10-Q 1 G28005-10Q.HTM FORM 10-Q corresp
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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 September 30, 2011
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 35203    
 
  (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    
 
       
001-31737
  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 registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). 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 September 30, 2011
The Southern Company
  Par Value $5 Per Share     861,928,103  
Alabama Power Company
  Par Value $40 Per Share     30,537,500  
Georgia Power Company
  Without Par Value     9,261,500  
Gulf Power Company
  Without Par Value     4,142,717  
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
September 30, 2011
             
        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        
 
  The Southern Company and Subsidiary Companies        
 
 
Condensed Consolidated Statements of Income
    9  
 
 
Condensed Consolidated Statements of Cash Flows
    10  
 
 
Condensed Consolidated Balance Sheets
    11  
 
 
Condensed Consolidated Statements of Comprehensive Income
    13  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    14  
 
  Alabama Power Company        
 
 
Condensed Statements of Income
    39  
 
 
Condensed Statements of Comprehensive Income
    39  
 
 
Condensed Statements of Cash Flows
    40  
 
 
Condensed Balance Sheets
    41  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    43  
 
  Georgia Power Company        
 
 
Condensed Statements of Income
    60  
 
 
Condensed Statements of Comprehensive Income
    60  
 
 
Condensed Statements of Cash Flows
    61  
 
 
Condensed Balance Sheets
    62  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    64  
 
  Gulf Power Company        
 
 
Condensed Statements of Income
    84  
 
 
Condensed Statements of Comprehensive Income
    84  
 
 
Condensed Statements of Cash Flows
    85  
 
 
Condensed Balance Sheets
    86  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    88  
 
  Mississippi Power Company        
 
 
Condensed Statements of Income
    105  
 
 
Condensed Statements of Comprehensive Income
    105  
 
 
Condensed Statements of Cash Flows
    106  
 
 
Condensed Balance Sheets
    107  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    109  
 
  Southern Power Company and Subsidiary Companies        
 
 
Condensed Consolidated Statements of Income
    132  
 
 
Condensed Consolidated Statements of Comprehensive Income
    132  
 
 
Condensed Consolidated Statements of Cash Flows
    133  
 
 
Condensed Consolidated Balance Sheets
    134  
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    136  
 
  Notes to the Condensed Financial Statements     148  
  Quantitative and Qualitative Disclosures about Market Risk     37  
 
Controls and Procedures
    37  

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2011
             
        Page  
        Number  
 
  PART II — OTHER INFORMATION        
  Legal Proceedings     185  
  Risk Factors     185  
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds   Inapplicable  
Item 3.
  Defaults Upon Senior Securities   Inapplicable  
Item 5.
  Other Information   Inapplicable  
  Exhibits     186  
 
  Signatures     191  

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DEFINITIONS
     
Term   Meaning
2007 Retail Rate Plan
  Georgia Power’s retail rate plan for the years 2008 through 2010
2010 ARP
  Alternate Rate Plan approved by the Georgia PSC for Georgia Power which became effective January 1, 2011 and will continue through December 31, 2013
AFUDC
  Allowance for funds used during construction
Alabama Power
  Alabama Power Company
Clean Air Act
  Clean Air Act Amendments of 1990
DOE
  U.S. Department of Energy
Duke Energy
  Duke Energy Corporation
ECO Plan
  Mississippi Power’s Environmental Compliance Overview Plan
EPA
  U.S. Environmental Protection Agency
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, 2010
GAAP
  Generally Accepted Accounting Principles
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IGCC
  Integrated coal gasification combined cycle
IIC
  Intercompany Interchange Contract
Internal Revenue Code
  Internal Revenue Code of 1986, as amended
IRP
  Integrated Resource Plan
IRS
  Internal Revenue Service
KWH
  Kilowatt-hour
LIBOR
  London Interbank Offered Rate
Mississippi Power
  Mississippi Power Company
mmBtu
  Million British thermal unit
MW
  Megawatt
MWH
  Megawatt-hour
NCCR tariff
  Georgia Power’s Nuclear Construction Cost Recovery tariff, which became effective January 1, 2011, in accordance with the Georgia Nuclear Energy Financing Act
NDR
  Alabama Power’s natural disaster reserve
NRC
  Nuclear Regulatory Commission
NSR
  New Source Review
OCI
  Other Comprehensive Income
PEP
  Mississippi Power’s Performance Evaluation Plan
Plant Vogtle Units 3 and 4
  Two new nuclear generating units under construction at Plant
Vogtle
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 Environmental
  Alabama Power’s rate certificated new plant environmental
Rate ECR
  Alabama Power’s energy cost recovery rate mechanism
registrants
  Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power
SCR
  Selective catalytic reduction
SCS
  Southern Company Services, Inc.

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Term   Meaning
SEC
  Securities and Exchange Commission
Southern Company
  The Southern Company
Southern Company system
  Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
SouthernLINC Wireless
  Southern Communications Services, Inc.
Southern Nuclear
  Southern Nuclear Operating Company, Inc.
Southern Power
  Southern Power Company
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, customer growth, economic recovery, fuel cost recovery and other rate actions, current and proposed environmental regulations and related estimated expenditures, future earnings, access to sources of capital, financing activities, start and completion of construction projects, plans and estimated costs for new generation resources, impact of the Small Business Jobs and Credit Act of 2010, impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, estimated sales and purchases under new power sale and purchase agreements, storm damage cost recovery and repairs, 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 changes, 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, coal combustion byproducts, and emissions of sulfur, nitrogen, carbon, soot, particulate matter, hazardous air pollutants, including mercury, and other substances, financial reform legislation, 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 and IRS audits;
 
  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 and recovery from the recent recession, 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 and avoid cost overruns during the development and construction of facilities;
 
  investment performance of Southern Company’s employee benefit plans and nuclear decommissioning trust funds;
 
  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 other cost recovery mechanisms;
 
  regulatory approvals and actions related to the Plant Vogtle expansion, including Georgia PSC and NRC approvals and potential DOE loan guarantees;
 
  regulatory approvals and actions related to the Kemper IGCC, including Mississippi PSC approvals and potential DOE loan guarantees;
 
  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 wholesale customers;
 
  the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents, including cyber intrusion;
 
  interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;
 
  the impacts of any potential U.S. credit rating downgrade or other sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the availability or benefits of proposed DOE loan guarantees;
 
  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 influenzas, or other similar occurrences;
 
  the direct or indirect effects on Southern Company’s business resulting from incidents affecting the U.S. electric grid or operation of generating resources;
 
  the effect of accounting pronouncements issued periodically by standard setting bodies; and
 
  other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC.
The registrants expressly disclaim 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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)     (in millions)  
Operating Revenues:
                               
Retail revenues
  $ 4,693     $ 4,573     $ 11,931     $ 11,603  
Wholesale revenues
    557       566       1,513       1,581  
Other electric revenues
    161       160       464       438  
Other revenues
    17       21       53       63  
 
                       
Total operating revenues
    5,428       5,320       13,961       13,685  
 
                       
Operating Expenses:
                               
Fuel
    1,908       1,970       5,057       5,244  
Purchased power
    215       209       460       464  
Other operations and maintenance
    983       1,019       2,837       2,846  
Depreciation and amortization
    431       427       1,279       1,137  
Taxes other than income taxes
    239       236       686       662  
 
                       
Total operating expenses
    3,776       3,861       10,319       10,353  
 
                       
Operating Income
    1,652       1,459       3,642       3,332  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    42       45       113       140  
Interest expense, net of amounts capitalized
    (217 )     (225 )     (638 )     (666 )
Other income (expense), net
    (1 )     (3 )     (3 )     (10 )
 
                       
Total other income and (expense)
    (176 )     (183 )     (528 )     (536 )
 
                       
Earnings Before Income Taxes
    1,476       1,276       3,114       2,796  
Income taxes
    543       442       1,123       925  
 
                       
Consolidated Net Income
    933       834       1,991       1,871  
Dividends on Preferred and Preference Stock of Subsidiaries
    17       17       49       49  
 
                       
Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries
  $ 916     $ 817     $ 1,942     $ 1,822  
 
                       
Common Stock Data:
                               
Earnings per share (EPS) -
                               
Basic EPS
  $ 1.07     $ 0.98     $ 2.27     $ 2.20  
Diluted EPS
  $ 1.06     $ 0.97     $ 2.26     $ 2.19  
Average number of shares of common stock outstanding (in millions)
                               
Basic
    860       836       854       829  
Diluted
    868       842       861       833  
Cash dividends paid per share of common stock
  $ 0.4725     $ 0.4550     $ 1.4000     $ 1.3475  
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in millions)  
Operating Activities:
               
Consolidated net income
  $ 1,991     $ 1,871  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    1,530       1,377  
Deferred income taxes
    914       573  
Deferred revenues
    (2 )     (77 )
Allowance for equity funds used during construction
    (113 )     (140 )
Pension, postretirement, and other employee benefits
    (1 )     52  
Stock based compensation expense
    35       28  
Generation construction screening costs
          (51 )
Other, net
    13       (1 )
Changes in certain current assets and liabilities —
               
-Receivables
    (118 )     (319 )
-Fossil fuel stock
    229       220  
-Other current assets
    (45 )     (59 )
-Accounts payable
    (155 )     (82 )
-Accrued taxes
    440       118  
-Accrued compensation
    (96 )     93  
-Other current liabilities
    (24 )     (76 )
 
           
Net cash provided from operating activities
    4,598       3,527  
 
           
Investing Activities:
               
Property additions
    (3,115 )     (2,894 )
Distribution of restricted cash
    61       25  
Nuclear decommissioning trust fund purchases
    (1,946 )     (696 )
Nuclear decommissioning trust fund sales
    1,942       672  
Proceeds from property sales
    21       7  
Cost of removal, net of salvage
    (90 )     (84 )
Change in construction payables
    137       (84 )
Other investing activities
    92       48  
 
           
Net cash used for investing activities
    (2,898 )     (3,006 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (1,160 )     (289 )
Proceeds —
               
Long-term debt issuances
    3,144       2,796  
Common stock issuances
    620       610  
Redemptions —
               
Long-term debt
    (1,987 )     (1,871 )
Payment of common stock dividends
    (1,193 )     (1,114 )
Payment of dividends on preferred and preference stock of subsidiaries
    (49 )     (49 )
Other financing activities
    (6 )     (35 )
 
           
Net cash provided from (used for) financing activities
    (631 )     48  
 
           
Net Change in Cash and Cash Equivalents
    1,069       569  
Cash and Cash Equivalents at Beginning of Period
    447       690  
 
           
Cash and Cash Equivalents at End of Period
  $ 1,516     $ 1,259  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $54 and $61 capitalized for 2011 and 2010, respectively)
  $ 369     $ 589  
Income taxes (net of refunds)
    (358 )     278  
Noncash transactions — accrued property additions at end of period
    541       361  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in millions)  
Current Assets:
               
Cash and cash equivalents
  $ 1,516     $ 447  
Restricted cash and cash equivalents
    9       68  
Receivables —
               
Customer accounts receivable
    1,401       1,140  
Unbilled revenues
    449       420  
Under recovered regulatory clause revenues
    210       209  
Other accounts and notes receivable
    250       285  
Accumulated provision for uncollectible accounts
    (30 )     (25 )
Fossil fuel stock, at average cost
    1,076       1,308  
Materials and supplies, at average cost
    854       827  
Vacation pay
    150       151  
Prepaid expenses
    319       784  
Other regulatory assets, current
    191       210  
Other current assets
    100       59  
 
           
Total current assets
    6,495       5,883  
 
           
Property, Plant, and Equipment:
               
In service
    58,079       56,731  
Less accumulated depreciation
    20,891       20,174  
 
           
Plant in service, net of depreciation
    37,188       36,557  
Other utility plant, net
    57        
Nuclear fuel, at amortized cost
    743       670  
Construction work in progress
    5,809       4,775  
 
           
Total property, plant, and equipment
    43,797       42,002  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    1,159       1,370  
Leveraged leases
    641       624  
Miscellaneous property and investments
    256       277  
 
           
Total other property and investments
    2,056       2,271  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    1,361       1,280  
Prepaid pension costs
    137       88  
Unamortized debt issuance expense
    163       178  
Unamortized loss on reacquired debt
    283       274  
Deferred under recovered regulatory clause revenues
    64       218  
Other regulatory assets, deferred
    2,496       2,402  
Other deferred charges and assets
    491       436  
 
           
Total deferred charges and other assets
    4,995       4,876  
 
           
Total Assets
  $ 57,343     $ 55,032  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholders’ Equity   2011     2010  
    (in millions)  
Current Liabilities:
               
Securities due within one year
  $ 1,891     $ 1,301  
Notes payable
    137       1,297  
Accounts payable
    1,355       1,275  
Customer deposits
    340       332  
Accrued taxes —
               
Accrued income taxes
    46       8  
Unrecognized tax benefits
    22       187  
Other accrued taxes
    458       440  
Accrued interest
    245       225  
Accrued vacation pay
    191       194  
Accrued compensation
    349       438  
Liabilities from risk management activities
    136       152  
Other regulatory liabilities, current
    107       88  
Other current liabilities
    380       535  
 
           
Total current liabilities
    5,657       6,472  
 
           
Long-term Debt
    18,733       18,154  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    8,613       7,554  
Deferred credits related to income taxes
    223       235  
Accumulated deferred investment tax credits
    579       509  
Employee benefit obligations
    1,608       1,580  
Asset retirement obligations
    1,307       1,257  
Other cost of removal obligations
    1,170       1,158  
Other regulatory liabilities, deferred
    255       312  
Other deferred credits and liabilities
    483       517  
 
           
Total deferred credits and other liabilities
    14,238       13,122  
 
           
Total Liabilities
    38,628       37,748  
 
           
Redeemable Preferred Stock of Subsidiaries
    375       375  
 
           
Stockholders’ Equity:
               
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1.5 billion shares
               
Issued — September 30, 2011: 862 million shares
               
— December 31, 2010: 844 million shares
               
Treasury — September 30, 2011: 0.5 million shares
               
— December 31, 2010: 0.5 million shares
               
Par value
    4,312       4,219  
Paid-in capital
    4,302       3,702  
Treasury, at cost
    (16 )     (15 )
Retained earnings
    9,116       8,366  
Accumulated other comprehensive loss
    (81 )     (70 )
 
           
Total Common Stockholders’ Equity
    17,633       16,202  
 
           
Preferred and Preference Stock of Subsidiaries
    707       707  
 
           
Total Stockholders’ Equity
    18,340       16,909  
 
           
Total Liabilities and Stockholders’ Equity
  $ 57,343     $ 55,032  
 
           
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)     (in millions)  
Consolidated Net Income
  $ 933     $ 834     $ 1,991     $ 1,871  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(10), $-, $(8), and $-, respectively
    (17 )     2       (14 )     1  
Reclassification adjustment for amounts included in net income, net of tax of $2, $4, $4, and $10, respectively
    3       3       6       14  
Marketable securities:
                               
Change in fair value, net of tax of $(2), $-, $(1) and $-, respectively
    (5 )     (3 )     (3 )      
Pension and other post retirement benefit plans:
                               
Reclassification adjustment for amounts included in net income, net of tax of $2, $1, $2, and $1, respectively
                      1  
 
                       
Total other comprehensive income (loss)
    (19 )     2       (11 )     16  
 
                       
Dividends on preferred and preference stock of subsidiaries
    (17 )     (17 )     (49 )     (49 )
 
                       
Comprehensive Income
  $ 897     $ 819     $ 1,931     $ 1,838  
 
                       
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
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
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, owns, 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 and telecommunications. 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
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$99   12.1   $120   6.6
 
Southern Company’s third quarter 2011 net income after dividends on preferred and preference stock of subsidiaries was $916 million ($1.07 per share) compared to $817 million ($0.98 per share) for the third quarter 2010. The net income increase for the third quarter 2011 when compared to the corresponding period in 2010 was primarily the result of increases in retail base revenues at Georgia Power as authorized under the 2010 ARP and the NCCR tariff and a decrease in other operations and maintenance expenses. The net income increase for third quarter 2011 was partially offset by decreases in revenues due to relatively cooler weather primarily in the month of September compared to the third quarter 2010.
Southern Company’s year-to-date 2011 net income after dividends on preferred and preference stock of subsidiaries was $1.94 billion ($2.27 per share) compared to $1.82 billion ($2.20 per share) for year-to-date 2010. The net income increase for year-to-date 2011 when compared to the corresponding period in 2010 was primarily the result of increases in retail base revenues at Georgia Power as authorized under the 2010 ARP and the NCCR tariff and increases in energy and capacity revenues at Southern Power. The net income increase for year-to-date 2011 was partially offset by a decrease in the amortization of the regulatory liability related to other cost of removal obligations at Georgia Power, decreases in revenues due to relatively cooler weather primarily in the month of September compared to the third quarter 2010 and significantly colder weather in the first quarter 2010, a decrease in wholesale revenues primarily at Alabama Power, and an increase in depreciation on additional plant in service related to environmental, transmission, and distribution projects.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$120   2.6   $328   2.8
 
In the third quarter 2011, retail revenues were $4.69 billion compared to $4.57 billion for the corresponding period in 2010. For year-to-date 2011, retail revenues were $11.93 billion compared to $11.60 billion for the corresponding period in 2010.
Details of the change to retail revenues follow:
                                 
    Third Quarter   Year-to-Date
    2011   2011
    (in millions)   (% change)   (in millions)   (% change)
Retail — prior year
  $ 4,573             $ 11,603          
Estimated change in —
                               
Rates and pricing
    227       5.0       593       5.1  
Sales growth (decline)
    9       0.2       25       0.2  
Weather
    (93 )     (2.0 )     (170 )     (1.5 )
Fuel and other cost recovery
    (23 )     (0.5 )     (120 )     (1.0 )
 
Retail – current year
  $ 4,693       2.7 %   $ 11,931       2.8 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 primarily due to increases in Georgia Power’s retail base revenues as authorized under the 2010 ARP and the NCCR tariff, which both became effective January 1, 2011. Also contributing to these increases were revenues associated with Alabama Power’s Rate CNP Environmental due to completion of construction projects related to environmental mandates, although there was no increase in the Rate CNP Environmental billing factors in 2011.
Revenues attributable to changes in sales increased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 due to increases in weather-adjusted retail KWH sales of 0.5% and 1.1%, respectively. For the third quarter 2011, weather-adjusted residential KWH sales decreased 0.3%, weather-adjusted commercial KWH sales remained flat, and weather-adjusted industrial KWH sales increased 2.0%. For year-to-date 2011, weather-adjusted residential KWH sales decreased 0.1%, weather-adjusted commercial KWH sales decreased 0.2%, and weather-adjusted industrial KWH sales increased 3.9%. Increased demand in the primary metals, petroleum refining, fabricated metals, and pipelines sectors were the main contributors to the increases in weather-adjusted industrial KWH sales for the third quarter and year-to-date 2011.
Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 due to relatively cooler weather primarily in the month of September compared to the third quarter 2010 and significantly colder weather in the first quarter 2010.
Fuel and other cost recovery revenues decreased $23 million in the third quarter 2011 and $120 million for year-to-date 2011 when compared to the corresponding periods in 2010. 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.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(9)   (1.6)   $(68)   (4.3)
 
