tax refunds and reduce its claim against Mirant for the payment of Mirant taxes by the amount of such refunds. MC Asset Recovery, a special purpose subsidiary of Reorganized Mirant, has objected to and sought to equitably subordinate the Southern Company tax claim in its fraudulent transfer litigation against Southern Company. Southern Company has reserved the approximately $3 million amount remaining with respect to its Mirant tax claim.
Under the terms of the separation agreements entered into in connection with the spin-off, Mirant agreed to indemnify Southern Company for costs associated with these guarantees, lawsuits, and additional IRS assessments. However, as a result of Mirant’s bankruptcy, Southern Company sought reimbursement as an unsecured creditor in Mirant’s Chapter 11 proceeding. As part of a complaint filed against Southern Company in June 2005 and amended thereafter, Mirant and The Official Committee of Unsecured Creditors of Mirant Corporation (Unsecured Creditors’ Committee) objected to and sought equitable subordination of Southern Company’s claims, and Mirant moved to reject the separation agreements entered into in connection with the spin-off. MC Asset Recovery has been substituted as plaintiff in the complaint. If Southern Company’s claims for indemnification with respect to these, or any additional future payments, are allowed, then Mirant’s indemnity obligations to Southern Company would constitute unsecured claims against Mirant entitled to stock in Reorganized Mirant. The final outcome of this matter cannot now be determined.
MC Asset Recovery Litigation
In June 2005, Mirant, as a debtor in possession, and the Unsecured Creditors’ Committee filed a complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas, which was amended in July 2005, February 2006, May 2006, and March 2007.
In December 2005, the Bankruptcy Court entered an order authorizing the transfer of this proceeding, along with certain other actions, to MC Asset Recovery. Under that order, Reorganized Mirant is obligated to fund up to $20 million in professional fees in connection with the lawsuits, as well as certain additional amounts. Any net recoveries from these lawsuits will be distributed to, and shared equally by, certain unsecured creditors and the original equity holders. In January 2006, the U.S. District Court for the Northern District of Texas substituted MC Asset Recovery as plaintiff.
The complaint, as amended in March 2007, alleges that Southern Company caused Mirant to engage in certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The alleged fraudulent transfers and illegal dividends include without limitation: (1) certain dividends from Mirant to Southern Company in the aggregate amount of $668 million, (2) the repayment of certain intercompany loans and accrued interest in an aggregate amount of $1.035 billion, and (3) the dividend distribution of one share of Series B Preferred Stock and its subsequent redemption in exchange for Mirant’s 80% interest in a holding company that owned SE Finance Capital Corporation and Southern Company Capital Funding, Inc., which transfer plaintiff asserts is valued at over $200 million. The complaint also seeks to recharacterize certain advances from Southern Company