Wholesale revenues consist of PPAs with investor-owned utilities and electric cooperatives, unit power sales contracts, and short-term opportunity sales. Wholesale revenues from PPAs and unit power sales contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system-owned generation, demand for energy within the Southern Company system service territory, and the availability of the Southern Company system generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above the variable cost to produce the energy.
In the third quarter 2011, wholesale revenues were $557 million compared to $566 million for the corresponding period in 2010, reflecting a $15 million decrease in energy revenues and a $6 million increase in capacity revenues. The decrease was primarily due to less favorable weather in the third quarter 2011 and lower energy and capacity revenues associated with the expiration of PPAs in December 2010 at Southern Power. The decrease was partially offset by higher energy and capacity revenues under new PPAs at Southern Power that began in December 2010 and January 2011.
For year-to-date 2011, wholesale revenues were $1.51 billion compared to $1.58 billion for the corresponding period in 2010, reflecting a $48 million decrease in energy revenues and a $20 million decrease in capacity revenues. The decrease was primarily related to a decrease in wholesale revenues at Alabama Power due to the expiration of long-term unit power sales contracts in May 2010 and the capacity subject to those contracts being made available for retail service starting in June 2010, as well as lower energy and capacity revenues associated with the expiration of PPAs in December 2010 at Southern Power. The decrease was partially offset by higher energy and capacity revenues under new PPAs at Southern Power that began in June, July, and December 2010 and January 2011.
Other Electric Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$1   0.6   $26   5.9
 
In the third quarter 2011, other electric revenues were $161 million compared to $160 million for the corresponding period in 2010. The increase when compared to the corresponding period in 2010 was not material. For year-to-date 2011, other electric revenues were $464 million compared to $438 million for the corresponding period in 2010. The increase was primarily the result of an increase in transmission revenues at Georgia Power.
Other Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(4)   (19.0)   $(10)   (15.9)
 
In the third quarter 2011, other revenues were $17 million compared to $21 million for the corresponding period in 2010. For year-to-date 2011, other revenues were $53 million compared to $63 million for the corresponding period in 2010. The third quarter and year-to-date 2011 decreases were primarily the result of a decrease in revenues at SouthernLINC Wireless related to lower average revenue per subscriber and fewer subscribers due to continued competition in the industry.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2011   Year-to-Date 2011
    vs.   vs.
    Third Quarter 2010   Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel*
  $ (62 )     (3.1 )   $ (187 )     (3.6 )
Purchased power
    6       2.9       (4 )     (0.9 )
                         
Total fuel and purchased power expenses
  $ (56 )           $ (191 )        
                         
 
*   Fuel includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider and is included in purchased power when determining the average cost of purchased power.
Fuel and purchased power expenses for the third quarter 2011 were $2.12 billion compared to $2.18 billion for the corresponding period in 2010. The decrease was primarily the result of a $59 million net decrease in the average cost of fuel and purchased power, slightly offset by a $3 million net increase related to total KWHs generated and purchased. The decrease in the average cost of fuel and purchased power was primarily the result of a 21.7% decrease in the average cost of purchased power, slightly offset by a 1.1% increase in the average cost of fuel per KWH generated.
For year-to-date 2011, fuel and purchased power expenses were $5.52 billion compared to $5.71 billion for the corresponding period in 2010. The decrease was primarily the result of a $143 million net decrease related to total KWHs generated and purchased and a $48 million decrease in the average cost of fuel and purchased power. The net decrease related to total KWHs generated and purchased resulted primarily from lower customer demand. The decrease in the average cost of fuel and purchased power resulted primarily from a 9.6% decrease in the average cost of natural gas per KWH generated, partially offset by a 3.8% increase in the average cost of coal per KWH generated.
Fuel expenses at the traditional operating companies are generally offset by fuel revenues and do not have a significant effect on net income. See FUTURE EARNINGS POTENTIAL — “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 the Southern Company system’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter                           Percent
Average Cost   2011   2010   Percent Change   Year-to-Date 2011   Year-to-Date 2010   Change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    3.59       3.55       1.1       3.52       3.55       (0.9 )
Purchased power
    6.29       8.03       (21.7 )     7.06       7.13       (1.0 )
 
Energy purchases will vary depending on demand for energy within the Southern Company system 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.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(36)   (3.5)   $(9)   (0.3)
 
In the third quarter 2011, other operations and maintenance expenses were $983 million compared to $1.02 billion for the corresponding period in 2010. The decrease was primarily the result of an additional accrual in the third quarter 2010 of $40 million to the NDR at Alabama Power and reductions in overhead line costs at Alabama Power due to storm restoration efforts. The decrease was partially offset by increases in routine transmission and distribution expenses and customer service related costs.
For year-to-date 2011, other operations and maintenance expenses were $2.84 billion compared to $2.85 billion for the corresponding period in 2010. The decrease was primarily the result of a $53 million decrease in transmission and distribution costs mainly due to an additional accrual in the third quarter 2010 of $40 million to the NDR at Alabama Power and reductions in overhead line costs at Alabama Power due to storm restoration efforts, partially offset by an increase in overhead line maintenance at Georgia Power. Also contributing to the decrease was a $20 million reduction in administrative and general costs. The decrease was partially offset by a $33 million increase in commodity and labor costs, a $17 million increase in scheduled outage and maintenance costs, and a $12 million increase in customer service related costs.
In August 2010, the Alabama PSC approved a change to Alabama Power’s nuclear maintenance outage accounting process associated with routine refueling activities. As a result, Alabama Power will not recognize any nuclear maintenance outage expenses in 2011, reducing nuclear production expense by approximately $50 million as compared to 2010. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Alabama Power — Nuclear Outage Accounting Order” of Southern Company in Item 7 of the Form 10-K for additional information.
Depreciation and Amortization
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$4   0.9   $142   12.5
 
In the third quarter 2011, depreciation and amortization was $431 million compared to $427 million for the corresponding period in 2010. The increase when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, depreciation and amortization was $1.28 billion compared to $1.14 billion for the corresponding period in 2010. The increase was primarily the result of a $94 million decrease in the amortization of the regulatory liability related to other cost of removal obligations at Georgia Power as authorized by the Georgia PSC and additional depreciation on plant in service related to environmental, transmission, and distribution projects.
See Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Retail Regulatory Matters — Georgia Power — Retail Rate Plans” for additional information on the other cost of removal regulatory liability.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$3   1.3   $24   3.6
 
In the third quarter 2011, taxes other than income taxes were $239 million compared to $236 million for the corresponding period in 2010. The increase when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, taxes other than income taxes were $686 million compared to $662 million for the corresponding period in 2010. The year-to-date 2011 increase was primarily the result of increases in property taxes and franchise fees.
Allowance for Equity Funds Used During Construction
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(3)   (6.7)   $(27)   (19.3)
 
In the third quarter 2011, AFUDC equity was $42 million compared to $45 million for the corresponding period in 2010. The decrease when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, AFUDC equity was $113 million compared to $140 million for the corresponding period in 2010. The decrease was primarily due to the inclusion of Georgia Power’s Plant Vogtle Units 3 and 4 construction work in progress in rate base effective January 1, 2011 which reduced the amount of AFUDC capitalized and the completion of construction projects related to environmental mandates at Alabama Power. The decrease was partially offset by construction work in progress related to Mississippi Power’s Kemper IGCC which began construction in June 2010.
See Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Retail Regulatory Matters — Georgia Power — Nuclear Construction” and Note (B) to the Condensed Financial Statements under “State PSC Matters — Georgia Power — Nuclear Construction” herein for additional information.
Interest Expense, Net of Amounts Capitalized
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(8)   (3.6)   $(28)   (4.2)
 
In the third quarter 2011, interest expense, net of amounts capitalized was $217 million compared to $225 million for the corresponding period in 2010. The decrease was primarily due to lower interest expense on variable rate pollution control bonds at Georgia Power.
For year-to-date 2011, interest expense, net of amounts capitalized was $638 million compared to $666 million for the corresponding period in 2010. The decrease was primarily due to a reduction of $23 million in interest expense at Georgia Power related to the settlement of tax litigation with the Georgia Department of Revenue (DOR). See Note (B) to the Condensed Financial Statements under “Income Tax Matters — Georgia State Income Tax Credits” 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
Income Taxes
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$101   22.9   $198   21.4
 
In the third quarter 2011, income taxes were $543 million compared to $442 million for the corresponding period in 2010. The increase was primarily due to higher pre-tax earnings and an increase in Alabama state income taxes due to a decrease in the state income tax deduction for federal income taxes paid.
For year-to-date 2011, income taxes were $1.12 billion compared to $925 million for the corresponding period in 2010. The increase was primarily due to higher pre-tax earnings, a decrease in the first quarter 2010 in uncertain tax positions at Georgia Power related to state income tax credits, an increase in Alabama state income taxes due to a decrease in the state income tax deduction for federal income taxes paid, and a reduction in AFUDC equity, which is non-taxable.
See Notes (B) and (G) to the Condensed Financial Statements under “Income Tax Matters — Georgia State Income Tax Credits” and “Unrecognized Tax Benefits,” respectively, herein for additional information.
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 constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Other major factors include profitability of the competitive wholesale supply business and federal regulatory policy. Future earnings for the electricity business in the near term will depend, in part, upon maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities and other wholesale customers, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline 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 available generating capacity, future acquisitions and construction of generating facilities, and the successful remarketing of capacity as current contracts expire. Changes in economic conditions impact sales for the traditional operating companies and Southern Power, and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. 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. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. 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.
Southern Company has completed a preliminary assessment of the EPA’s proposed Utility Maximum Achievable Control Technology (MACT), water quality, and coal combustion byproduct rules. See “Air Quality” and “Water Quality” below for additional information regarding the proposed Utility MACT and water quality rules. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Coal Combustion Byproducts” of Southern Company in Item 7 of the Form 10-K for additional information regarding the proposed coal combustion byproducts rule. Although its analysis is preliminary,

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company estimates that the aggregate capital costs to the traditional operating companies for compliance with these rules could range from $13 billion to $18 billion through 2020 if the rules are adopted as proposed. Included in this amount is $686 million of estimated expenditures included in the 2011-2013 base level capital budgets of Southern Company subsidiaries described herein in anticipation of these rules. See FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” herein for additional information. These costs may arise from existing unit retirements, installation of additional environmental controls, the addition of new generating resources, and changing fuel sources for certain existing units. Southern Company’s preliminary analysis further indicates that the short timeframe for compliance with these rules could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters will depend on the final form of the proposed rules and the outcome of any legal challenges to the rules and cannot be determined at this time.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA against certain Southern Company subsidiaries. The EPA’s action against Alabama Power alleged that Alabama Power violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On March 14, 2011, the U.S. District Court for the Northern District of Alabama granted Alabama Power’s motion for summary judgment on all remaining claims and dismissed the case with prejudice. The EPA has appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. The ultimate outcome of this matter cannot be determined at this time.
Carbon Dioxide Litigation
New York Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — New York Case” of Southern Company in Item 7 and Note 3 of the financial statements of Southern Company under “Environmental Matters — Carbon Dioxide Litigation — New York Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.
Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” of Southern Company in Item 7 and Note 3 of the financial statements of Southern Company under “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies (including Alabama Power, Georgia Power, Gulf Power, and Southern Power) and includes many of the same defendants that were involved in the earlier case. Southern Company believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.
Air Quality
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 regulation of air quality.
On May 3, 2011, the EPA published a proposed rule, called Utility MACT, which would impose stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The proposed rule contains numeric emission limits for acid gases, mercury, and total particulate matter. Meeting the proposed limits would likely require additional emission control equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant to a court-approved consent decree, the EPA must issue a final rule by December 16, 2011. Compliance for existing sources would be required three years after the effective date of the final rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized as proposed, compliance with this rule would require significant capital expenditures and compliance costs at many of the facilities of Southern Company’s subsidiaries which could affect unit retirement and replacement decisions. In addition, results of operations, cash flows, and financial condition could be affected if the costs are not recovered through regulated rates. Further, there is uncertainty regarding the ability of the electric utility industry to achieve compliance with the requirements of the proposed rule within the compliance period, and the limited compliance period could negatively affect electric system reliability. The outcome of this rulemaking will depend on the requirements in the final rule and the outcome of any legal challenges and cannot be determined at this time.
In April 2010, the EPA proposed an Industrial Boiler MACT rule that would establish emissions limits for various hazardous air pollutants typically emitted from industrial boilers, including biomass boilers and start-up boilers. The EPA published the final rule on March 21, 2011 and, at the same time, issued a notice of intent to reconsider the final rule to allow for additional public review and comment. The EPA has announced plans to finalize the rule by April 30, 2012. The effect of the regulatory proceedings will depend on the final form of the revised regulations and the outcome of any legal challenges and cannot be determined at this time. On October 18, 2011, the Georgia PSC approved Georgia Power’s request to further delay the decision to convert Plant Mitchell Unit 3 from coal to biomass for two to four years, until there is greater clarity regarding the Industrial Boiler MACT rule and other proposed and recently adopted regulations. Georgia Power will file semi-annual construction monitoring reports on March 1 and August 15 throughout the delay period.
In October 2008, the EPA approved a revision to Alabama’s State Implementation Plan (SIP) requirements related to opacity which granted some flexibility to affected sources while requiring compliance with Alabama’s very strict opacity limits through use of continuous opacity monitoring system data. On April 6, 2011, the EPA attempted to rescind its previous approval of the Alabama SIP revision. On April 8, 2011, Alabama Power filed an appeal of that decision with the U.S. Court of Appeals for the Eleventh Circuit and requested the court to stay the effectiveness of the EPA’s

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attempted rescission pending judicial review. The EPA’s decision became effective May 6, 2011 and the court denied Alabama Power’s requested stay on May 12, 2011. Unless the court resolves Alabama Power’s appeal in its favor, the EPA’s rescission will continue to affect Alabama Power’s operations. The EPA’s rescission has affected unit availability and increased maintenance and compliance costs. The final outcome of this matter cannot be determined at this time.
On June 23, 2011, the EPA published its determination that the 20-county area within metropolitan Atlanta has air quality which attains the 1997 eight-hour ozone air quality standard. In March 2008, the EPA adopted a more stringent eight-hour ozone air quality standard, which it began to implement in September 2011. The 2008 standard is expected to result in designation of new nonattainment areas within the Southern Company system service territory and could result in additional required reductions in nitrogen oxide emissions. The ultimate outcome of this matter cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. Each of the states within the Southern Company system service area is subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program, and the States of Alabama, Georgia, North Carolina, and Texas are subject to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for each state, and the effect on each of the traditional operating companies will vary. The rule could have significant effects on the traditional operating companies, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including the traditional operating companies and Southern Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
On March 22, 2011, the Board of the Georgia Department of Natural Resources began consideration of modifications to the Georgia Multi-Pollutant Rule, which is designed to reduce emissions of mercury, sulfur dioxide, and nitrogen oxides statewide. On June 29, 2011, the modifications were approved and the compliance dates for certain of Georgia Power’s coal-fired generating units were changed as follows:
         
 
  Branch 1   December 31, 2013
 
  Branch 2   October 1, 2013
 
  Branch 3   October 1, 2015
 
  Branch 4   December 31, 2015
See “State PSC Matters — Georgia Power Retail Regulatory Matters — 2011 Integrated Resource Plan Update” herein for additional information.
Water Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Water Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn

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through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at many of Southern Company’s subsidiaries’ existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of the facilities of Southern Company’s subsidiaries may be subject to significant additional capital expenditures and compliance costs that could affect future unit retirement and replacement decisions. Also, results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.
State PSC Matters
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. In previous years, the traditional operating companies have experienced volatility in pricing of fuel commodities with higher than expected pricing for coal and uranium and volatile price swings in natural gas. These higher fuel costs have resulted in total under recovered fuel costs included in the balance sheets of Alabama Power, Georgia Power, and Gulf Power of approximately $260 million at September 30, 2011. Mississippi Power collected all previously under recovered fuel costs and, as of September 30, 2011, had a total over recovered fuel balance of approximately $41 million. At December 31, 2010, total under recovered fuel costs included in the balance sheets of Alabama Power, Georgia Power, and Gulf Power were approximately $420 million and Mississippi Power had a total over recovered fuel balance of $55 million. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changing the billing factor has no significant effect on Southern Company’s revenues or net income, but does impact annual cash flow. The traditional operating companies continuously monitor the under or over recovered fuel cost balances.
On May 24, 2011, the Georgia PSC approved Georgia Power’s request to decrease fuel rates by 0.61%. The decrease reduced Georgia Power’s annual billings by approximately $43 million effective June 1, 2011. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates.
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 “Retail Regulatory Matters — Alabama Power — Fuel Cost Recovery” and “Retail Regulatory Matters — Georgia Power — Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.
Alabama Power Retail Regulatory Matters
Environmental Accounting Order
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — General” of Southern Company in Item 7 of the Form 10-K for additional information regarding environmental regulations. Proposed environmental regulations could result in significant additional compliance costs that could affect future unit retirement and replacement decisions. On September 7, 2011, the Alabama PSC approved an order allowing for the establishment of a regulatory asset to record the unrecovered investment costs associated with any such decisions, including the unrecovered plant asset balance and the unrecovered costs associated with site removal and closure. These costs would be amortized over the affected unit’s remaining useful life, as established prior to the decision regarding early retirement.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Rate Adjustments
See BUSINESS — “Rate Matters — Rate Structure and Cost Recovery Plans” of Southern Company in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Alabama Power — Rate RSE” and “PSC Matters — Alabama Power — Natural Disaster Reserve” of Southern Company in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power. On July 12, 2011, the Alabama PSC issued an order to eliminate a tax-related adjustment under Alabama Power’s rate structure effective with October 2011 billings. Alabama Power anticipates the elimination of this adjustment will result in additional revenues of approximately $30 million for the remainder of 2011 and is expected to have an annual effect of approximately $150 million beginning in 2012.
In accordance with the order, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues from the elimination of the tax-related adjustment to replenish the NDR, which was impacted as a result of operations and maintenance expenses incurred in connection with the April 2011 storms in Alabama. Alabama Power expects that the additional revenue in 2012 will preclude the need for a rate adjustment under Rate Stabilization and Equalization (Rate RSE). Accordingly, Alabama Power agreed to a moratorium on any increase in 2012 under Rate RSE.
Natural Disaster Reserve
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Alabama Power — Natural Disaster Reserve” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters — Alabama Power — Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information.
During the first half of 2011, multiple storms caused varying degrees of damage to Alabama Power’s transmission and distribution facilities. The most significant storm occurred on April 27, 2011, causing over 400,000 of Alabama Power’s 1.4 million customers to be without electrical service. The estimated cost of repairing the damage to facilities and restoring electrical service to customers, as a result of these storms, is approximately $45 million for operations and maintenance expenses and approximately $163 million for capital-related expenditures. Alabama Power maintains a reserve for operations and maintenance expenses to cover the cost of damages from major storms to Alabama Power’s transmission and distribution facilities.
At September 30, 2011, the NDR had an accumulated balance of $75 million, which is included in the Condensed Balance Sheets herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in the Condensed Statements of Income herein.
In accordance with the order discussed above that was issued by the Alabama PSC on July 12, 2011 to eliminate a tax-related adjustment under Alabama Power’s rate structure, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues, which are expected to be approximately $30 million.
Georgia Power Retail Regulatory Matters
2011 Integrated Resource Plan Update
See “Environmental Matters — Air Quality” and “— Water Quality” herein and BUSINESS — “Rate Matters — Integrated Resource Planning” of Southern Company in Item 1, MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Air Quality,” “— Water Quality,” and “— Coal Combustion Byproducts” of Southern Company in Item 7, and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters — Georgia Power — Retail Rate Plans” in Item 8 of the Form 10-K for additional information regarding potential rules and regulations being developed by the EPA, including the Utility