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to Mirant for investments in energy facilities from debt to equity. The complaint further alleges that Southern Company is liable to Mirant’s creditors for the full amount of Mirant’s liability under an alter ego theory of recovery and that Southern Company breached its fiduciary duties to Mirant and its creditors, caused Mirant to breach its fiduciary duties to creditors, and aided and abetted breaches of fiduciary duties by Mirant’s directors and officers. The complaint also seeks recoveries under the theories of restitution and unjust enrichment. In addition, the complaint alleges a claim under the Federal Debt Collection Procedure Act (FDCPA) to void certain transfers from Mirant to Southern Company. MC Asset Recovery claims to have standing to assert violations of the FDCPA and to recover property on behalf of the Mirant debtors’ estates. The complaint seeks monetary damages in excess of $2 billion plus interest, punitive damages, attorneys’ fees, and costs. Finally, the complaint includes an objection to Southern Company’s pending claims against Mirant in the Bankruptcy Court (which relate to reimbursement under the separation agreements of payments such as income taxes, interest, legal fees, and other guarantees described in Note 7 to the financial statements of Southern Company in Item 8 of the Form 10- K) and seeks equitable subordination of Southern Company’s claims to the claims of all other creditors. Southern Company served an answer to the complaint in April 2007.
In January 2006, the U.S. District Court for the Northern District of Texas granted Southern Company’s motion to withdraw this action from the Bankruptcy Court and, in February 2006, granted Southern Company’s motion to transfer the case to the U.S. District Court for the Northern District of Georgia. In May 2006, Southern Company filed a motion for summary judgment seeking entry of judgment against the plaintiff as to all counts of the complaint. In December 2006, the U.S. District Court for the Northern District of Georgia granted in part and denied in part the motion. As a result, certain breach of fiduciary duty claims alleged in earlier versions of the complaint are barred; all other claims in the complaint may proceed. Southern Company believes there is no meritorious basis for the claims in the complaint and is vigorously defending itself in this action. However, the final outcome of this matter cannot now be determined.
Mirant Securities Litigation
In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants in a class action lawsuit that several Mirant shareholders originally filed against Mirant and certain Mirant officers in May 2002. Several other similar lawsuits filed subsequently were consolidated into this litigation in the U.S. District Court for the Northern District of Georgia. The amended complaint is based on allegations related to alleged improper energy trading and marketing activities involving the California energy market, alleged false statements and omissions in Mirant’s prospectus for its initial public offering and in subsequent public statements by Mirant, and accounting-related issues previously disclosed by Mirant. The lawsuit purports to include persons who acquired Mirant securities between September 26, 2000 and September 5, 2002.
In July 2003, the court dismissed all claims based on Mirant’s alleged improper energy trading and marketing activities involving the California energy market. The other claims do not allege any improper trading and marketing activity, accounting errors, or material misstatements or omissions on the part of Southern Company but seek to impose liability on Southern Company based on allegations that Southern Company was a “control person” as to Mirant prior to the spin-off date. Southern Company filed an answer to the consolidated amended class action complaint in September 2003. Plaintiffs have also filed a motion for class certification.
During Mirant’s Chapter 11 proceeding, the securities litigation was stayed, with the exception of limited discovery. Since Mirant’s plan of reorganization has become effective, the stay has been lifted. In March 2006, the plaintiffs filed a motion for reconsideration requesting that the court vacate that portion of its July 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged

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improper energy trading and marketing activities involving the California energy market. Southern Company and the other defendants have opposed the plaintiffs’ motion. On March 6, 2007, the court granted plaintiffs’ motion for reconsideration, reinstated the California energy market claims, and granted in part and denied in part defendants’ motion to compel certain class certification discovery. On March 21, 2007, defendants filed renewed motions to dismiss the California energy claims on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by the court. On July 27, 2007, certain defendants, including Southern Company, filed motions for reconsideration of the court’s denial of a motion seeking dismissal of certain federal securities laws claims based upon, among other things, certain alleged errors included in financial statements issued by Mirant. The ultimate outcome of this matter cannot be determined at this time.
The plaintiffs have also stated that they intend to request that the court grant leave for them to amend the complaint to add allegations based upon claims asserted against Southern Company in the MC Asset Recovery litigation.
Under certain circumstances, Southern Company will be obligated under its Bylaws to indemnify the four current and/or former Southern Company officers who served as directors of Mirant at the time of its initial public offering through the date of the spin-off and who are also named as defendants in this lawsuit. The final outcome of this matter cannot now be determined.
Environmental Matters
New Source Review Actions
In November 1999, the EPA brought a civil action in the U.S. District Court for the Northern District of Georgia against certain Southern Company subsidiaries, including Alabama Power and Georgia Power, alleging that these subsidiaries had violated the NSR provisions of the Clean Air Act and related state laws at certain coal-fired generating facilities. Through subsequent amendments and other legal procedures, the EPA filed a separate action in January 2001 against Alabama Power in the U.S. District Court for the Northern District of Alabama after Alabama Power was dismissed from the original action. In these lawsuits, the EPA alleged that NSR violations occurred at eight coal-fired generating facilities operated by Alabama Power and Georgia Power, including one co-owned by Mississippi Power. The civil actions request penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued notices of violations relating to Gulf Power’s Plant Crist and a unit partially owned by Gulf Power at Plant Scherer. In early 2000, the EPA filed a motion to amend its complaint to add the allegations in the notice of violation and to add Gulf Power as a defendant. However, in March 2001, the Court denied the motion based on lack of jurisdiction, and the EPA has not refiled. The action against Georgia Power has been administratively closed since the spring of 2001, and the case has not been reopened.
In June 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving the alleged NSR violations at Plant Miller. The consent decree required Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and to donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization and formalized specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. In August 2006, the district court in Alabama granted Alabama Power’s motion for summary judgment and entered final judgment in favor of Alabama Power on the EPA’s claims related to all of the remaining plants: Plants Barry, Gaston, Gorgas, and Greene County.