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MACT rule for coal- and oil-fired EGUs, revisions to effluent guidelines for steam electric power plants, and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; and the 2010 ARP.
On August 4, 2011, Georgia Power filed an update to its IRP (2011 IRP Update). The filing included Georgia Power’s application to decertify Plant Branch Units 1 and 2 as of December 31, 2013 and October 1, 2013, the compliance dates for the respective units under the Georgia Multi-Pollutant Rule. However, as a result of the considerable uncertainty regarding pending state and federal environmental regulations, Georgia Power is continuing to defer decisions to add controls, switch fuel, or retire its remaining fossil generating units where environmental controls have not yet been installed, representing approximately 2,600 MWs of capacity. Georgia Power expects to update its economic analysis of these units once the Utility MACT rule is finalized. Georgia Power currently expects that certain units, representing approximately 600 MWs of capacity, are more likely than others to switch fuel or be controlled in time to comply with the Utility MACT rule. However, even if the updated economic analysis shows more positive benefits associated with adding controls or switching fuel for more units, it is unlikely that all of the required controls could be completed by 2015, the expected effective date of the Utility MACT rule. As a result, Georgia Power currently cannot rely on the availability of approximately 2,000 MWs of capacity in 2015. As such, the 2011 IRP Update also includes Georgia Power’s application requesting that the Georgia PSC certify the purchase of a total of 1,562 MWs of capacity beginning in 2015, from four PPAs selected through the 2015 request for proposal process.
Under the terms of the 2010 ARP, any costs associated with changes to Georgia Power’s approved environmental operating or capital budgets resulting from new or revised environmental regulations through 2013 that are approved by the Georgia PSC in connection with an updated IRP will be deferred as a regulatory asset to be recovered over a time period deemed appropriate by the Georgia PSC. In connection with the retirement decision, Georgia Power reclassified the retail portion of the net carrying value of Plant Branch Units 1 and 2 from plant in service, net of depreciation, to other utility plant, net. Georgia Power is continuing to depreciate these units using the current composite straight-line rates previously approved by the Georgia PSC and upon actual retirement has requested that the Georgia PSC approve the continued deferral and amortization of the units’ remaining net carrying value. As a result of this regulatory treatment, the de-certification of Plant Branch Units 1 and 2 is not expected to have a significant impact on Southern Company’s financial statements.
The Georgia PSC is expected to vote on these requests in March 2012. The ultimate outcome of these matters cannot be determined at this time.
Storm Damage Recovery
During April 2011, severe storms in Georgia caused significant damage to Georgia Power’s distribution and transmission facilities. Georgia Power defers and recovers certain costs related to damages from major storms as mandated by the Georgia PSC. As of September 30, 2011, the balance in the regulatory asset related to storm damage was $45 million. As a result of this regulatory treatment, the costs related to the storms are not expected to have a material impact on Southern Company’s financial statements. See Note 1 to the financial statements of Southern Company under “Storm Damage Reserves” in Item 8 of the Form 10-K for additional information.
Gulf Power Retail Regulatory Matters
Retail Base Rate Case
On July 8, 2011, Gulf Power filed a petition with the Florida PSC requesting an increase in retail rates to the extent necessary to generate additional gross annual revenues in the amount of $93.5 million. The requested increase is expected to provide a reasonable opportunity for Gulf Power to earn a retail rate of return on common equity of 11.7%. The Florida PSC is expected to make a decision on this matter in the first quarter 2012.

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On August 23, 2011, the Florida PSC approved Gulf Power’s request for an interim retail rate increase of $38.5 million per year, effective beginning with billings based on meter readings on and after September 22, 2011 and continuing through the effective date of the Florida PSC’s decision on Gulf Power’s petition for the permanent increase. The interim rates are subject to refund pending the outcome of the permanent retail base rate proceeding.
The ultimate outcome of this matter cannot be determined at this time.
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters cannot be determined at this time.
Georgia State Income Tax Credits
Georgia Power’s 2005 through 2009 income tax filings for the State of Georgia included state income tax credits for increased activity through Georgia ports. Georgia Power also filed similar claims for the years 2002 through 2004. In July 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. On June 10, 2011, Georgia Power and the Georgia DOR agreed to a settlement resolving the claims. As a result, Georgia Power recorded additional tax benefits of approximately $64 million and, in accordance with the 2010 ARP, also recorded a related regulatory liability of approximately $62 million. In addition, Georgia Power recorded a reduction of approximately $23 million in related interest expense. See Notes 3 and 5 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Income Tax Matters” and “Unrecognized Tax Benefits,” respectively, for additional information.
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects to be placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Southern Company through 2013. On March 29, 2011, the IRS issued additional guidance and safe harbors relating to the 50% and 100% bonus depreciation rules. Based on recent discussions with the IRS, Southern Company estimates the potential increased cash flow for 2011 to be between approximately $500 million and $600 million. The ultimate outcome of this matter cannot be determined at this time.
Construction Program
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. Southern Company intends to continue its strategy of developing and constructing new generating facilities, including natural gas, biomass, and potentially solar units at Southern Power, natural gas and new nuclear units at Georgia Power, and the Kemper IGCC facility at Mississippi Power, as well as adding environmental control equipment and expanding the transmission and distribution systems. For the traditional operating companies, major generation construction projects are subject to state PSC approvals in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. See Note 7 to the financial statements of

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Southern Company under “Construction Program” in Item 8 of the Form 10-K for estimated construction expenditures for the next three years. In addition, see Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters — Georgia Power — Nuclear Construction,” “Retail Regulatory Matters — Georgia Power — Other Construction,” and “Retail Regulatory Matters — Mississippi Power Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “State PSC Matters — Georgia Power — Nuclear Construction” and “State PSC Matters — Mississippi Power — Integrated Coal Gasification Combined Cycle” herein for additional information.
On March 11, 2011, a major earthquake and tsunami struck Japan and caused substantial damage to the nuclear generating units at the Fukushima Daiichi generating plant. While the Southern Company system will continue to monitor this situation, it has not identified any immediate impact to the licensing and construction of Plant Vogtle Units 3 and 4 or the operation of the existing nuclear generating units of Alabama Power and Georgia Power.
The events in Japan have created uncertainties that may affect transportation of materials, price of fuels, availability of equipment from Japanese manufacturers, and future costs for operating nuclear plants. Specifically, the NRC plans to perform additional operational and safety reviews of nuclear facilities in the U.S., which could potentially impact future operations and capital requirements. On July 12, 2011, a special NRC task force issued a report with initial recommendations for enhancing nuclear reactor safety in the U.S., including potential changes in emergency planning, onsite backup generation, and spent fuel pools for existing reactors. The final form and resulting impact of any changes to safety requirements for existing nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time. The task force report supported completion of the certification of the AP1000 reactor design being used at Plant Vogtle Units 3 and 4, noting that the design has many of the features necessary to address the task force’s recommendations.
See RISK FACTORS of Southern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world. The ultimate outcome of these events cannot be determined at this time.
Investments in Leveraged Leases
Southern Company has several leveraged lease agreements, with terms ranging up to 45 years, which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. Southern Company reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the effective tax rate, the residual value, the credit quality of the lessees, and the timing of expected tax cash flows. See Note 1 to the financial statements of Southern Company under “Leveraged Leases” in Item 8 of the Form 10-K for additional information.
The recent financial and operational performance of one of Southern Company’s lessees and the associated generation assets has raised potential concerns on the part of Southern Company as to the credit quality of the lessee and the residual value of the asset. Southern Company will continue to monitor the performance of the underlying assets and to evaluate the ability of the lessee to continue to make the required lease payments. While there are strategic options that Southern Company may pursue to recover its investment in the leveraged lease, the potential impairment loss that would be incurred if there is an abandonment of the project is expected to be approximately $80 million on an after-tax basis. The ultimate outcome of this matter cannot be determined at this time.

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Other Matters
Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company’s subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 ultimate liabilities, if any, arising from such current proceedings would have a material 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 GAAP. 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 Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Company’s financial condition remained stable at September 30, 2011. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital” and “Financing Activities” herein for additional information.
Net cash provided from operating activities totaled $4.60 billion for the first nine months of 2011, an increase of $1.07 billion from the corresponding period in 2010. Significant changes in operating cash flow for the first nine months of 2011 as compared to the corresponding period in 2010 include an increase in net income as previously discussed. Also contributing to the increase was an increase in deferred income taxes related to bonus depreciation and an increase in accrued income taxes primarily due to the timing of tax payments. Net cash used for investing activities totaled $2.90 billion for the first nine months of 2011, a decrease of $108 million from the corresponding period in 2010 due to timing of capital expenditures. Net cash used for financing activities totaled $631 million for the first nine months of 2011, compared to $48 million provided from financing activities in the corresponding period in 2010. This change was primarily due to a decrease in notes payable and redemptions of long-term debt, partially offset by long-term debt issuances. Fluctuations in cash flow from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.

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Significant balance sheet changes for the first nine months of 2011 include an increase in cash of $1.07 billion due to increased cash collection from operations during the summer months, higher cash balances at Alabama Power, and an increase of $1.79 billion in total property, plant, and equipment for the installation of equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities. Other significant changes include a decrease in notes payable of $1.16 billion and an increase in equity of $1.43 billion.
The market price of Southern Company’s common stock at September 30, 2011 was $42.37 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $20.46 per share, representing a market-to-book ratio of 207%, compared to $38.23, $19.21, and 199%, respectively, at the end of 2010. The dividend for the third quarter 2011 was $0.4725 per share compared to $0.455 per share in the third quarter 2010.
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 the construction programs of its subsidiaries 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, unrecognized tax benefits and interest, and derivative obligations. Approximately $1.89 billion will be required through September 30, 2012 to fund maturities of long-term debt.
The construction programs of Southern Company’s subsidiaries are estimated to include a base level investment of $4.9 billion, $5.1 billion, and $4.5 billion for 2011, 2012, and 2013, respectively. Included in these estimated amounts are environmental expenditures to comply with existing statutes and regulations of $341 million, $427 million, and $452 million for 2011, 2012, and 2013, respectively. In addition, Southern Company estimates that potential incremental investments to comply with anticipated new environmental regulations could range from $74 million to $289 million for 2011, $191 million to $670 million for 2012, and $476 million to $1.9 billion for 2013. If the EPA’s proposed Utility MACT rule is finalized as proposed, Southern Company estimates the potential investments in 2011 through 2013 for new environmental regulations will be closer to the upper end of the ranges set forth above. The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; changes in generating plants, including unit retirements and replacements, to meet new regulatory requirements; changes in FERC rules and regulations; PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; 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 placements, or public offerings. The amount and timing of additional equity capital to be raised in 2011, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities.
Except as described below with respect to potential DOE loan guarantees, 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, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any future 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future Georgia Power borrowings related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Power’s 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs or approximately $3.46 billion, and are expected to be funded by the Federal Financing Bank. Final approval and issuance of loan guarantees by the DOE are subject to receipt of the combined construction and operating licenses for Plant Vogtle Units 3 and 4 from the NRC, negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. There can be no assurance that the DOE will issue loan guarantees for Georgia Power.
In addition, Mississippi Power has applied to the DOE for federal loan guarantees to finance a portion of the eligible construction costs of the Kemper IGCC. Mississippi Power is in advanced due diligence with the DOE. There can be no assurance that the DOE will issue federal loan guarantees for Mississippi Power.
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 which are backed by bank credit facilities.
At September 30, 2011, Southern Company and its subsidiaries had approximately $1.5 billion of cash and cash equivalents and approximately $5.13 billion of unused committed credit arrangements with banks, of which $96 million expire in 2011, $316 million expire in 2012, $60 million expire in 2013, $860 million expire in 2014, and $3.80 billion expire in 2016. Of the credit arrangements expiring on or before September 30, 2012, $41 million contain provisions allowing two-year term loans executable at expiration and $216 million contain provisions allowing one-year term loans executable at expiration. Subsequent to September 30, 2011, Alabama Power replaced a $20 million credit arrangement expiring in 2011 with a $30 million credit arrangement which will expire in 2014. At September 30, 2011, approximately $1.8 billion of the credit facilities were dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein 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 at the request and for the benefit of each of the traditional operating companies. At September 30, 2011, the Southern Company system had approximately $132 million of short-term borrowings outstanding, comprised of commercial paper, with a weighted average interest rate of 0.27% per annum. During the third quarter 2011, Southern Company had an average of $510 million of short-term borrowings outstanding with a weighted average interest rate of 0.29% per annum and the maximum amount outstanding was $903 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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 relating to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel (Facility).
Mississippi Power was required to provide notice of its intent to either renew the lease or purchase the Facility by July 22, 2011. On July 20, 2011, Mississippi Power provided notice to the lessor of its intent to purchase the Facility. Mississippi Power’s right to purchase the Facility was approved by the Mississippi PSC in its order dated January 7, 1998, as amended on February 19, 1999, which granted Mississippi Power a Certificate of Public Convenience and Necessity for the Facility.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 20, 2011, Mississippi Power purchased the Facility for approximately $85 million in cash and the assumption of debt obligations of the lessor related to the Facility, which mature in 2021, have a face value of $270 million and a fixed stated interest rate of 7.13%, and are secured by the Facility and certain personal property, accounts, and proceeds related thereto. Accounting rules require that the Facility be reflected on Southern Company’s financial statements at the time of the purchase at the fair value of the consideration rendered. Based on interest rates as of October 20, 2011, the fair value of the debt assumed was approximately $346 million. Accordingly, the Facility will be reflected in Southern Company’s financial statements at approximately $431 million. Mississippi Power intends to maintain its traditional capital structure by adding equity to support the additional debt.
In connection with the purchase of the Facility, Mississippi Power filed a request on July 25, 2011 for an accounting order from the Mississippi PSC. If the accounting order is approved as requested, the retail revenue requirements under the purchase option will be comparable to those otherwise required under operating lease accounting treatment for the extended lease term, with any differences deferred as a regulatory asset over the 10-year period ending October 2021. At the conclusion of the proposed deferral period in 2021, the unamortized deferral balance will be amortized into rates over the remaining life of the Facility. On November 2, 2011, Mississippi Power filed a request with the FERC seeking authorization to defer as a regulatory asset, for the 10-year period ending October 2021, the difference between the revenue requirement under the purchase of the Facility (assuming a remaining 30-year life) and the revenue requirement assuming the continuation of the operating lease regulatory treatment. At the conclusion of the proposed deferral period in 2021, the accumulated deferred balance will be amortized into wholesale rates over the remaining life of the Facility. The ultimate outcome of these matters cannot be determined at this time.
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 of certain subsidiaries to BBB and Baa2, or BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management, and construction of new generation. At September 30, 2011, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- and/or Baa3 rating were approximately $606 million. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $2.8 billion. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Company’s ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk. Southern Company may also occasionally have limited exposure to foreign currency exchange rates. To manage the volatility attributable to these exposures, Southern Company nets the exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Company’s policies in areas such as counterparty exposure and risk management practices. Southern Company’s policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.
Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional operating companies continue to have limited exposure to market volatility in interest rates, foreign currency, 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. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
electricity prices, the traditional operating companies enter into physical fixed-price contracts or heat-rate contracts for the purchase and sale of electricity through the wholesale electricity market. The traditional operating companies continue to manage fuel-hedging programs implemented per the guidelines of their respective state PSCs. Southern Company had no material change in market risk exposure for the third quarter 2011 when compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter   Year-to-Date
    2011   2011
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (136 )   $ (196 )
Contracts realized or settled
    51       137  
Current period changes(a)
    (66 )     (92 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (151 )   $ (151 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The change in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 was a decrease of $15 million and an increase of $45 million, respectively, substantially all of which is due to natural gas positions. The change is attributable to both the volume of mmBtu and prices of natural gas. At September 30, 2011, Southern Company had a net hedge volume of 160 million mmBtu with a weighted average contract cost approximately $1.10 per mmBtu above market prices, compared to 154 million mmBtu at June 30, 2011 with a weighted average contract cost approximately $0.97 per mmBtu above market prices and compared to 149 million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.35 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the traditional operating companies’ fuel cost recovery clauses.
The fair value of energy-related derivative contracts by hedge designation reflected in the financial statements as assets (liabilities) consists of the following:
                 
Asset (Liability) Derivatives   September 30, 2011   December 31, 2010
    (in millions)
Regulatory hedges
  $ (147 )   $ (193 )
Cash flow hedges
          (1 )
Not designated
    (4 )     (2 )
 
Total fair value
  $ (151 )   $ (196 )
 
Energy-related derivative contracts which are designated as regulatory hedges relate to the traditional operating companies’ fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Gains and losses on energy-related derivatives that are designated as cash flow hedges are used to hedge anticipated purchases and sales and are initially deferred in OCI 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.
Total net unrealized pre-tax gains (losses) recognized in income were $(1) million and $(2) million, respectively, for the three and nine months ended September 30, 2011 and will continue to be marked to market until the settlement date. For the three and nine months ended September 30, 2010, the total net unrealized pre-tax gains (losses) recognized in the statements of income were $(4) million and $(2) million, respectively.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
            September 30, 2011        
            Fair Value Measurements        
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (151 )     (117 )     (33 )     (1 )
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (151 )   $ (117 )   $ (33 )   $ (1 )
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Southern Company. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Southern Company in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
During the first nine months of 2011, Southern Company issued approximately 18.6 million shares of common stock for $620 million through the Southern Investment Plan and employee and director stock plans. The proceeds were primarily used for general corporate purposes, including the investment by Southern Company in its subsidiaries, and to repay short-term indebtedness. While Southern Company continues to issue additional equity through its employee and director equity compensation plans, Southern Company is not currently issuing additional shares of common stock through the Southern Investment Plan or its employee savings plan. All sales under the Southern Investment Plan and the employee savings plan are currently being funded with shares acquired on the open market by the independent plan administrators.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table outlines the debt financing activities for Southern Company, the traditional operating companies, and Southern Power for the first nine months of 2011:
                                                 
            Senior Note   Pollution
Control Bond
  Pollution
Control Bond
  Other Long-   Other Long-
Term Debt
    Senior Note   Redemptions   Issuances and   Redemptions   Term Debt   Redemptions
Company   Issuances   and Maturities   Remarketings(*)   and Maturities   Issuances   and Maturities
                    (in millions)                
Southern Company
  $ 500     $     $     $     $     $  
Alabama Power
    700       650             4              
Georgia Power
    550       277       604       286       250       509  
Gulf Power
    125                               110  
Mississippi Power
                            115       130  
Southern Power
    300                               3  
 
Total
  $ 2,175     $ 927     $ 604     $ 290     $ 365     $ 752  
 
 
(*)   Includes the remarketing by Georgia Power of pollution control bonds that had been purchased and held by Georgia Power.
In August 2011, Southern Company issued $500 million aggregate principal amount of Series 2011A 1.95% Senior Notes due September 1, 2016. The net proceeds from the sale of the Series 2011A Senior Notes were used to repay a portion of Southern Company’s outstanding short-term indebtedness and for other general corporate purposes.
Southern Company’s subsidiaries used the proceeds of the debt issuances shown in the table above for the redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including their respective continuous construction programs.
In March 2011, Alabama Power settled $200 million of interest rate hedges related to its Series 2011A 5.50% Senior Note issuance at a gain of approximately $4 million. The gain will be amortized to interest expense, in earnings, over 10 years.
In August 2011, Alabama Power entered into forward-starting interest rate swaps to mitigate exposure to interest rate changes related to an anticipated debt issuance. The notional amount of the swaps totaled $300 million.
In September 2011, Mississippi Power entered into forward-starting interest rate swaps to mitigate exposure to interest rate changes related to anticipated debt issuances. The notional amount of the swaps totaled $600 million.
Subsequent to September 30, 2011, Alabama Power announced the redemption that will occur on November 14, 2011 of approximately $100 million aggregate principal amount of its Series EE 5.75% Senior Notes due January 15, 2036.
Subsequent to September 30, 2011, Georgia Power announced the redemption that will occur on November 21, 2011 of $53 million aggregate principal amount of the Development Authority of Burke County Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Third Series 1999.
Subsequent to September 30, 2011, Mississippi Power issued $150 million aggregate principal amount of Series 2011A 2.35% Senior Notes due October 15, 2016 and $150 million aggregate principal amount of Series 2011B 4.75% Senior Notes due October 15, 2041. Mississippi Power also settled hedges totaling $150 million related to the Series 2011A issuance at a gain of approximately $1.4 million. This gain will be amortized to interest expense, in earnings, over five years. Mississippi Power settled hedges totaling $150 million related to the Series 2011B issuance at a loss of approximately $0.54 million. This loss will be amortized to interest expense, in earnings, over 10 years.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to September 30, 2011, Mississippi Power assumed the obligations of the lessor related to $270 million aggregate principal amount of Mississippi Business Finance Corporation Taxable Revenue Bonds, 7.13% Series 1999A due October 21, 2021, issued for the benefit of the lessor as described under “Off-Balance Sheet Financing Arrangements” herein. These bonds are secured by the Facility and certain personal property, accounts, and proceeds related thereto.
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 Note 1 to the financial statements of each registrant under “Financial Instruments,” Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power and Mississippi Power, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (H) 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, 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.
     (b) Changes in internal controls.
There have been no changes in Southern Company’s, 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 third quarter 2011 that have materially affected or are reasonably likely to materially affect Southern Company’s, 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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)     (in millions)  
Operating Revenues:
                               
Retail revenues
  $ 1,489     $ 1,527     $ 3,859     $ 3,925  
Wholesale revenues, non-affiliates
    80       86       218       395  
Wholesale revenues, affiliates
    52       43       202       194  
Other revenues
    50       50       152       149  
 
                       
Total operating revenues
    1,671       1,706       4,431       4,663  
 
                       
Operating Expenses:
                               
Fuel
    512       500       1,335       1,455  
Purchased power, non-affiliates
    34       35       62       66  
Purchased power, affiliates
    49       57       152       161  
Other operations and maintenance
    309       379       896       997  
Depreciation and amortization
    160       153       476       451  
Taxes other than income taxes
    84       85       254       248  
 
                       
Total operating expenses
    1,148       1,209       3,175       3,378  
 
                       
Operating Income
    523       497       1,256       1,285  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    7       9       18       29  
Interest income
    4       4       13       12  
Interest expense, net of amounts capitalized
    (73 )     (76 )     (224 )     (227 )
Other income (expense), net
    (7 )     (7 )     (20 )     (18 )
 
                       
Total other income and (expense)
    (69 )     (70 )     (213 )     (204 )
 
                       
Earnings Before Income Taxes
    454       427       1,043       1,081  
Income taxes
    180       158       407       399  
 
                       
Net Income
    274       269       636       682  
Dividends on Preferred and Preference Stock
    10       10       30       30  
 
                       
Net Income After Dividends on Preferred and Preference Stock
  $ 264     $ 259     $ 606     $ 652  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)       (in millions)  
Net Income After Dividends on Preferred and Preference Stock
  $ 264     $ 259     $ 606     $ 652  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(4), $-, $(3), and $-, respectively
    (8 )           (5 )      
Reclassification adjustment for amounts included in net income, net of tax of $-, $-, $(1), and $-, respectively
                (2 )      
 
                       
Total other comprehensive income (loss)
    (8 )           (7 )      
 
                       
Comprehensive Income
  $ 256     $ 259     $ 599     $ 652  
 
                       
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in millions)  
Operating Activities:
               
Net income
  $ 636     $ 682  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    562       519  
Deferred income taxes
    350       301  
Allowance for equity funds used during construction
    (18 )     (29 )
Pension, postretirement, and other employee benefits
    (17 )     (9 )
Stock based compensation expense
    5       4  
Other, net
    6       29  
Changes in certain current assets and liabilities —
               
-Receivables
    (74 )     (110 )
-Fossil fuel stock
    75       21  
-Materials and supplies
    (13 )     (10 )
-Other current assets
    (19 )     (34 )
-Accounts payable
    (120 )     (66 )
-Accrued taxes
    215       (48 )
-Accrued compensation
    (35 )     8  
-Other current liabilities
    5       (103 )
 
           
Net cash provided from operating activities
    1,558       1,155  
 
           
Investing Activities:
               
Property additions
    (694 )     (685 )
Distribution of restricted cash from pollution control revenue bonds
    11       18  
Nuclear decommissioning trust fund purchases
    (301 )     (126 )
Nuclear decommissioning trust fund sales
    301       126  
Cost of removal, net of salvage
    (52 )     (26 )
Change in construction payables
    (13 )     (34 )
Other investing activities
    14       (9 )
 
           
Net cash used for investing activities
    (734 )     (736 )
 
           
Financing Activities:
               
Proceeds —
               
Capital contributions from parent company
    10       19  
Senior notes issuances
    700        
Redemptions —
               
Pollution control revenue bonds
    (4 )      
Senior notes
    (650 )      
Payment of preferred and preference stock dividends
    (30 )     (30 )
Payment of common stock dividends
    (415 )     (407 )
Other financing activities
    (13 )     (1 )
 
           
Net cash used for financing activities
    (402 )     (419 )
 
           
Net Change in Cash and Cash Equivalents
    422        
Cash and Cash Equivalents at Beginning of Period
    154       368  
 
           
Cash and Cash Equivalents at End of Period
  $ 576     $ 368  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $7 and $11 capitalized for 2011 and 2010, respectively)
  $ 207     $ 214  
Income taxes (net of refunds)
    (95 )     212  
Noncash transactions — accrued property additions at end of period
    15       39  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in millions)  
Current Assets:
               
Cash and cash equivalents
  $ 576     $ 154  
Restricted cash and cash equivalents
    3       18  
Receivables —
               
Customer accounts receivable
    419       362  
Unbilled revenues
    126       153  
Under recovered regulatory clause revenues
    11       5  
Other accounts and notes receivable
    48       35  
Affiliated companies
    47       57  
Accumulated provision for uncollectible accounts
    (10 )     (10 )
Fossil fuel stock, at average cost
    316       391  
Materials and supplies, at average cost
    355       346  
Vacation pay
    55       55  
Prepaid expenses
    77       208  
Other regulatory assets, current
    33       38  
Other current assets
    11       10  
 
           
Total current assets
    2,067       1,822  
 
           
Property, Plant, and Equipment:
               
In service
    20,530       19,966  
Less accumulated provision for depreciation
    7,247       6,931  
 
           
Plant in service, net of depreciation
    13,283       13,035  
Nuclear fuel, at amortized cost
    316       283  
Construction work in progress
    485       547  
 
           
Total property, plant, and equipment
    14,084       13,865  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    62       64  
Nuclear decommissioning trusts, at fair value
    502       552  
Miscellaneous property and investments
    73       71  
 
           
Total other property and investments
    637       687  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    528       488  
Prepaid pension costs
    287       257  
Deferred under recovered regulatory clause revenues
    39       4  
Other regulatory assets, deferred
    680       675  
Other deferred charges and assets
    193       196  
 
           
Total deferred charges and other assets
    1,727       1,620  
 
           
Total Assets
  $ 18,515     $ 17,994  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2011     2010  
    (in millions)  
Current Liabilities:
               
Securities due within one year
  $     $ 200  
Accounts payable —
               
Affiliated
    195       210  
Other
    198       273  
Customer deposits
    85       86  
Accrued taxes —
               
Accrued income taxes
    13       2  
Other accrued taxes
    103       32  
Accrued interest
    71       63  
Accrued vacation pay
    45       45  
Accrued compensation
    73       99  
Liabilities from risk management activities
    24       31  
Over recovered regulatory clause revenues
    25       22  
Other current liabilities
    35       41  
 
           
Total current liabilities
    867       1,104  
 
           
Long-term Debt
    6,232       5,987  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    3,148       2,747  
Deferred credits related to income taxes
    81       85  
Accumulated deferred investment tax credits
    151       157  
Employee benefit obligations
    323       311  
Asset retirement obligations
    544       520  
Other cost of removal obligations
    702       701  
Other regulatory liabilities, deferred
    92       217  
Other deferred credits and liabilities
    92       87  
 
           
Total deferred credits and other liabilities
    5,133       4,825  
 
           
Total Liabilities
    12,232       11,916  
 
           
Redeemable Preferred Stock
    342       342  
 
           
Preference Stock
    343       343  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized - 40,000,000 shares
               
Outstanding - 30,537,500 shares
    1,222       1,222  
Paid-in capital
    2,177       2,156  
Retained earnings
    2,213       2,022  
Accumulated other comprehensive loss
    (14 )     (7 )
 
           
Total common stockholder’s equity
    5,598       5,393  
 
           
Total Liabilities and Stockholder’s Equity
  $ 18,515     $ 17,994  
 
           
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
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail and wholesale 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 constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel, capital expenditures, and restoration following major storms. Appropriately balancing 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 after dividends on preferred and preference stock. 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
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$5   1.9   $(46)   (7.1)
 
Alabama Power’s net income after dividends on preferred and preference stock for the third quarter 2011 was $264 million compared to $259 million for the corresponding period in 2010. Alabama Power’s net income after dividends on preferred and preference stock for year-to-date 2011 was $606 million compared to $652 million for the corresponding period in 2010. For the third quarter 2011, the increase in net income when compared to the corresponding period in 2010 was not material. The decrease for year-to-date 2011 when compared to the corresponding period in 2010 was primarily due to reductions in wholesale revenues from sales to non-affiliates, relatively cooler weather primarily in the month of September compared to the third quarter 2010, significantly colder weather in the first quarter 2010, an increase in depreciation and amortization, and a reduction in AFUDC equity. The decreases in income were partially offset by a decrease in other operations and maintenance expenses, an increase in revenues under Rate CNP Environmental associated with the completion of construction projects related to environmental projects, and an increase in industrial KWH sales.
Retail Revenues
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$(38)   (2.5)   $(66)   (1.7)
 
In the third quarter 2011, retail revenues were $1.49 billion compared to $1.53 billion for the corresponding period in 2010. For year-to-date 2011, retail revenues were $3.86 billion compared to $3.93 billion for the corresponding period in 2010.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2011   2011
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 1,527             $ 3,925          
Estimated change in –
                               
Rates and pricing
    3       0.2       49       1.2  
Sales growth (decline)
    19       1.2       23       0.6  
Weather
    (61 )     (4.0 )     (97 )     (2.5 )
Fuel and other cost recovery
    1       0.1       (41 )     (1.0 )
 
Retail – current year
  $ 1,489       (2.5 )%   $ 3,859       (1.7 )%
 
Revenues associated with changes in rates and pricing increased in the third quarter 2011 and year-to-date 2011, when compared to the corresponding periods in 2010, primarily due to increased revenues associated with Rate CNP Environmental. The increase was due to the completion of construction projects related to environmental mandates, although there was no increase in the Rate CNP Environmental billing factors in 2011.
Revenues attributable to changes in sales increased in the third quarter 2011 when compared to the corresponding period in 2010. Industrial KWH energy sales increased 3.1% due to an increase in demand resulting from changes in production levels primarily in the primary metals sector. Weather-adjusted residential and commercial KWH energy sales increased 1.3% and 1.2%, respectively, driven by an increase in demand.
Revenues attributable to changes in sales increased year-to-date 2011 when compared to the corresponding period in 2010. Industrial KWH energy sales increased 5.7% due to an increase in demand resulting from changes in production levels primarily in the chemical and primary metals sectors. The decreases in weather-adjusted residential and commercial KWH energy sales were not material.
Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010. In the third quarter 2011, residential and commercial sales revenues decreased 6.4% and 3.3%, respectively, as a result of relatively cooler weather primarily in the month of September compared to the third quarter 2010. For year-to-date 2011, residential and commercial sales revenues decreased 4.5% and 1.5%, respectively, as a result of relatively cooler weather primarily in the month of September compared to the third quarter 2010 and significantly colder weather in the first quarter 2010.
In the third quarter 2011, the increase in fuel and other cost recovery revenues when compared to the corresponding period in 2010 was not material. Fuel and other cost recovery revenues decreased year-to-date 2011 when compared to the corresponding period in 2010 primarily due to a decrease in fuel costs and a decrease in costs associated with PPAs certificated by the Alabama PSC. Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not impact net income.
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.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$(6)   (7.0)   $(177)   (44.8)
 
Wholesale revenues from non-affiliates will vary depending on the market prices of wholesale energy compared to the cost of Alabama Power and Southern Company system-owned generation, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
In the third quarter 2011, wholesale revenues from non-affiliates were $80 million compared to $86 million for the corresponding period in 2010, reflecting a $9 million decrease in revenue from energy sales and a $3 million increase in capacity revenue. The decrease was primarily due to a 9.0% decrease in KWH sales, partially offset by a 2.4% increase in the price of energy.
For year-to-date 2011, wholesale revenues from non-affiliates were $218 million compared to $395 million for the corresponding period in 2010, reflecting a $101 million decrease in revenue from energy sales and a $76 million decrease in capacity revenue. The decrease was primarily due to a 51.3% decrease in KWH sales, partially offset by a 13.3% increase in the price of energy.
In May 2010, the long-term unit power sales contracts expired and the unit power energy sales and capacity revenues ceased. In the third quarter 2011, the revenue reduction when compared to the corresponding period in 2010 was not material. For year-to-date 2011, there was a $178 million revenue reduction when compared to the corresponding period in 2010. Beginning in June 2010, such capacity subject to the unit power sales contracts became available for retail service. See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – “Operating Revenues” of Alabama Power in Item 7 of the Form 10-K for additional information.
Wholesale Revenues – Affiliates
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$9   20.9   $8   4.1
 
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 the energy is generally sold at marginal cost.
In the third quarter 2011, wholesale revenues from affiliates were $52 million compared to $43 million for the corresponding period in 2010. The increase was primarily due to a 25.0% increase in KWH sales, partially offset by a 3.1% decrease in price.
For year-to-date 2011, the increase in wholesale revenues from affiliates when compared to the corresponding period in 2010 was not material.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2011   Year-to-Date 2011
    vs.   vs.
    Third Quarter 2010   Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel *
  $ 12       2.4     $ (120 )     (8.2 )
Purchased power – non-affiliates
    (1 )     (2.9 )     (4 )     (6.1 )
Purchased power – affiliates
    (8 )     (14.0 )     (9 )     (5.6 )
                   
Total fuel and purchased power expenses
  $ 3             $ (133 )        
                     
 
*   Fuel includes fuel purchased by Alabama Power for tolling agreements where power is generated by the provider and is included in purchased power when determining the average cost of purchased power.
In the third quarter 2011, the increase in total fuel and purchased power expenses when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, total fuel and purchased power expenses were $1.55 billion compared to $1.68 billion for the corresponding period in 2010. The decrease was primarily due to a $78 million decrease related to lower KWHs generated as a result of relatively cooler weather primarily in the month of September compared to the third quarter 2010 and significantly colder weather in the first quarter 2010 and a $42 million decrease in the cost of fuel and the average cost of purchased power.
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. See FUTURE EARNINGS POTENTIAL – “Alabama PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
Details of Alabama Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2011   2010   Change   2011   2010   Change
    (cents per net KWH)           (cents per net KWH)        
Fuel *
    2.89       2.72       6.3       2.75       2.78       (1.1 )
Purchased power
    6.97       7.11       (2.0 )     6.14       6.83       (10.1 )
 
 
*   KWHs generated by hydro are excluded from the average cost of fuel.
In the third quarter 2011, the increase in fuel expense when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, fuel expense was $1.34 billion compared to $1.46 billion for the corresponding period in 2010. The $120 million decrease was due to a 12.3% decrease in KWHs generated by coal and an 11.7% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements. The decreases were partially offset by a 5.4% increase in the average cost of coal.
Non-Affiliates
The decreases for the third quarter and year-to-date 2011 in purchased power expense from non-affiliates, when compared to the corresponding periods in 2010, were not material.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliates
In the third quarter 2011, purchased power expense from affiliates was $49 million compared to $57 million for the corresponding period in 2010. The decrease was related to a 14.8% decrease in the average cost per KWH.
For year-to-date 2011, purchased power expense from affiliates was $152 million compared to $161 million for the corresponding period in 2010. The decrease was related to a 25.5% decrease in the average cost per KWH, partially offset by a 12.1% increase in the amount of energy purchased.
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, or other contractual agreements, all as approved by the FERC.
Other Operations and Maintenance Expenses
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$(70)   (18.5)   $(101)   (10.1)
 
In the third quarter 2011, other operations and maintenance expenses were $309 million compared to $379 million for the corresponding period in 2010. Distribution and transmission expenses decreased $57 million primarily due to an additional accrual of $40 million to the NDR in the third quarter 2010 and reductions in overhead line costs due to storm restoration efforts. See FUTURE EARNINGS POTENTIAL – “Alabama PSC Matters – Natural Disaster Reserve” herein for additional information. Administrative and general expenses decreased $5 million primarily related to decreases in injuries and damages expenses and affiliated service companies’ expenses. Nuclear production expenses decreased $5 million primarily due to a change to the nuclear maintenance outage accounting process associated with the routine refueling activities, as approved by the Alabama PSC in August 2010. As a result, no nuclear maintenance outage expenses will be recognized in 2011, reducing nuclear production expense by approximately $50 million as compared to 2010. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Nuclear Outage Accounting Order” of Alabama Power in Item 7 of the Form 10-K for additional information. In addition, the decrease in nuclear production expenses was partially offset by an increase in operations costs related to increases in labor.
For year-to-date 2011, other operations and maintenance expenses were $896 million compared to $997 million for the corresponding period in 2010. Distribution and transmission expenses decreased $69 million primarily due to an additional accrual of $40 million to the NDR in 2010 and reductions in overhead line costs due to storm restoration efforts. See FUTURE EARNINGS POTENTIAL – “Alabama PSC Matters – Natural Disaster Reserve” herein for additional information. Administrative and general expenses decreased $17 million primarily related to decreases in injuries and damages expenses and affiliated service companies’ expenses. Nuclear production expenses decreased $16 million primarily due to a change to the nuclear maintenance outage accounting process, as discussed above, partially offset by an increase in operations costs related to increases in labor.
Depreciation and Amortization
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$7   4.6   $25   5.5
 
In the third quarter 2011, depreciation and amortization was $160 million compared to $153 million for the corresponding period in 2010. The increase was due to additions of property, plant, and equipment related to environmental mandates (which are offset by revenues associated with Rate CNP Environmental), distribution, and transmission projects.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2011, depreciation and amortization was $476 million compared to $451 million for the corresponding period in 2010. The increase was due to additions of property, plant, and equipment primarily related to environmental mandates (which are offset by revenues associated with Rate CNP Environmental), distribution, and transmission projects.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$(2)   (22.2)   $(11)   (37.9)
 
In the third quarter 2011, the decrease in AFUDC equity when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, AFUDC equity was $18 million compared to $29 million for the corresponding period in 2010. The decrease was primarily due to the completion of construction projects related to environmental mandates at Plants Barry, Gaston, and Miller.
Income Taxes
             
Third Quarter 2011 vs. Third Quarter 2010         Year-to-Date 2011 vs. Year-to-Date 2010          
 
(change in millions)   (% change)   (change in millions)   (% change)
$22   13.9   $8   2.0
 
In the third quarter 2011, income taxes were $180 million compared to $158 million for the corresponding period in 2010. The increase was primarily due to higher pre-tax earnings, an increase in Alabama state income taxes due to a decrease in the state income tax deduction for federal income taxes paid, and prior year tax return actualization.
For year-to-date 2011, income taxes were $407 million compared to $399 million for the corresponding period in 2010. The increase was primarily due to an increase in Alabama state income taxes due to a decrease in the state income tax deduction for federal income taxes paid, partially offset by lower pre-tax earnings.
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 constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining 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 or decline in Alabama Power’s service area. Changes in economic conditions impact sales for Alabama Power and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. 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.