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The plaintiffs appealed the district court’s decision to the U.S. Court of Appeals for the Eleventh Circuit, and the appeal was stayed by the Appeals Court pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. The Supreme Court issued its decision in the Duke Energy case in April 2007. On October 5, 2007, the U.S. District Court for the Northern District of Alabama issued an order in the Alabama Power case indicating a willingness to re-evaluate its previous decision in light of the Supreme Court’s Duke Energy opinion. On December 21, 2007, the Eleventh Circuit vacated the district court’s decision in the Alabama Power case and remanded the case back to the district court for consideration of the legal issues in light of the Supreme Court’s decision in the Duke Energy case. The final outcome of these matters cannot be determined at this time.
Southern Company and the traditional operating companies believe they complied with applicable laws and the EPA regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes maximum civil penalties of $25,000 to $32,500 per day, per violation at each generating unit, depending on the date of the alleged violation. An adverse outcome in either of these cases could require substantial capital expenditures or affect the timing of currently budgeted capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. Such expenditures could affect future results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.
Carbon Dioxide Litigation
New York Case
In July 2004, attorneys general from eight states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed a complaint in the U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. A nearly identical complaint was filed by three environmental groups in the same court. The complaints allege that the companies’ emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs assert is a public nuisance. Under common law public and private nuisance theories, the plaintiffs seek a judicial order (1) holding each defendant jointly and severally liable for creating, contributing to, and/or maintaining global warming and (2) requiring each of the defendants to cap its emissions of carbon dioxide and then reduce those emissions by a specified percentage each year for at least a decade. Plaintiffs have not, however, requested that damages be awarded in connection with their claims. Southern Company believes these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. In September 2005, the U.S. District Court for the Southern District of New York granted Southern Company’s and the other defendants’ motions to dismiss these cases. The plaintiffs filed an appeal to the U.S. Court of Appeals for the Second Circuit in October 2005 and no decision has been issued. The ultimate outcome of these matters cannot be determined at this time.
Kivalina Case
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

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Environmental Remediation
The registrants must comply with other environmental laws and regulations that cover the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the subsidiaries may also incur substantial costs to clean up properties. The traditional operating companies have each received authority from their respective state PSCs to recover approved environmental compliance costs through regulatory mechanisms. Within limits approved by the state PSCs, these rates are adjusted annually or as necessary.
Georgia Power has been designated as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), including a large site in Brunswick, Georgia on the CERCLA National Priorities List (NPL). The parties have completed the removal of wastes from the Brunswick site as ordered by the EPA. Additional claims for recovery of natural resource damages at this site or for the assessment and potential cleanup of other sites on the Georgia Hazardous Sites Inventory and CERCLA NPL are anticipated.
Gulf Power’s environmental remediation liability includes estimated costs of environmental remediation projects of approximately $66.9 million as of March 31, 2008. These estimated costs relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for impacts to groundwater from herbicide applications at Gulf Power substations. The schedule for completion of the remediation projects will be subject to FDEP approval. The projects have been approved by the Florida PSC for recovery through Gulf Power’s environmental cost recovery clause; therefore, there was no impact on net income as a result of these estimates.
In 2003, the Texas Commission on Environmental Quality (TCEQ) designated Mississippi Power as a potentially responsible party at a site in Texas. The site was owned by an electric transformer company that handled Mississippi Power’s transformers as well as those of many other entities. The site owner is now in bankruptcy and the State of Texas has entered into an agreement with Mississippi Power and several other utilities to investigate and remediate the site. Amounts expensed during 2005, 2006, and 2007 related to this work were not material. Hundreds of entities have received notices from the TCEQ requesting their participation in the anticipated site remediation. The final outcome of this matter to Mississippi Power will depend upon further environmental assessment and the ultimate number of potentially responsible parties and cannot now be determined. The remediation expenses incurred by Mississippi Power are expected to be recovered through the ECO Plan. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory