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ALABAMA 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. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. 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.
Alabama Power has completed a preliminary assessment of the EPA’s proposed Utility Maximum Achievable Control Technology (MACT), water quality, and coal combustion byproduct rules. See “Air Quality” and “Water Quality” below for additional information regarding the proposed Utility MACT and water quality rules. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Alabama Power in Item 7 of the Form 10-K for additional information regarding the proposed coal combustion byproducts rule. Although its analysis is preliminary, Alabama Power estimates that the aggregate capital costs for compliance with these rules could range from $5 billion to $7 billion through 2020 if the rules are adopted as proposed. These costs may arise from existing unit retirements, installation of additional environmental controls, the addition of new generating resources, and changing fuel sources for certain existing units. Alabama Power’s preliminary analysis further indicates that the short timeframe for compliance with these rules could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters will depend on the final form of the proposed rules and the outcome of any legal challenges to the rules and cannot be determined at this time.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA against certain Southern Company subsidiaries. The EPA’s action against Alabama Power alleged that Alabama Power violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On March 14, 2011, the U.S. District Court for the Northern District of Alabama granted Alabama Power’s motion for summary judgment on all remaining claims and dismissed the case with prejudice. The EPA has appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. The ultimate outcome of this matter cannot be determined at this time.
Carbon Dioxide Litigation
New York Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – New York Case” of Alabama Power in Item 7 and Note 3 of the financial statements of Alabama Power under “Environmental Matters – Carbon Dioxide Litigation – New York Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” of Alabama Power in Item 7 and Note 3 of the financial statements of Alabama Power under “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies, including Alabama Power, and includes many of the same defendants that were involved in the earlier case. Alabama Power believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.
Air Quality
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 regulation of air quality.
On May 3, 2011, the EPA published a proposed rule, called Utility MACT, which would impose stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The proposed rule contains numeric emission limits for acid gases, mercury, and total particulate matter. Meeting the proposed limits would likely require additional emission control equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant to a court-approved consent decree, the EPA must issue a final rule by December 16, 2011. Compliance for existing sources would be required three years after the effective date of the final rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized as proposed, compliance with this rule would require significant capital expenditures and compliance costs at many of Alabama Power’s facilities which could affect unit retirement and replacement decisions. In addition, results of operations, cash flows, and financial condition could be affected if the costs are not recovered through regulated rates. Further, there is uncertainty regarding the ability of the electric utility industry to achieve compliance with the requirements of the proposed rule within the compliance period, and the limited compliance period could negatively affect electric system reliability. The outcome of this rulemaking will depend on the requirements in the final rule and the outcome of any legal challenges and cannot be determined at this time.
In October 2008, the EPA approved a revision to Alabama’s State Implementation Plan (SIP) requirements related to opacity which granted some flexibility to affected sources while requiring compliance with Alabama’s very strict opacity limits through use of continuous opacity monitoring system data. On April 6, 2011, the EPA attempted to rescind its previous approval of the Alabama SIP revision. On April 8, 2011, Alabama Power filed an appeal of that decision with the U.S. Court of Appeals for the Eleventh Circuit and requested the court to stay the effectiveness of the EPA’s attempted rescission pending judicial review. The EPA’s decision became effective May 6, 2011 and the court denied Alabama Power’s requested stay on May 12, 2011. Unless the court resolves Alabama Power’s appeal in its favor, the EPA’s rescission will continue to affect Alabama Power’s operations. The EPA’s rescission has affected unit availability

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and increased maintenance and compliance costs. The final outcome of this matter cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. The State of Alabama is subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program and to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for the State of Alabama. The rule could have significant effects on Alabama Power, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including Alabama Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
Water Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at many of Alabama Power’s existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of Alabama Power’s facilities may be subject to significant additional capital expenditures and compliance costs that could affect future unit retirement and replacement decisions. Also, results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.
FERC Matters
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters” of Alabama Power in Item 7 of the Form 10-K for additional information. On June 8, 2011, Alabama Power filed an application with the FERC to relicense the Martin hydroelectric project located on the Tallapoosa River. The current license will expire in 2013. The ultimate outcome of this matter cannot be determined at this time.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama PSC Matters
Environmental Accounting Order
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” of Alabama Power in Item 7 of the Form 10-K for additional information regarding environmental regulations. Proposed environmental regulations could result in significant additional compliance costs that could affect future unit retirement and replacement decisions. On September 7, 2011, the Alabama PSC approved an order allowing for the establishment of a regulatory asset to record the unrecovered investment costs associated with any such decisions, including the unrecovered plant asset balance and the unrecovered costs associated with site removal and closure. These costs would be amortized over the affected unit’s remaining useful life, as established prior to the decision regarding early retirement.
Retail Rate Adjustments
See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” and “PSC Matters – Natural Disaster Reserve” of Alabama Power in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power. On July 12, 2011, the Alabama PSC issued an order to eliminate a tax-related adjustment under Alabama Power’s rate structure effective with October 2011 billings. Alabama Power anticipates the elimination of this adjustment will result in additional revenues of approximately $30 million for the remainder of 2011 and is expected to have an annual effect of approximately $150 million beginning in 2012.
In accordance with the order, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues from the elimination of the tax-related adjustment to replenish the NDR, which was impacted as a result of operations and maintenance expenses incurred in connection with the April 2011 storms in Alabama. Alabama Power expects that the additional revenue in 2012 will preclude the need for a rate adjustment under Rate Stabilization and Equalization (Rate RSE). Accordingly, Alabama Power agreed to a moratorium on any increase in 2012 under Rate RSE.
Natural Disaster Reserve
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Natural Disaster Reserve” of Alabama Power in Item 7 and Note 3 to the financial statements under “Retail Regulatory Matters – Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information.
During the first half of 2011, multiple storms caused varying degrees of damage to Alabama Power’s transmission and distribution facilities. The most significant storm occurred on April 27, 2011, causing over 400,000 of Alabama Power’s 1.4 million customers to be without electrical service. The estimated cost of repairing the damage to facilities and restoring electrical service to customers, as a result of these storms, is approximately $45 million for operations and maintenance expenses and approximately $163 million for capital-related expenditures. Alabama Power maintains a reserve for operations and maintenance expenses to cover the cost of damages from major storms to Alabama Power’s transmission and distribution facilities.
At September 30, 2011, the NDR had an accumulated balance of $75 million, which is included in the Condensed Balance Sheets herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in the Condensed Statements of Income herein.

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In accordance with the order discussed above that was issued by the Alabama PSC on July 12, 2011 to eliminate a tax-related adjustment under Alabama Power’s rate structure, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues, which are expected to be approximately $30 million.
Retail Fuel Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – 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 September 30, 2011 totaled $39 million as compared to $4 million at December 31, 2010. These under recovered fuel costs at September 30, 2011 are included in deferred under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheets herein. 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 any recovery of the under recovered fuel costs.
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters cannot be determined at this time.
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects to be placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Alabama Power through 2013. On March 29, 2011, the IRS issued additional guidance and safe harbors relating to the 50% and 100% bonus depreciation rules. Based on recent discussions with the IRS, Alabama Power estimates the potential increased cash flow for 2011 to be between approximately $150 million and $200 million. The ultimate outcome of this matter cannot be determined at this time.
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, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power’s financial statements.
On March 11, 2011, a major earthquake and tsunami struck Japan and caused substantial damage to the nuclear generating units at the Fukushima Daiichi generating plant. The events in Japan have created uncertainties that may affect transportation of materials, price of fuels, availability of equipment from Japanese manufacturers, and future costs for operating nuclear plants. Specifically, the NRC plans to perform additional operational and safety reviews of existing nuclear facilities in the U.S., which could potentially impact future operations and capital requirements. On July 12, 2011, a special NRC task force issued a report with initial recommendations for enhancing nuclear reactor safety in the U.S., including potential changes in emergency planning, onsite backup generation, and spent fuel pools for existing reactors. The final form and resulting impact of any changes to safety requirements for existing nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time.
See RISK FACTORS of Alabama Power in Item 1A of the Form 10-K for a discussion of certain risks associated with the operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
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 GAAP. 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, Unbilled Revenues, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Power’s financial condition remained stable at September 30, 2011. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital” and “Financing Activities” herein for additional information.
Net cash provided from operating activities totaled $1.56 billion for the first nine months of 2011, an increase of $403 million as compared to the first nine months of 2010. The increase in cash provided from operating activities was primarily due to accrued taxes and deferred income taxes related to benefits associated with bonus depreciation and other current liabilities. This increase was partially offset by decreases in accounts payable and net income. Net cash used for investing activities totaled $734 million for the first nine months of 2011 primarily due to gross property additions related to steam and nuclear generation equipment, nuclear fuel, transmission, and distribution expenditures. Net cash used for financing activities totaled $402 million for the first nine months of 2011 primarily due to issuances, redemptions, and a maturity of

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senior notes and payment of common stock dividends. Fluctuations in cash flow from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first nine months of 2011 include increases in cash and cash equivalents and accumulated deferred income taxes of $422 million and $401 million, respectively, related to additional bonus depreciation, $219 million in property, plant, and equipment associated with routine property additions and nuclear fuel, and $191 million in retained earnings, partially offset by decreases of $131 million in prepaid expenses related to income taxes and $125 million in other regulatory liabilities, deferred.
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, purchase commitments, and trust funding requirements. There are no requirements through September 30, 2012 to fund maturities of long-term debt.
As of September 30, 2011, the approved construction program of Alabama Power included a base level investment of $0.9 billion for 2011, $0.9 billion for 2012, and $1.1 billion for 2013. Included in Alabama Power’s approved construction program are estimated environmental expenditures to comply with existing statutes and regulations of $47 million, $26 million, and $53 million for 2011, 2012, and 2013, respectively. Alabama Power anticipates that additional expenditures may be required to comply with anticipated statutes and regulations. Such additional expenditures are estimated to be in amounts up to $48 million, $108 million, and $354 million for 2011, 2012, and 2013, respectively. If the EPA’s proposed Utility MACT rule is finalized as proposed, Alabama Power estimates that the potential incremental investments for new environmental regulations may exceed these estimates. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; changes in generating plants, including unit retirements and replacements, to meet new regulatory requirements; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; 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
Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. 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 September 30, 2011 cash and cash equivalents of approximately $576 million and unused committed credit arrangements with banks of approximately $1.3 billion. Of the unused credit arrangements, $60 million expire in 2011, $121 million expire in 2012, $35 million expire in 2013, $280 million expire in 2014, and $800 million expire in 2016. Of the credit arrangements expiring on or before September 30, 2012, $111 million contain provisions allowing for one-year term loans executable at expiration. Alabama Power expects to renew its credit arrangements, as needed, prior to expiration. The credit arrangements provide liquidity support to Alabama

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Power’s commercial paper borrowings and $794 million are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds. Subsequent to September 30, 2011, Alabama Power replaced a $20 million credit arrangement expiring in 2011 with a $30 million credit arrangement which will expire in 2014. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. At September 30, 2011, Alabama Power had no commercial paper borrowings outstanding. During the third quarter 2011, Alabama Power had an average of $1 million of commercial paper outstanding at a weighted average interest rate of 0.10% per annum and the maximum amount outstanding was $25 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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- and/or Baa3. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, and energy price risk management. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $311 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Alabama Power’s ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Alabama Power’s market risk exposure relative to interest rate changes for the third quarter 2011 has not changed materially compared with the December 31, 2010 reporting period. Since a significant portion of outstanding indebtedness remains at fixed rates, Alabama Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation and other various cost recovery mechanisms, Alabama Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. Alabama Power continues to manage a retail fuel-hedging program implemented per the guidelines of the Alabama PSC. As such, Alabama Power had no material change in market risk exposure for the third quarter 2011 when compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter   Year-to-Date
    2011   2011
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (24 )   $ (38 )
Contracts realized or settled
    9       29  
Current period changes(a)
    (14 )     (20 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (29 )   $ (29 )
 
 
(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
The change in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 was a decrease of $5 million and an increase of $9 million, respectively, substantially all of which is due to natural gas positions. The change is attributable to both the volume of mmBtu and prices of natural gas. At September 30, 2011, Alabama Power had a net hedge volume of 31 million mmBtu with a weighted average contract cost approximately $1.04 per mmBtu above market prices, compared to 31 million mmBtu at June 30, 2011 with a weighted average contract cost approximately $0.79 per mmBtu above market prices and compared to 34 million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.14 per mmBtu above market prices.
Regulatory hedges relate to Alabama Power’s fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clause.
Unrealized pre-tax gains and losses recognized in income for the three and nine months ended September 30, 2011 and 2010 for energy-related derivative contracts that are not hedges were not material.
Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
            September 30, 2011        
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (29 )     (24 )     (5 )      
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (29 )   $ (24 )   $ (5 )   $  
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Alabama Power. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Alabama Power in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Alabama Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In February 2011, Alabama Power’s $200 million Series HH 5.10% Senior Notes due February 1, 2011 matured.
In March 2011, Alabama Power issued $250 million aggregate principal amount of Series 2011A 5.50% Senior Notes due March 15, 2041. The proceeds were used for general corporate purposes, including Alabama Power’s continuous construction program. Alabama Power settled $200 million of interest rate hedges related to its Series 2011A 5.50% Senior Note issuance at a gain of approximately $4 million. The gain will be amortized to interest expense, in earnings, over 10 years.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May 2011, Alabama Power issued $200 million aggregate principal amount of Series 2011B 3.950% Senior Notes due June 1, 2021 and $250 million aggregate principal amount of Series 2011C 5.200% Senior Notes due June 1, 2041. The net proceeds were used by Alabama Power for the redemption of $100 million aggregate principal amount of the Series GG 5 7/8% Senior Notes due February 1, 2046, $200 million aggregate principal amount of the Series II 5.875% Senior Notes due March 15, 2046, and $150 million aggregate principal amount of the Series JJ 6.375% Senior Notes due June 15, 2046.
In August 2011, Alabama Power entered into forward-starting interest rate swaps to mitigate exposure to interest rate changes related to an anticipated debt issuance. The notional amount of the swaps totaled $300 million.
In September 2011, Alabama Power redeemed approximately $4 million of The Industrial Development Board of the Town of Wilsonville, Alabama Solid Waste Disposal Revenue Bonds (Alabama Power Company Plant Gaston), Series 2008.
Subsequent to September 30, 2011, Alabama Power announced the redemption that will occur on November 14, 2011 of approximately $100 million aggregate principal amount of its Series EE 5.75% Senior Notes due January 15, 2036.
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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CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)     (in millions)  
Operating Revenues:
                               
Retail revenues
  $ 2,609     $ 2,418     $ 6,494     $ 6,036  
Wholesale revenues, non-affiliates
    90       109       270       307  
Wholesale revenues, affiliates
    4       17       31       43  
Other revenues
    85       84       247       226  
 
                       
Total operating revenues
    2,788       2,628       7,042       6,612  
 
                       
Operating Expenses:
                               
Fuel
    838       928       2,299       2,443  
Purchased power, non-affiliates
    127       128       297       294  
Purchased power, affiliates
    193       143       513       437  
Other operations and maintenance
    453       435       1,294       1,224  
Depreciation and amortization
    180       182       531       426  
Taxes other than income taxes
    102       98       283       264  
 
                       
Total operating expenses
    1,893       1,914       5,217       5,088  
 
                       
Operating Income
    895       714       1,825       1,524  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    26       34       73       105  
Interest expense, net of amounts capitalized
    (90 )     (95 )     (257 )     (275 )
Other income (expense), net
    (4 )     (5 )     (10 )     (12 )
 
                       
Total other income and (expense)
    (68 )     (66 )     (194 )     (182 )
 
                       
Earnings Before Income Taxes
    827       648       1,631       1,342  
Income taxes
    303       224       583       433  
 
                       
Net Income
    524       424       1,048       909  
Dividends on Preferred and Preference Stock
    4       4       13       13  
 
                       
Net Income After Dividends on Preferred and Preference Stock
  $ 520     $ 420     $ 1,035     $ 896  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in millions)     (in millions)  
Net Income After Dividends on Preferred and Preference Stock
  $ 520     $ 420     $ 1,035     $ 896  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Reclassification adjustment for amounts included in net income, net of tax of $-, $1, $1, and $5, respectively
    1       2       2       8  
 
                       
Comprehensive Income
  $ 521     $ 422     $ 1,037     $ 904  
 
                       
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in millions)  
Operating Activities:
               
Net income
  $ 1,048     $ 909  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    646       551  
Deferred income taxes
    422       225  
Deferred revenues
          (77 )
Deferred expenses
    (30 )     (54 )
Allowance for equity funds used during construction
    (73 )     (105 )
Pension, postretirement, and other employee benefits
    2       20  
Stock based compensation expense
    7       5  
Other, net
    (47 )     (10 )
Changes in certain current assets and liabilities —
               
-Receivables
    (68 )     (126 )
-Fossil fuel stock
    115       153  
-Prepaid income taxes
    81       2  
-Other current assets
    (2 )     4  
-Accounts payable
    (46 )     61  
-Accrued taxes
    (1 )     66  
-Accrued compensation
    (18 )     45  
-Other current liabilities
    43       38  
 
           
Net cash provided from operating activities
    2,079       1,707  
 
           
Investing Activities:
               
Property additions
    (1,363 )     (1,628 )
Nuclear decommissioning trust fund purchases
    (1,645 )     (570 )
Nuclear decommissioning trust fund sales
    1,641       546  
Cost of removal, net of salvage
    (21 )     (46 )
Change in construction payables, net of joint owner portion
    108       27  
Other investing activities
    (9 )     5  
 
           
Net cash used for investing activities
    (1,289 )     (1,666 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (575 )     (321 )
Proceeds —
               
Capital contributions from parent company
    199       681  
Pollution control revenue bonds issuances
    604        
Senior notes issuances
    550       1,950  
Other long-term debt issuances
    250        
Redemptions —
               
Pollution control revenue bonds
    (286 )      
Senior notes
    (277 )     (1,112 )
Other long-term debt
    (509 )     (3 )
Payment of preferred and preference stock dividends
    (13 )     (13 )
Payment of common stock dividends
    (672 )     (615 )
Other financing activities
    (3 )     (32 )
 
           
Net cash provided from (used for) financing activities
    (732 )     535  
 
           
Net Change in Cash and Cash Equivalents
    58       576  
Cash and Cash Equivalents at Beginning of Period
    8       14  
 
           
Cash and Cash Equivalents at End of Period
  $ 66     $ 590  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $27 and $39 capitalized for 2011 and 2010, respectively)
  $ 240     $ 231  
Income taxes (net of refunds)
    (2 )     107  
Noncash transactions — accrued property additions at end of period
    375       261  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in millions)  
Current Assets:
               
Cash and cash equivalents
  $ 66     $ 8  
Receivables —
               
Customer accounts receivable
    764       580  
Unbilled revenues
    235       172  
Under recovered regulatory clause revenues
    189       184  
Joint owner accounts receivable
    52       60  
Other accounts and notes receivable
    58       67  
Affiliated companies
    28       21  
Accumulated provision for uncollectible accounts
    (17 )     (11 )
Fossil fuel stock, at average cost
    509       624  
Materials and supplies, at average cost
    379       371  
Vacation pay
    77       78  
Prepaid income taxes
    1       99  
Other regulatory assets, current
    94       105  
Other current assets
    144       80  
 
           
Total current assets
    2,579       2,438  
 
           
Property, Plant, and Equipment:
               
In service
    26,918       26,397  
Less accumulated provision for depreciation
    10,198       9,966  
 
           
Plant in service, net of depreciation
    16,720       16,431  
Other utility plant, net
    57        
Nuclear fuel, at amortized cost
    427       386  
Construction work in progress
    3,774       3,287  
 
           
Total property, plant, and equipment
    20,978       20,104  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    63       70  
Nuclear decommissioning trusts, at fair value
    657       818  
Miscellaneous property and investments
    39       42  
 
           
Total other property and investments
    759       930  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    747       723  
Prepaid pension costs
    122       91  
Deferred under recovered regulatory clause revenues
    25       214  
Other regulatory assets, deferred
    1,282       1,207  
Other deferred charges and assets
    213       207  
 
           
Total deferred charges and other assets
    2,389       2,442  
 
           
Total Assets
  $ 26,705     $ 25,914  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2011     2010  
    (in millions)  
Current Liabilities:
               
Securities due within one year
  $ 254     $ 415  
Notes payable
    1       576  
Accounts payable —
               
Affiliated
    328       243  
Other
    580       574  
Customer deposits
    206       198  
Accrued taxes —
               
Accrued income taxes
    105       1  
Unrecognized tax benefits
    9       187  
Other accrued taxes
    252       328  
Accrued interest
    117       94  
Accrued vacation pay
    56       58  
Accrued compensation
    100       109  
Liabilities from risk management activities
    53       77  
Other cost of removal obligations, current
    31       31  
Nuclear decommissioning trust securities lending collateral
    37       144  
Other current liabilities
    162       134  
 
           
Total current liabilities
    2,291       3,169  
 
           
Long-term Debt
    8,422       7,931  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    4,256       3,718  
Deferred credits related to income taxes
    124       129  
Accumulated deferred investment tax credits
    222       229  
Employee benefit obligations
    716       684  
Asset retirement obligations
    729       705  
Other cost of removal obligations
    123       131  
Other deferred credits and liabilities
    237       211  
 
           
Total deferred credits and other liabilities
    6,407       5,807  
 
           
Total Liabilities
    17,120       16,907  
 
           
Preferred Stock
    45       45  
 
           
Preference Stock
    221       221  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 9,261,500 shares
    398       398  
Paid-in capital
    5,504       5,291  
Retained earnings
    3,426       3,063  
Accumulated other comprehensive loss
    (9 )     (11 )
 
           
Total common stockholder’s equity
    9,319       8,741  
 
           
Total Liabilities and Stockholder’s Equity
  $ 26,705     $ 25,914  
 
           
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
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
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 constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, and fuel prices. Georgia Power is currently constructing two new nuclear and three new combined cycle generating units. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future.
On May 24, 2011, the Georgia PSC approved Georgia Power’s request to decrease fuel rates by 0.61%. The decrease reduced Georgia Power’s annual billings by approximately $43 million effective June 1, 2011. However, this has no impact on earnings as fuel cost recovery revenues generally equal fuel expenses.
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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$100   23.8   $139   15.5
 
Georgia Power’s net income after dividends on preferred and preference stock for the third quarter 2011 was $520 million compared to $420 million for the corresponding period in 2010. Georgia Power’s year-to-date 2011 net income after dividends on preferred and preference stock was $1.04 billion compared to $896 million for the corresponding period in 2010. The increases were primarily due to increases in retail base revenues as authorized under the 2010 ARP and the NCCR tariff, which both became effective January 1, 2011, partially offset by relatively cooler weather primarily in the month of September compared to the third quarter 2010, higher non-fuel operating expenses, and higher income taxes. The year-to-date increase was also due to a reduction in interest expense arising from the settlement of tax litigation with the Georgia Department of Revenue (DOR), partially offset by a decrease in the amortization of the regulatory liability related to other cost of removal obligations.
Retail Revenues
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$191   7.9   $458   7.6
 
In the third quarter 2011, retail revenues were $2.61 billion compared to $2.42 billion for the corresponding period in 2010. For year-to-date 2011, retail revenues were $6.49 billion compared to $6.04 billion for the corresponding period in 2010.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
                                 
    Third Quarter     Year-to-Date  
    2011     2011  
    (in millions)   (% change)   (in millions)   (% change)
Retail — prior year
  $ 2,418             $ 6,036          
Estimated change in —
                               
Rates and pricing
    225       9.3       546       9.0  
Sales growth (decline)
    (11 )     (0.4 )     (7 )     (0.1 )
Weather
    (26 )     (1.1 )     (55 )     (0.9 )
Fuel cost recovery
    3       0.1       (26 )     (0.4 )
 
Retail – current year
  $ 2,609       7.9 %   $ 6,494       7.6 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 due to increases in retail base revenues as authorized under the 2010 ARP and the NCCR tariff, which both became effective January 1, 2011.
Revenues attributable to changes in sales decreased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010. Weather-adjusted residential KWH sales decreased 1.3%, weather-adjusted commercial KWH sales increased 0.1%, and weather-adjusted industrial KWH sales were flat in the third quarter 2011 when compared to the corresponding period in 2010. Weather-adjusted residential and commercial KWH sales each decreased 0.3% and weather-adjusted industrial KWH sales increased 1.8% year-to-date 2011 when compared to the corresponding period in 2010. Increased demand in the primary metals sector was the main contributor to the increase in weather-adjusted industrial KWH sales for year-to-date 2011.
Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 due to relatively cooler weather primarily in the month of September compared to the third quarter 2010 and significantly colder weather in the first quarter 2010.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues increased $3 million in the third quarter 2011 when compared to the corresponding period in 2010 due to higher KWHs purchased, partially offset by lower KWHs generated. Retail fuel cost recovery revenues decreased $26 million for year-to-date 2011 when compared to the corresponding period in 2010 due to the lower cost of purchased power per KWH purchased and lower KWHs generated. See Note (B) to the Condensed Financial Statements under “Retail Regulatory Matters – Fuel Cost Recovery” herein for additional information.
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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(19)   (17.4)   $(37)   (12.1)
 
Wholesale revenues from non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power and Southern Company system-owned generation, demand for energy within the Southern Company system service territory, and the availability of Southern Company system generation.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2011, wholesale revenues from non-affiliates were $90 million compared to $109 million for the corresponding period in 2010, reflecting a $24 million decrease in energy revenues, partially offset by a $5 million increase in capacity revenues. The decrease in the third quarter 2011 was primarily due to a 31.7% decrease in KWH sales from lower demand as a result of less favorable weather in the third quarter 2011 and current economic conditions.
For year-to-date 2011, wholesale revenues from non-affiliates were $270 million compared to $307 million for the corresponding period in 2010. The decrease was primarily due to a $38 million decrease in energy revenues, slightly offset by an increase in capacity revenues. The decrease in year-to-date 2011 was primarily due to a 19.8% decrease in KWH sales from lower demand resulting from more favorable weather in the first quarter 2010, lower market costs of available energy compared to Georgia Power-owned generation, and the expiration of a long-term unit power sales contract in May 2010.
Wholesale Revenues — Affiliates
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(13)   (76.5)   $(12)   (27.9)
 
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 third quarter 2011, wholesale revenues from affiliates were $4 million compared to $17 million for the corresponding period in 2010. For year-to-date 2011, wholesale revenues from affiliates were $31 million compared to $43 million for the corresponding period in 2010. These decreases were due to an 80.8% decrease and a 26.2% decrease in KWH sales due to lower demand in the third quarter and year-to-date 2011, respectively, primarily because the market cost of available energy was lower than the cost of Georgia Power-owned generation.
Other Revenues
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$1   1.2   $21   9.3
 
In the third quarter 2011, other revenues were $85 million compared to $84 million for the corresponding period in 2010. The increase when compared to the corresponding period in 2010 was not material. For year-to-date 2011, other revenues were $247 million compared to $226 million for the corresponding period in 2010. The increase was primarily due to a $21 million increase in transmission revenues as a result of new contracts that replaced the transmission component of a unit power sales contract that expired in May 2010 and increased usage of Georgia Power’s transmission system by non-affiliate companies.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2011   Year-to-Date 2011
    vs.   vs.
    Third Quarter 2010   Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel*
  $ (90 )     (9.7 )   $ (144 )     (5.9 )
Purchased power — non-affiliates
    (1 )     (0.8 )     3       1.0  
Purchased power — affiliates
    50       35.0       76       17.4  
                     
Total fuel and purchased power expenses
  $ (41 )           $ (65 )        
                     
 
*   Fuel includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider and is included in purchased power when determining the average cost of purchased power.
In the third quarter 2011, total fuel and purchased power expenses were $1.16 billion compared to $1.20 billion for the corresponding period in 2010. The decrease was primarily due to a 5.6% decrease in total KWHs generated and purchased to meet demand, partially offset by a 0.4% increase in the average cost of fuel and purchased power.
For year-to-date 2011, total fuel and purchased power expenses were $3.11 billion compared to $3.17 billion for the corresponding period in 2010. The decrease was primarily due to a 3.6% decrease in total KWHs generated and purchased primarily due to lower customer demand as a result of significantly colder weather in the first quarter 2010 and a 0.7% decrease in the average cost of fuel and purchased power.
Fuel and purchased power transactions do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL — “Georgia PSC Matters — Fuel Cost Recovery” herein for additional information.
Details of Georgia Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter     Third Quarter     Percent     Year-to-Date     Year-to-Date     Percent  
Average Cost   2011     2010     Change     2011     2010     Change  
    (cents per net KWH)             (cents per net KWH)          
Fuel
    3.99       3.97       0.5       3.90       3.84       1.6  
Purchased power
    5.51       5.50       0.2       5.61       5.90       (4.9 )
 
In the third quarter 2011, fuel expense was $838 million compared to $928 million for the corresponding period in 2010. This decrease was due to a 12.2% decrease in KWHs generated, partially offset by a 0.5% increase in the average cost of fuel per KWH generated. The decrease in KWHs generated and the increase in cost are primarily due to lower customer demand and increased global demand for coal as well as an increase in the price of nuclear fuel.
For year-to-date 2011, fuel expense was $2.30 billion compared to $2.44 billion for the corresponding period in 2010. The decrease was primarily due to a 9.8% decrease in KWHs generated, partially offset by a 1.6% increase in the average cost of fuel per KWH generated. The decrease in KWHs generated and the increase in cost are primarily the result of higher prices as described above.
Affiliates
In the third quarter 2011, purchased power expense from affiliates was $193 million compared to $143 million for the corresponding period in 2010. The increase was due to a 17.1% increase in the volume of KWHs purchased, as system resources dispatched at lower cost than Georgia Power units and a 7.4% increase in the average cost per KWH purchased, reflecting a higher level of purchases during peaking hours in 2011.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2011, purchased power expense from affiliates was $513 million compared to $437 million in the corresponding period in 2010. The increase was due to a 23.8% increase in the volume of KWHs purchased, primarily as the result of a new PPA that began in June 2010, partially offset by a 5.5% decrease in the average cost per KWH purchased, reflecting lower gas prices.
Energy purchases from affiliates will vary depending on the 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 or other contractual agreements, all as approved by the FERC.
Other Operations and Maintenance Expenses
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$18   4.1   $70   5.7
 
In the third quarter 2011, other operations and maintenance expenses were $453 million compared to $435 million for the corresponding period in 2010. The increase was primarily due to a $5 million increase in distribution maintenance expense, a $6 million increase in customer assistance expense related to new demand side management programs in 2011, and a $2 million increase in uncollectible account expense as a result of higher revenues and the current economic conditions.
For year-to-date 2011, other operations and maintenance expenses were $1.29 billion compared to $1.22 billion for the corresponding period in 2010. The increase was primarily due to a $23 million increase in scheduled outages and maintenance for generating units, a $10 million increase in overhead line maintenance, an $8 million increase in customer assistance expense related to new demand side management programs in 2011, and a $6 million increase in uncollectible account expense as a result of higher revenues and the current economic conditions.
Depreciation and Amortization
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(2)   (1.1)   $105   24.6
 
In the third quarter 2011, depreciation and amortization was $180 million compared to $182 million for the corresponding period in 2010. The decrease when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, depreciation and amortization was $531 million compared to $426 million for the corresponding period in 2010. The increase was primarily due to a $94 million decrease in the amortization of the regulatory liability related to other cost of removal obligations as authorized by the Georgia PSC. See Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters — Rate Plans” in Item 8 of the Form 10-K for additional information on the other cost of removal regulatory liability.
Taxes Other Than Income Taxes
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$4   4.1   $19   7.2
 
In the third quarter 2011, taxes other than income taxes were $102 million compared to $98 million for the corresponding period in 2010. The increase when compared to the corresponding period in 2010 was not material.
For year-to-date 2011, taxes other than income taxes were $283 million compared to $264 million for the corresponding period in 2010. The increase was due to a $10 million increase in property taxes and an $8 million increase in franchise fees related to higher operating revenues.

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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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(8)   (23.5)   $(32)   (30.5)
 
In the third quarter 2011, AFUDC equity was $26 million compared to $34 million for the corresponding period in 2010. For year-to-date 2011, AFUDC equity was $73 million compared to $105 million for the corresponding period in 2010. The decreases were primarily due to the inclusion of Plant Vogtle Units 3 and 4 construction work in progress in rate base effective January 1, 2011, which reduced the amount of AFUDC capitalized. See Note 3 to the financial statements of Georgia Power under “Construction – Nuclear” in Item 8 of the Form 10-K, Note (B) to the Condensed Financial Statements herein under “State PSC Matters – Georgia Power – Nuclear Construction,” and FUTURE EARNINGS POTENTIAL – “Construction – Nuclear” herein for additional information.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(5)   (5.3)   $(18)   (6.5)
 
In the third quarter 2011, interest expense, net of amounts capitalized was $90 million compared to $95 million for the corresponding period in 2010. The decrease in third quarter 2011 compared to the corresponding period in 2010 was primarily due to lower interest expense on variable rate pollution control bonds. For year-to-date 2011, interest expense, net of amounts capitalized was $257 million compared to $275 million for the corresponding period in 2010. The decrease was primarily due to a reduction of $23 million in interest expense related to the settlement of tax litigation with the Georgia DOR, partially offset by a reduction in interest capitalized due to the inclusion of Plant Vogtle Units 3 and 4 construction work in progress in rate base effective January 1, 2011, as described above. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters” herein, Notes 3 and 5 to the financial statements of Georgia Power under “Income Tax Matters” and “Unrecognized Tax Benefits,” respectively, in Item 8 of the Form 10-K, and Note (G) herein for additional information.
Income Taxes
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$79   35.3   $150   34.6
 
In the third quarter 2011, income taxes were $303 million compared to $224 million for the corresponding period in 2010. The increase in income taxes was primarily due to higher pre-tax earnings and a decrease in non-taxable AFUDC equity, as described previously.
For year-to-date 2011, income taxes were $583 million compared to $433 million for the corresponding period in 2010. The increase in income taxes was primarily due to higher pre-tax earnings, the recognition in the first quarter 2010 of certain state income tax credits, and a decrease in non-taxable AFUDC equity.

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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 constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining 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 or decline in Georgia Power’s service area. Changes in economic conditions impact sales for Georgia Power and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. 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.
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. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. 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.
Georgia Power has completed a preliminary assessment of the EPA’s proposed Utility Maximum Achievable Control Technology (MACT), water quality, and coal combustion byproduct rules. See “Air Quality” and “Water Quality” below for additional information regarding the proposed Utility MACT and water quality rules. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Georgia Power in Item 7 of the Form 10-K for additional information regarding the proposed coal combustion byproducts rule. Although its analysis is preliminary, Georgia Power estimates that the aggregate capital costs for compliance with these rules could range from $5 billion to $7 billion through 2020 if the rules are adopted as proposed. These costs may arise from existing unit retirements, installation of additional environmental controls, the addition of new generating resources, and changing fuel sources for certain existing units. Georgia Power’s preliminary analysis further indicates that the short timeframe for compliance with these rules could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters will depend on the final form of the proposed rules and the outcome of any legal challenges to the rules and cannot be determined at this time.
Carbon Dioxide Litigation
New York Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – New York Case” of Georgia Power in Item 7 and Note 3 of the financial statements of Georgia Power under “Environmental Matters – Carbon Dioxide Litigation – New York Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.

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Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” of Georgia Power in Item 7 and Note 3 of the financial statements of Georgia Power under “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies, including Georgia Power, and includes many of the same defendants that were involved in the earlier case. Georgia Power believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.
Air Quality
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 regulation of air quality.
On May 3, 2011, the EPA published a proposed rule, called Utility MACT, which would impose stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The proposed rule contains numeric emission limits for acid gases, mercury, and total particulate matter. Meeting the proposed limits would likely require additional emission control equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant to a court-approved consent decree, the EPA must issue a final rule by December 16, 2011. Compliance for existing sources would be required three years after the effective date of the final rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized as proposed, compliance with this rule would require significant capital expenditures and compliance costs at many of Georgia Power’s facilities which could affect unit retirement and replacement decisions. In addition, results of operations, cash flows, and financial condition could be affected if the costs are not recovered through regulated rates. Further, there is uncertainty regarding the ability of the electric utility industry to achieve compliance with the requirements of the proposed rule within the compliance period, and the limited compliance period could negatively affect electric system reliability. The outcome of this rulemaking will depend on the requirements in the final rule and the outcome of any legal challenges and cannot be determined at this time.
In April 2010, the EPA proposed an Industrial Boiler MACT rule that would establish emissions limits for various hazardous air pollutants typically emitted from industrial boilers, including biomass boilers and start-up boilers. The EPA published the final rule on March 21, 2011 and, at the same time, issued a notice of intent to reconsider the final rule to allow for additional public review and comment. The EPA has announced plans to finalize the rule by April 30, 2012. The effect of the regulatory proceedings will depend on the final form of the revised regulations and the outcome of any legal challenges and cannot be determined at this time. On October 18, 2011, the Georgia PSC approved Georgia Power’s request to further delay the decision to convert Plant Mitchell Unit 3 from coal to biomass for two to four years, until there is greater clarity regarding the Industrial Boiler MACT rule and other proposed and recently adopted regulations. Georgia Power will file semi-annual construction monitoring reports on March 1 and August 15 throughout the delay period.