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Matters -Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for additional information.
The final outcome of these matters cannot now be determined. However, based on the currently known conditions at these sites and the nature and extent of activities relating to these sites, Southern Company, Georgia Power, Gulf Power, and Mississippi Power do not believe that additional liabilities, if any, at these sites would be material to their respective financial statements.
FERC Matters
Market-Based Rate Authority
Each of the traditional operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates, including short-term opportunity sales, at market-based prices. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate.
In December 2004, the FERC initiated a proceeding to assess Southern Company’s generation dominance within its retail service territory. The ability to charge market-based rates in other markets is not an issue in the proceeding. Any new market-based rate sales by any subsidiary of Southern Company in Southern Company’s retail service territory entered into during a 15-month refund period that ended in May 2006 could be subject to refund to a cost-based rate level.
In late June and July 2007, hearings were held in this proceeding and the presiding administrative law judge issued an initial decision on November 9, 2007 regarding the methodology to be used in the generation dominance tests. The proceedings are ongoing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could require the traditional operating companies and Southern Power to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates and could also result in total refunds of up to $19.7 million, plus interest. The potential refunds include $3.9 million for Alabama Power, $5.8 million for Georgia Power, $0.8 million for Gulf Power, $8.4 million for Mississippi Power, and $0.7 million for Southern Power, in each case plus interest. Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter.
On June 21, 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This latest order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. The impact of these orders and their effect on the generation dominance proceeding cannot now be determined.
Intercompany Interchange Contract
Southern Company’s generation fleet in its retail service territory is operated under the IIC as approved by the FERC. In May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among the traditional operating companies, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct.

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In October 2006, the FERC issued an order accepting a settlement resolving the proceeding subject to Southern Company’s agreement to accept certain modifications to the settlement’s terms and Southern Company notified the FERC that it accepted the modifications. The modifications largely involve functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Southern Company filed with the FERC in November 2006 a compliance plan in connection with the order. On April 19, 2007, the FERC approved, with certain modifications, the plan submitted by Southern Company. Implementation of the plan is not expected to have a material impact on the financial statements of Southern Company or the traditional operating companies. Southern Power’s cost of implementing the compliance plan, including the modifications, is expected to be approximately $8 million annually. On November 19, 2007, Southern Company notified the FERC that the plan had been implemented and the FERC division of audits subsequently began an audit pertaining to compliance implementation and related matters, which is ongoing.
Generation Interconnection Agreements
In November 2004, generator company subsidiaries of Tenaska, Inc. (Tenaska), as counterparties to three previously executed interconnection agreements with subsidiaries of Southern Company, filed complaints at the FERC requesting that the FERC modify the agreements and that those Southern Company subsidiaries refund a total of $19 million previously paid for interconnection facilities of which $11 million would be refunded by Alabama Power and $8 million by Georgia Power. No other similar complaints are pending with the FERC.
On January 19, 2007, the FERC issued an order granting Tenaska’s requested relief. Although the FERC’s order required the modification of Tenaska’s interconnection agreements, under the provisions of the order, Southern Company determined that no refund was payable to Tenaska. Southern Company requested rehearing asserting that the FERC retroactively applied a new principle to existing interconnection agreements. Tenaska requested rehearing of FERC’s methodology for determining the amount of refunds. The requested rehearings were denied, and Southern Company and Tenaska have appealed the orders to the U.S. Circuit Court for the District of Columbia. The final outcome of this matter cannot now be determined.
Right of Way Litigation
Southern Company and certain of its subsidiaries, including Gulf Power, Mississippi Power, and Southern Telecom, Inc. (a subsidiary of SouthernLINC Wireless), have been named as defendants in numerous lawsuits brought by landowners since 2001. The plaintiffs’ lawsuits claim that defendants may not use, or sublease to third parties, some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs’ properties and that such actions exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment and seek compensatory and punitive damages and injunctive relief. Management of Southern Company and its subsidiaries believe that they have complied with applicable laws and that the plaintiffs’ claims are without merit.
In November 2003, the Second Circuit Court in Gadsden County, Florida, ruled in favor of the plaintiffs on their motion for partial summary judgment concerning liability in one such lawsuit brought by landowners regarding the installation and use of fiber optic cable over Gulf Power rights of way located on the landowners’ property. Subsequently, the plaintiffs sought to amend their complaint and asked the court to enter a final declaratory judgment and to enter an order enjoining Gulf Power from allowing expanded general telecommunications use of the fiber optic cables that are the subject of this litigation. In January 2005, the trial court granted in part the plaintiffs’ motion to amend their complaint and denied the requested declaratory and injunctive relief. In November 2005, the trial court ruled in favor of the plaintiffs and against Gulf Power on their respective motions for

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partial summary judgment. In that same order, the trial court also denied Gulf Power’s motion to dismiss certain claims. Gulf Power filed an appeal to the Florida First District Court of Appeals in December 2005. In October 2006, the Florida First District Court of Appeal issued an order dismissing Gulf Power’s December 2005 appeal on the basis that the trial court’s order was a non-final order and therefore not subject to review on appeal at this time. The case was returned to the trial court for further proceedings. The parties reached agreement on a proposed settlement plan that was subject to approval by the trial court. On November 7, 2007, the trial court granted preliminary approval and set forth the requirements for the trial court to make its final determination on the proposed settlement. At a hearing on April 30, 2008, the trial court granted final approval of the settlement agreement. The resulting order will become final and not subject to appeal 30 days following signature by the court.
To date, Mississippi Power has entered into agreements with plaintiffs in approximately 90% of the actions pending against Mississippi Power to clarify its easement rights in the State of Mississippi. These agreements have been approved by the Circuit Courts of Harrison County and Jasper County, Mississippi (First Judicial Circuit), and dismissals of the related cases are in progress. These agreements have not resulted in any material effects on Southern Company’s or Mississippi Power’s financial statements.
In addition, in late 2001, certain subsidiaries of Southern Company, including Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Telecom, Inc. (a subsidiary of SouthernLINC Wireless), were named as defendants in a lawsuit brought by a telecommunications company that uses certain of the defendants’ rights of way. This lawsuit alleges, among other things, that the defendants are contractually obligated to indemnify, defend, and hold harmless the telecommunications company from any liability that may be assessed against it in pending and future right of way litigation. The defendants believe that the plaintiff’s claims are without merit. In the fall of 2004, the trial court stayed the case until resolution of the underlying landowner litigation discussed above. In January 2005, the Georgia Court of Appeals dismissed the telecommunications company’s appeal of the trial court’s order for lack of jurisdiction. An adverse outcome in this matter, combined with an adverse outcome against the telecommunications company in one or more of the right of way lawsuits, could result in substantial judgments; however, the final outcome of these matters cannot now be determined.
Income Tax Matters
Leveraged Lease Transactions
See Note 1 to the financial statements of Southern Company under “Income and Other Taxes,” Note 3 to the financial statements of Southern Company under “Income Tax Matters,” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K. The IRS challenged Southern Company’s deductions related to three international lease transactions (so-called SILO or sale-in-lease-out transactions), in connection with its audits of Southern Company’s 2000 through 2003 tax returns. In the third quarter 2006, Southern Company paid the full amount of the disputed tax and the applicable interest on the SILO issue for tax years 2000 – 2001 and filed a claim for refund which has now been denied by the IRS. The disputed tax amount is $79 million and the related interest is approximately $24 million for these tax years. This payment, and the subsequent IRS disallowance of the refund claim, closed the issue with the IRS and Southern Company has initiated litigation in the U.S. District Court for the Northern District of Georgia for a complete refund of tax and interest paid for the 2000 – 2001 tax years. The IRS also challenged the SILO deductions for the tax years 2002 and 2003. The estimated amount of disputed tax and interest for these tax years was approximately $83 million and $15 million, respectively. The tax and interest for these tax years was paid to the IRS in the fourth quarter 2006. Southern Company has accounted for both payments in 2006 as deposits. For tax years 2000 through 2007, Southern

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      Company has claimed approximately $330 million in tax benefits related to these SILO transactions challenged by the IRS. These tax benefits relate to timing differences and do not impact total net income over the life of the transactions. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. Southern Company is continuing to pursue resolution of these matters; however, the ultimate outcome cannot now be determined. In accordance with the requirements of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” and FASB Staff Position No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” Southern Company will continue to evaluate the SILO transactions and the projected timing of income tax cash flows in light of Southern Company’s pending litigation, other recent court decisions involving lease-in-lease-out (LILO) and SILO transactions, and proposed legislation. As a result, it is reasonably possible that the amount of the unrecognized tax benefit could significantly change within the next 12 months. In addition, the U.S. Senate is currently considering legislation that would disallow tax benefits after December 31, 2007 for SILO losses and other international leveraged lease transactions (such as LILO transactions). The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of the pending litigation, other court decisions, and proposed legislation, but could be significant, and potentially material.
 
      Georgia State Income Tax Credits
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