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On June 23, 2011, the EPA published its determination that the 20-county area within metropolitan Atlanta has air quality which attains the 1997 eight-hour ozone air quality standard. In March 2008, the EPA adopted a more stringent eight-hour ozone air quality standard, which it began to implement in September 2011. The 2008 standard is expected to result in designation of new nonattainment areas within Georgia Power’s service territory and could result in additional required reductions in nitrogen oxide emissions. The ultimate outcome of this matter cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. The State of Georgia is subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program and to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for the State of Georgia. Georgia Power may need to purchase allowances to demonstrate compliance with the CSAPR. The rule could have significant effects on Georgia Power, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including Georgia Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
On March 22, 2011, the Board of the Georgia Department of Natural Resources began consideration of modifications to the Georgia Multi-Pollutant Rule, which is designed to reduce emissions of mercury, sulfur dioxide, and nitrogen oxides statewide. On June 29, 2011, the modifications were approved and the compliance dates for certain of Georgia Power’s coal-fired generating units were changed as follows:
     
Branch 1
  December 31, 2013
Branch 2
  October 1, 2013
Branch 3
  October 1, 2015
Branch 4
  December 31, 2015
See “Georgia PSC Matters – 2011 Integrated Resource Plan Update” herein for additional information.
Water Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at

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many of Georgia Power’s existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of Georgia Power’s facilities may be subject to significant additional capital expenditures and compliance costs that could affect future unit retirement and replacement decisions. Also, results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.
Georgia PSC Matters
Fuel Cost Recovery
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. As of September 30, 2011, Georgia Power had a total under recovered fuel cost balance of approximately $214 million compared to $398 million at December 31, 2010.
On May 24, 2011, the Georgia PSC approved Georgia Power’s request to decrease fuel rates by 0.61%. The decrease reduced Georgia Power’s annual billings by approximately $43 million effective June 1, 2011. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Georgia Power’s revenues or net income, but will affect cash flow.
2011 Integrated Resource Plan Update
See “Environmental Matters – Air Quality” and “– Water Quality” herein and BUSINESS – “Rate Matters – Integrated Resource Planning” of Georgia Power in Item 1, MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality,” “– Water Quality,” and “– Coal Combustion Byproducts” of Georgia Power in Item 7, and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Rate Plans” in Item 8 of the Form 10-K for additional information regarding potential rules and regulations being developed by the EPA, including the Utility MACT rule for coal- and oil-fired EGUs, revisions to effluent guidelines for steam electric power plants, and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; and the 2010 ARP.
On August 4, 2011, Georgia Power filed an update to its IRP (2011 IRP Update). The filing included Georgia Power’s application to decertify Plant Branch Units 1 and 2 as of December 31, 2013 and October 1, 2013, the compliance dates for the respective units under the Georgia Multi-Pollutant Rule. However, as a result of the considerable uncertainty regarding pending state and federal environmental regulations, Georgia Power is continuing to defer decisions to add controls, switch fuel, or retire its remaining fossil generating units where environmental controls have not yet been installed, representing approximately 2,600 MWs of capacity. Georgia Power expects to update its economic analysis of these units once the Utility MACT rule is finalized. Georgia Power currently expects that certain units, representing approximately 600 MWs of capacity, are more likely than others to switch fuel or be controlled in time to comply with the Utility MACT rule. However, even if the updated economic analysis shows more positive benefits associated with adding controls or switching fuel for more units, it is unlikely that all of the required controls could be completed by 2015, the expected effective date of the Utility MACT rule. As a result, Georgia Power currently cannot rely on the availability of approximately 2,000 MWs of capacity in 2015. As such, the 2011 IRP Update also includes Georgia Power’s application requesting that the Georgia PSC certify the purchase of a total of 1,562 MWs of capacity beginning in 2015, from four PPAs selected through the 2015 request for proposal process.

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Under the terms of the 2010 ARP, any costs associated with changes to Georgia Power’s approved environmental operating or capital budgets resulting from new or revised environmental regulations through 2013 that are approved by the Georgia PSC in connection with an updated IRP will be deferred as a regulatory asset to be recovered over a time period deemed appropriate by the Georgia PSC. In connection with the retirement decision, Georgia Power reclassified the retail portion of the net carrying value of Plant Branch Units 1 and 2 from plant in service, net of depreciation, to other utility plant, net. Georgia Power is continuing to depreciate these units using the current composite straight-line rates previously approved by the Georgia PSC and upon actual retirement has requested that the Georgia PSC approve the continued deferral and amortization of the units’ remaining net carrying value. As a result of this regulatory treatment, the de-certification of Plant Branch Units 1 and 2 is not expected to have a significant impact on Georgia Power’s financial statements.
The Georgia PSC is expected to vote on these requests in March 2012. The ultimate outcome of these matters cannot be determined at this time.
Storm Damage Recovery
During April 2011, severe storms in Georgia caused significant damage to Georgia Power’s distribution and transmission facilities. Georgia Power defers and recovers certain costs related to damages from major storms as mandated by the Georgia PSC. As of September 30, 2011, the balance in the regulatory asset related to storm damage was $45 million. As a result of this regulatory treatment, the costs related to the storms are not expected to have a material impact on Georgia Power’s financial statements. See Note 1 to the financial statements of Georgia Power under “Storm Damage Reserve” in Item 8 of the Form 10-K for additional information.
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters cannot be determined at this time.
Georgia State Income Tax Credits
Georgia Power’s 2005 through 2009 income tax filings for the State of Georgia included state income tax credits for increased activity through Georgia ports. Georgia Power also filed similar claims for the years 2002 through 2004. In July 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. On June 10, 2011, Georgia Power and the Georgia DOR agreed to a settlement resolving the claims. As a result, Georgia Power recorded additional tax benefits of approximately $64 million and, in accordance with the 2010 ARP, also recorded a related regulatory liability of approximately $62 million. In addition, Georgia Power recorded a reduction of approximately $23 million in related interest expense. See Notes 3 and 5 to the financial statements of Georgia Power in Item 8 of the Form 10-K under “Income Tax Matters” and “Unrecognized Tax Benefits,” respectively, for additional information.

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Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects to be placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Georgia Power through 2013. On March 29, 2011, the IRS issued additional guidance and safe harbors relating to the 50% and 100% bonus depreciation rules. Based on recent discussions with the IRS, Georgia Power estimates the potential increased cash flow for 2011 to be between approximately $275 million and $350 million. The ultimate outcome of this matter cannot be determined at this time.
Construction
Nuclear
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction – Nuclear” of Georgia Power in Item 7 of the Form 10-K for information regarding the construction of Plant Vogtle Units 3 and 4, which are expected to attain commercial operation in 2016 and 2017, respectively.
In December 2010, Westinghouse submitted a revision to the supporting documents for the AP1000 Design Certification Amendment (DCA) to the NRC. On January 24, 2011, the Advisory Committee on Reactor Safeguards endorsed the issuance of the Construction and Operating Licenses (COLs) for Plant Vogtle Units 3 and 4. In addition, on March 25, 2011, the NRC submitted to the EPA the final environmental impact statement for Plant Vogtle Units 3 and 4. On September 27 and 28, 2011, the NRC held the mandatory hearing for the COLs and Georgia Power’s request for a second limited work authorization. On October 18, 2011, the Atomic Safety and Licensing Board (ASLB) denied the remaining motions seeking to re-open the Plant Vogtle Units 3 and 4 licensing proceeding; however, on October 27, 2011, the petitioners requested reconsideration of this decision and, on November 2, 2011, further appealed to the NRC to admit their contentions, should they again be denied by the ASLB. The remaining steps in the regulatory process are to address the status of these petitions and to obtain the NRC approvals of the DCA and the COLs, which Georgia Power expects in late 2011. Issuance of the COLs by the NRC staff generally would be expected to occur within 10 days after the NRC’s decision. However, due to certain administrative procedural requirements, it is possible that the effective date of the DCA and issuance of the COLs could occur in early 2012. In this case, the NRC could approve Georgia Power’s request for a second limited work authorization, which would allow Georgia Power to perform additional construction activities related to the nuclear island in late 2011.
In connection with its certification of Plant Vogtle Units 3 and 4, the Georgia PSC ordered Georgia Power and the Georgia PSC Public Interest Advocacy Staff to work together to develop a risk sharing or incentive mechanism that would provide some level of protection to ratepayers in the event of significant cost overruns, but also not penalize Georgia Power’s earnings if and when overruns are due to mandates from governing agencies. In May 2011, the Georgia PSC initiated a separate proceeding to address the issue. On August 2, 2011, the Georgia PSC voted to approve a settlement agreement between Georgia Power and the Georgia PSC Public Interest Advocacy Staff whereby the proposed risk sharing mechanisms were withdrawn. On August 16, 2011, the Georgia PSC voted to approve Georgia Power’s fourth semi-annual construction monitoring report including total costs of $1.3 billion for Plant Vogtle Units 3 and 4 incurred through December 31, 2010. Georgia Power will continue to file construction monitoring reports by February 28 and August 31 of each year during the construction period.
In December 2010, the Georgia PSC approved the NCCR tariff, which became effective January 1, 2011. The NCCR tariff was established to recover financing costs for nuclear construction projects by including the related construction work in progress accounts in rate base during the construction period in accordance with the Georgia Nuclear Energy Financing Act. With respect to Plant Vogtle Units 3 and 4, this legislation allows Georgia Power to recover projected

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financing costs of approximately $1.7 billion during the construction period beginning in 2011, which reduces the projected in-service cost to approximately $4.4 billion. Georgia Power is collecting and amortizing to earnings approximately $91 million of financing costs capitalized in 2009 and 2010 over the five-year period ending December 31, 2015, in addition to the ongoing financing costs. At September 30, 2011, approximately $78 million of these 2009 and 2010 costs were included in construction work in progress.
Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and 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 (collectively, Owners), and a consortium consisting of Westinghouse and Stone & Webster, Inc. have established both informal and formal dispute resolution procedures in order to resolve issues that commonly arise during the course of constructing a project of this magnitude. Southern Nuclear, on behalf of the Owners, has initiated both formal and informal claims through these procedures, including ongoing claims. During the course of construction activities, issues have materialized that may impact the project budget and schedule, including potential costs associated with compressing the project schedule to meet the projected commercial operation dates. The Owners have successfully used both the informal and formal procedures to resolve disputes and expect to resolve any existing and future disputes through these procedures as well.
On March 11, 2011, a major earthquake and tsunami struck Japan and caused substantial damage to the nuclear generating units at the Fukushima Daiichi generating plant. While Georgia Power will continue to monitor this situation, it has not identified any immediate impact to the licensing and construction of Plant Vogtle Units 3 and 4 or the operation of its existing nuclear generating units.
The events in Japan have created uncertainties that may affect transportation of materials, price of fuels, availability of equipment from Japanese manufacturers, and future costs for operating nuclear plants. Specifically, the NRC plans to perform additional operational and safety reviews of nuclear facilities in the U.S., which could potentially impact future operations and capital requirements. On July 12, 2011, a special NRC task force issued a report with initial recommendations for enhancing nuclear reactor safety in the U.S., including potential changes in emergency planning, onsite backup generation, and spent fuel pools for existing reactors. The final form and resulting impact of any changes to safety requirements for existing nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time. The task force report supported completion of the certification of the AP1000 reactor design being used at Plant Vogtle Units 3 and 4, noting that the design has many of the features necessary to address the task force’s recommendations.
See RISK FACTORS of Georgia Power in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
There are other pending technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4, including petitions filed at the NRC in response to the events in Japan. Similar additional challenges at the state and federal level are expected as construction proceeds.
The ultimate outcome of these matters cannot be determined at this time.
Other Construction
Georgia Power is currently constructing Plant McDonough Units 4, 5, and 6 which are expected to be placed into service in January 2012, May 2012, and January 2013, respectively. The Georgia PSC has approved Georgia Power’s quarterly construction monitoring reports, including actual project expenditures incurred, through December 31, 2010. Georgia Power filed its second quarter 2011 construction monitoring report on August 26, 2011, including actual project expenditures incurred through June 30, 2011 as well as a request to approve a 4.6% increase in the current certified

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amount. The Georgia PSC is scheduled to issue its decision on February 16, 2012. Georgia Power will continue to file quarterly construction monitoring reports throughout the construction period. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Georgia Power is involved in various other matters being litigated and regulatory matters 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, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 ultimate liabilities, if any, arising from such current proceedings would have a material 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 GAAP. 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 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, Unbilled Revenues, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Power’s financial condition remained stable at September 30, 2011. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital” and “Financing Activities” herein for additional information.
Net cash provided from operating activities totaled $2.08 billion for the first nine months of 2011, compared to $1.71 billion for the corresponding period in 2010. The $372 million increase in cash provided from operating activities is primarily due to higher retail operating revenues and increased deferred income taxes in 2011. Net cash used for investing activities totaled $1.29 billion primarily due to gross property additions to utility plant in the first nine months of 2011. Net cash used for financing activities totaled $732 million for the first nine months of 2011, compared to $535 million net cash provided from financing activities for the corresponding period in 2010. The $1.27 billion decrease is primarily due to higher capital contributions from Southern Company and an increased amount of debt issued in 2010. Fluctuations in cash flow from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.

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Significant balance sheet changes for the first nine months of 2011 include an increase of $874 million in total property, plant, and equipment, an increase of $538 million in accumulated deferred income taxes related to bonus depreciation and repairs accounting, an increase of $491 million in long-term debt primarily to replace short-term debt, and an increase in paid in capital of $213 million reflecting equity contributions from Southern Company. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Bonus Depreciation” herein for additional information.
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, trust funding requirements, and unrecognized tax benefits. Approximately $254 million will be required through September 30, 2012 to fund maturities of long-term debt.
The construction program of Georgia Power is estimated to include a base level investment of $2.1 billion, $2.2 billion, and $2.0 billion for 2011, 2012, and 2013, respectively. Included in these estimated amounts are environmental expenditures to comply with existing statutes and regulations of $73 million, $79 million, and $58 million for 2011, 2012, and 2013, respectively. In addition, Georgia Power estimates that potential incremental investments to comply with anticipated new environmental regulations could range from $69 million to $289 million for 2011, $191 million to $651 million for 2012, and $476 million to $1.4 billion for 2013. If the EPA’s proposed Utility MACT rule is finalized as proposed, Georgia Power estimates that the potential incremental investments in 2011 through 2013 for new environmental regulations will be closer to the upper end of the ranges set forth above. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; changes in generating plants, including unit retirements and replacements, to meet new regulatory requirements; changes in FERC rules and regulations; Georgia PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
In June 2011, Georgia Power entered into four PPAs totaling 1,562 MWs annually, which are subject to certification by the Georgia PSC. See FUTURE EARNINGS POTENTIAL – “Georgia PSC Matters – 2011 Integrated Resource Plan Update” herein for additional information. If approved, these PPAs are expected to result in additional obligations of approximately $84 million in 2015, $102 million in 2016, and $1.41 billion thereafter. However, the PPAs include an early termination provision through March 27, 2012 that allows Georgia Power to terminate one or more of the PPAs if Georgia Power does not retire certain coal-fired units as a result of the potential rules and regulations being developed by the EPA. Of the total capacity, 564 MWs will expire in 2027 and 998 MWs in 2030. Three of the PPAs are with Southern Power and are also subject to FERC approval.
Also in June 2011, Georgia Power renewed two rail car leases that contain obligations upon expiration with respect to the residual value of the leased property. These operating leases expire in 2014 and 2018 and Georgia Power’s maximum obligation is approximately $11 million and $20 million, respectively. At the termination of the leases, at Georgia Power’s option, Georgia Power may either exercise its purchase option or the property can be sold to a third party. Estimated annual commitments for the three-year lease and seven-year lease are approximately $1 million and $2 million, respectively.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sources of Capital
Except as described below with respect to potential DOE loan guarantees, Georgia Power plans 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, short-term debt, security issuances, term loans, 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.
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future borrowings by Georgia Power related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Power’s 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs or approximately $3.46 billion and are expected to be funded by the Federal Financing Bank. Final approval and issuance of loan guarantees by the DOE are subject to receipt of the COLs for Plant Vogtle Units 3 and 4 from the NRC, negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. There can be no assurance that the DOE will issue loan guarantees for Georgia Power. See FUTURE EARNINGS POTENTIAL – “Construction – Nuclear” herein for more information on Plant Vogtle Units 3 and 4.
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 fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at September 30, 2011 approximately $66 million of cash and cash equivalents and approximately $1.74 billion of unused committed credit arrangements with banks. As of September 30, 2011, of the unused credit arrangements, $250 million expire in 2014 and $1.50 billion expire in 2016. Georgia Power expects to renew its credit arrangements, as needed, prior to expiration. At September 30, 2011, the credit arrangements were dedicated to providing liquidity support to Georgia Power’s commercial paper program and approximately $868 million of purchase obligations related to variable rate pollution control revenue bonds. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At September 30, 2011, Georgia Power had no commercial paper borrowings outstanding. During the third quarter 2011, Georgia Power had an average of $110 million of commercial paper outstanding with a weighted average interest rate of 0.2% per annum and the maximum amount outstanding was $364 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, and construction of new generation. At September 30, 2011, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $68 million. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $1.5 billion. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Georgia Power’s ability to access capital markets, particularly the short-term debt market.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Georgia Power’s market risk exposure relative to interest rate changes for the third quarter 2011 has not changed materially compared with the December 31, 2010 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Georgia Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation and other various cost recovery mechanisms, Georgia Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. Georgia Power continues to manage a natural gas hedging program implemented per the guidelines of the Georgia PSC. As such, Georgia Power had no material change in market risk exposure for the third quarter 2011 relative to fuel and electricity prices when compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter   Year-to-Date
    2011   2011
    Changes   Changes
    Fair Value  
    (in millions)  
Contracts outstanding at the beginning of the period, assets (liabilities), net
    $(67 )     $(100 )
Contracts realized or settled
    26       72  
Current period changes(a)
    (25 )     (38 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
    $(66 )     $(66 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The change in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 was an increase of $1 million and an increase of $34 million, respectively, all of which is due to natural gas positions. The change is attributable to both the volume of mmBtu and prices of natural gas. At September 30, 2011, Georgia Power had a net hedge volume of 66 million mmBtu with a weighted average contract cost approximately $1.24 per mmBtu above market prices, compared to 65 million mmBtu at June 30, 2011 with a weighted average contract cost approximately $1.18 per mmBtu above market prices and compared to 59 million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.74 per mmBtu above market prices.
Regulatory hedges relate to Georgia Power’s natural gas hedging program where gains and losses 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.
Unrealized pre-tax gains and losses recognized in income for the three and nine months ended September 30, 2011 and 2010 for energy-related derivative contracts that are not hedges were not material.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
            September 30, 2011          
            Fair Value Measurements          
    Total   Maturity  
    Fair Value   Year 1   Years 2&3   Years 4&5
            (in millions)          
Level 1
  $     $     $     $  
Level 2
    (66 )     (53 )     (13 )      
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (66 )   $ (53 )   $ (13 )   $  
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Georgia Power. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Georgia Power in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Georgia Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In December 2010, the Development Authority of Floyd County issued $53 million aggregate principal amount of Pollution Control Revenue Bonds (Georgia Power Company Plant Hammond Project), First Series 2010 for the benefit of Georgia Power. These bonds were purchased and held by Georgia Power. In January 2011, Georgia Power remarketed these bonds to investors.
In January 2011, Georgia Power’s $100 million aggregate principal amount of Series S 4.0% Senior Notes due January 15, 2011 matured.
In January 2011, Georgia Power issued $300 million aggregate principal amount of Series 2011A Floating Rate Senior Notes due January 15, 2013. The proceeds were used to repay short-term debt and for general corporate purposes, including Georgia Power’s continuous construction program.
In March 2011, Georgia Power’s $300 million variable rate bank term loan due on March 4, 2011 matured and was partially replaced by two one-year $125 million aggregate principal amount variable rate bank loans that bear interest based on one-month LIBOR.
In April 2011, Georgia Power issued $250 million aggregate principal amount of Series 2011B 3.0% Senior Notes due April 15, 2016. The proceeds were used to repay short-term debt and for general corporate purposes, including Georgia Power’s continuous construction program.
In April 2011, Georgia Power purchased and held $113.5 million of pollution control revenue bonds. In June 2011, the bonds were remarketed to investors.
In July 2011, Georgia Power redeemed $67 million of the Development Authority of Appling County Pollution Control Revenue Bonds (Georgia Power Company Plant Hatch Project), First Series 2006.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In July 2011, approximately $8 million of Georgia Power’s Development Authority of Cobb County Pollution Control Revenue Bonds (Georgia Power Company Plant McDonough Project), First Series 1991 matured.
In September 2011, Georgia Power redeemed (i) $140.7 million aggregate principal amount of Series M 5.40% Senior Insured Notes due March 1, 2033, (ii) $35 million aggregate principal amount of Savannah Electric Series F 5.50% Senior Notes due December 12, 2028, (iii) approximately $14.1 million aggregate principal amount of Development Authority of Coweta County Pollution Control Revenue Bonds (Georgia Power Company Plant Yates Project), Second Series 2001, and (iv) $200 million aggregate principal amount of Series G 5-7/8% Junior Subordinated Notes due January 15, 2044 and the related Trust Preferred Securities of Georgia Power Capital Trust VII (as well as approximately $6.2 million of such Series G Junior Subordinated Notes related to Georgia Power’s ownership of the common securities of Georgia Power Capital Trust VII).
In September 2011, Georgia Power remarketed $173 million aggregate principal amount of the Development Authority of Bartow County Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009 and $114.3 million aggregate principal amount of the Development Authority of Burke County Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2009 to investors.
In September 2011, the Development Authority of Appling County issued $67 million aggregate principal amount of Pollution Control Revenue Bonds (Georgia Power Company Plant Hatch Project), First Series 2011 for the benefit of Georgia Power.
Subsequent to September 30, 2011, Georgia Power announced the redemption that will occur on November 21, 2011 of $53 million aggregate principal amount of the Development Authority of Burke County Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Third Series 1999.
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 362,109     $ 396,671     $ 957,409     $ 1,021,530  
Wholesale revenues, non-affiliates
    33,921       31,211       103,814       86,041  
Wholesale revenues, affiliates
    52,833       37,995       79,825       88,386  
Other revenues
    19,167       17,578       50,855       47,381  
 
                       
Total operating revenues
    468,030       483,455       1,191,903       1,243,338  
 
                       
Operating Expenses:
                               
Fuel
    220,305       237,003       530,773       585,167  
Purchased power, non-affiliates
    20,046       12,771       37,938       34,615  
Purchased power, affiliates
    9,941       20,282       39,108       51,725  
Other operations and maintenance
    74,144       67,178       227,236       202,202  
Depreciation and amortization
    32,673       34,032       96,733       90,651  
Taxes other than income taxes
    29,467       29,293       79,230       78,586  
 
                       
Total operating expenses
    386,576       400,559       1,011,018       1,042,946  
 
                       
Operating Income
    81,454       82,896       180,885       200,392  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    2,434       1,424       7,091       4,504  
Interest income
    22       31       56       87  
Interest expense, net of amounts capitalized
    (15,156 )     (13,764 )     (43,208 )     (38,286 )
Other income (expense), net
    (451 )     (471 )     (1,461 )     (1,355 )
 
                       
Total other income and (expense)
    (13,151 )     (12,780 )     (37,522 )     (35,050 )
 
                       
Earnings Before Income Taxes
    68,303       70,116       143,363       165,342  
Income taxes
    25,535       25,658       52,451       60,166  
 
                       
Net Income
    42,768       44,458       90,912       105,176  
Dividends on Preference Stock
    1,551       1,551       4,652       4,652  
 
                       
Net Income After Dividends on Preference Stock
  $ 41,217     $ 42,907     $ 86,260     $ 100,524  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preference Stock
  $ 41,217     $ 42,907     $ 86,260     $ 100,524  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $-, $-, $-, and $(542), respectively
                      (863 )
Reclassification adjustment for amounts included in net income, net of tax of $90, $90, $270, and $286, respectively
    143       143       430       455  
 
                       
Total other comprehensive income (loss)
    143       143       430       (408 )
 
                       
Comprehensive Income
  $ 41,360     $ 43,050     $ 86,690     $ 100,116  
 
                       
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in thousands)  
Operating Activities:
               
Net income
  $ 90,912     $ 105,176  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    101,335       95,491  
Deferred income taxes
    56,869       55,355  
Allowance for equity funds used during construction
    (7,091 )     (4,504 )
Pension, postretirement, and other employee benefits
    (179 )     2,883  
Stock based compensation expense
    1,055       959  
Other, net
    (5,787 )     2,570  
Changes in certain current assets and liabilities —
               
-Receivables
    (13,605 )     (67,814 )
-Prepayments
    7,745       2,667  
-Fossil fuel stock
    36,802       29,483  
-Materials and supplies
    (6,382 )     (1,363 )
-Prepaid income taxes
    36,081       (9,558 )
-Property damage cost recovery
          34  
-Other current assets
    (571 )      
-Accounts payable
    (65 )     12,003  
-Accrued taxes
    22,186       18,166  
-Accrued compensation
    (4,290 )     2,695  
-Other current liabilities
    10,284       10,776  
 
           
Net cash provided from operating activities
    325,299       255,019  
 
           
Investing Activities:
               
Property additions
    (228,696 )     (203,911 )
Distribution of restricted cash from pollution control revenue bonds
          6,347  
Cost of removal, net of salvage
    (9,137 )     (750 )
Change in construction payables
    636       (17,792 )
Payments pursuant to long-term service agreements
    (6,173 )     (4,211 )
Other investing activities
    303       (295 )
 
           
Net cash used for investing activities
    (243,067 )     (220,612 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (56,607 )     (88,733 )
Proceeds —
               
Common stock issued to parent
    50,000       50,000  
Capital contributions from parent company
    1,569       3,571  
Pollution control revenue bonds
          21,000  
Senior notes
    125,000       300,000  
Redemptions —
               
Senior notes
    (553 )     (140,413 )
Other long-term debt
    (110,000 )      
Payment of preference stock dividends
    (4,652 )     (4,652 )
Payment of common stock dividends
    (82,500 )     (78,225 )
Other financing activities
    (3,593 )     (3,280 )
 
           
Net cash provided from (used for) financing activities
    (81,336 )     59,268  
 
           
Net Change in Cash and Cash Equivalents
    896       93,675  
Cash and Cash Equivalents at Beginning of Period
    16,434       8,677  
 
           
Cash and Cash Equivalents at End of Period
  $ 17,330     $ 102,352  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $2,826 and $1,795 capitalized for 2011 and 2010, respectively)
  $ 36,427     $ 28,394  
Income taxes (net of refunds)
    (46,319 )     13,862  
Noncash transactions — accrued property additions at end of period
    15,820       28,670  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 17,330     $ 16,434  
Receivables —
               
Customer accounts receivable
    91,252       74,377  
Unbilled revenues
    58,813       64,697  
Under recovered regulatory clause revenues
    9,840       19,690  
Other accounts and notes receivable
    14,829       9,867  
Affiliated companies
    15,429       7,859  
Accumulated provision for uncollectible accounts
    (1,863 )     (2,014 )
Fossil fuel stock, at average cost
    128,283       167,155  
Materials and supplies, at average cost
    51,111       44,729  
Other regulatory assets, current
    22,491       20,278  
Prepaid expenses
    22,342       58,412  
Other current assets
    1,838       3,585  
 
           
Total current assets
    431,695       485,069  
 
           
Property, Plant, and Equipment:
               
In service
    3,813,901       3,634,255  
Less accumulated provision for depreciation
    1,108,710       1,069,006  
 
           
Plant in service, net of depreciation
    2,705,191       2,565,249  
Construction work in progress
    231,156       209,808  
 
           
Total property, plant, and equipment
    2,936,347       2,775,057  
 
           
Other Property and Investments
    16,343       16,352  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    52,219       46,357  
Prepaid pension costs
    9,414       7,291  
Other regulatory assets, deferred
    259,136       219,877  
Other deferred charges and assets
    35,318       34,936  
 
           
Total deferred charges and other assets
    356,087       308,461  
 
           
Total Assets
  $ 3,740,472     $ 3,584,939  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2011     2010  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $     $ 110,000  
Notes payable
    36,577       93,183  
Accounts payable —
               
Affiliated
    62,464       46,342  
Other
    53,842       68,840  
Customer deposits
    35,859       35,600  
Accrued taxes —
               
Accrued income taxes
    8,587       3,835  
Other accrued taxes
    25,014       7,944  
Accrued interest
    18,175       13,393  
Accrued compensation
    10,169       14,459  
Other regulatory liabilities, current
    33,080       27,060  
Liabilities from risk management activities
    10,205       9,415  
Other current liabilities
    21,015       19,766  
 
           
Total current liabilities
    314,987       449,837  
 
           
Long-term Debt
    1,235,344       1,114,398  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    454,530       382,876  
Accumulated deferred investment tax credits
    7,097       8,109  
Employee benefit obligations
    76,695       76,654  
Other cost of removal obligations
    213,113       204,408  
Other regulatory liabilities, deferred
    43,399       42,915  
Other deferred credits and liabilities
    164,752       132,708  
 
           
Total deferred credits and other liabilities
    959,586       847,670  
 
           
Total Liabilities
    2,509,917       2,411,905  
 
           
Preference Stock
    97,998       97,998  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - September 30, 2011: 4,142,717 shares
               
- December 31, 2010: 3,642,717 shares
    353,060       303,060  
Paid-in capital
    541,706       538,375  
Retained earnings
    240,088       236,328  
Accumulated other comprehensive loss
    (2,297 )     (2,727 )
 
           
Total common stockholder’s equity
    1,132,557       1,075,036  
 
           
Total Liabilities and Stockholder’s Equity
  $ 3,740,472     $ 3,584,939  
 
           
The accompanying notes as they relate to Gulf 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
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
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 constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel prices, and storm restoration costs. Appropriately balancing required costs and capital 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.
On July 8, 2011, Gulf Power filed a petition with the Florida PSC requesting an increase in retail rates and charges to the extent necessary to generate additional gross annual revenues in the amount of $93.5 million. The requested increase is expected to provide a reasonable opportunity for Gulf Power to earn a retail rate of return on common equity of 11.7%. The Florida PSC is expected to make a decision on this matter in the first quarter 2012.
On August 23, 2011, the Florida PSC approved Gulf Power’s request for an interim retail rate increase of $38.5 million per year, to be operative beginning with billings based on meter readings on and after September 22, 2011 and continuing through the effective date of the Florida PSC’s decision on Gulf Power’s petition for the permanent increase. The interim rates are subject to refund pending the outcome of the permanent retail base rate proceeding.
RESULTS OF OPERATIONS
Net Income
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(1.7)   (3.9)   $(14.2)   (14.2)
 
Gulf Power’s net income after dividends on preference stock for the third quarter 2011 was $41.2 million compared to $42.9 million for the corresponding period in 2010. The decrease was primarily due to an increase in other operations and maintenance expenses for the third quarter 2011, partially offset by higher wholesale capacity revenues from non-affiliates.
Gulf Power’s net income after dividends on preference stock for year-to-date 2011 was $86.3 million compared to $100.5 million for the corresponding period in 2010. The decrease was primarily due to an increase in other operations and maintenance expenses for year-to-date 2011, relatively cooler weather in the third quarter 2011 primarily in the month of September compared to the third quarter 2010, and significantly colder weather in the first quarter 2010. These decreases were partially offset by an increase in AFUDC equity, which is non-taxable.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(34.6)   (8.7)   $(64.1)   (6.3)
 
In the third quarter 2011, retail revenues were $362.1 million compared to $396.7 million for the corresponding period in 2010. For year-to-date 2011, retail revenues were $957.4 million compared to $1.02 billion for the corresponding period in 2010.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
  2011   2011
    (in millions)   (% change)   (in millions)   (% change)
 
Retail - prior year
  $ 396.7             $ 1,021.5          
Estimated change in -
                               
Rates and pricing
    (0.1 )     (0.0 )     (4.0 )     (0.4 )
Sales growth (decline)
    2.4       0.6       5.7       0.6  
Weather
    (3.1 )     (0.8 )     (11.0 )     (1.1 )
Fuel and other cost recovery
    (33.8 )     (8.5 )     (54.8 )     (5.4 )
 
Retail - current year
  $ 362.1       (8.7 )%   $ 957.4       (6.3 )%
 
Revenues associated with changes in rates and pricing was relatively flat in the third quarter 2011 due to lower recoverable costs under Gulf Power’s environmental cost recovery clause due to lower coal generation in the third quarter 2011, partially offset by an increase related to interim retail rate revenues. See FUTURE EARNINGS POTENTIAL – “Florida PSC Matters – Retail Base Rate Case” herein for additional information.
Revenues associated with changes in rates and pricing decreased year-to-date 2011 when compared to the corresponding period in 2010 primarily due to lower recoverable costs under Gulf Power’s environmental cost recovery clause due to lower coal generation, partially offset by an increase related to interim retail rate revenues.
Annually, Gulf Power petitions the Florida PSC for recovery of projected environmental compliance 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 Matters – 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 increased in the third quarter 2011 when compared to the corresponding period in 2010. Weather-adjusted KWH energy sales to residential and commercial customers decreased 0.3% and 2.2%, respectively, due to lower use per customer. KWH energy sales to industrial customers increased 9.8% primarily due to the addition of a new large customer and a billing adjustment recorded in July 2011.
Revenues attributable to changes in sales increased for year-to-date 2011 when compared to the corresponding period in 2010. Weather-adjusted KWH energy sales to residential customers increased 1.1% due to an increase in customers and higher use per customer. The change in weather-adjusted KWH energy sales to commercial customers was relatively flat. KWH energy sales to industrial customers increased 8.8% primarily due to the addition of a new large customer and changes in customer production levels.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues attributable to changes in weather decreased in the third quarter 2011 when compared to the corresponding period for 2010 due to relatively cooler weather in the third quarter 2011 primarily in the month of September compared to the third quarter 2010.
Revenues attributable to changes in weather decreased year-to-date 2011 when compared to the corresponding period for 2010 due to relatively cooler weather in the third quarter 2011 primarily in the month of September compared to the third quarter 2010, and significantly colder weather in the first quarter 2010.
Fuel and other cost recovery revenues decreased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 primarily due to lower recoverable fuel and purchased power expenses. Fuel and other cost recovery revenues include fuel expenses, the energy component of purchased power costs, and purchased power capacity 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 – “Florida PSC Matters – 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 Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$2.7   8.7   $17.8   20.7
 
Wholesale revenues from non-affiliates are predominantly unit power sales under long-term contracts to other Florida and Georgia 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. Wholesale revenues from non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Gulf Power and Southern Company system-owned generation, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
In the third quarter 2011, wholesale revenues from non-affiliates were $33.9 million compared to $31.2 million for the corresponding period in 2010. The increase was primarily due to higher energy revenues related to a 7.2% increase in KWH energy sales and a 12.9% increase in price related to higher capacity rates in the third quarter 2011.
For year-to-date 2011, wholesale revenues from non-affiliates were $103.8 million compared to $86.0 million for the corresponding period in 2010. The increase was primarily due to higher energy revenues related to a 9.2% increase in KWH energy sales and a 30.2% increase in price related to higher capacity rates as a result of contracts effective in June 2010.
Wholesale Revenues – Affiliates
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$14.8   39.1   $(8.6)   (9.7)
 
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.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2011, wholesale revenues from affiliates were $52.8 million compared to $38.0 million for the corresponding period in 2010. The increase was primarily due to higher energy revenues related to a 63.9% increase in KWH energy sales as a result of increased utilization of Gulf Power generation to serve Southern Company system territorial demand. The increase was partially offset by a 15.1% decrease in price related to lower Gulf Power energy rates in the third quarter 2011.
For year-to-date 2011, wholesale revenues from affiliates were $79.8 million compared to $88.4 million for the corresponding period in 2010. The decrease was primarily due to decreased energy revenues related to a 6.7% decrease in KWH sales as a result of less Gulf Power generation being utilized to serve Southern Company system territorial demand and a 2.9% decrease in price related to lower Gulf Power energy rates for year-to-date 2011.
Other Revenues
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$1.6   9.0   $3.5   7.3
 
In the third quarter 2011, other revenues were $19.2 million compared to $17.6 million for the corresponding period in 2010. For year-to-date 2011, other revenues were $50.9 million compared to $47.4 million for the corresponding period in 2010. The increases were primarily due to increases in revenues from other energy services.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2011   Year-to-Date 2011
    vs.   vs.
    Third Quarter 2010   Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
 
Fuel*
  $ (16.7 )     (7.0 )   $ (54.4 )     (9.3 )
Purchased power – non-affiliates
    7.3       57.0       3.3       9.6  
Purchased power – affiliates
    (10.3 )     (51.0 )     (12.6 )     (24.4 )
                     
Total fuel and purchased power expenses
  $ (19.7 )           $ (63.7 )        
                     
     
*   Fuel includes fuel purchased by Gulf Power for tolling agreements where power is generated by the provider and is included in purchased power when determining the average cost of purchased power.
In the third quarter 2011, total fuel and purchased power expenses were $250.3 million compared to $270.0 million for the corresponding period in 2010. The net decrease in fuel and purchased power expenses was due to a $55.7 million decrease in the average cost of purchased power and a $10.6 million decrease in the average cost of fuel, partially offset by a $46.6 million net increase related to total KWHs generated and purchased.
For year-to-date 2011, total fuel and purchased power expenses were $607.8 million compared to $671.5 million for the corresponding period in 2010. The net decrease in fuel and purchased power expenses was due to a $35.6 million decrease in the average cost of purchased power, a $26.1 million decrease in the average cost of fuel, and a $2.0 million net decrease related to total KWHs generated and 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. See FUTURE EARNINGS POTENTIAL – “Florida PSC Matters – Fuel Cost Recovery” herein for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Gulf Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter     Third Quarter     Percent     Year-to-Date     Year-to-Date     Percent  
Average Cost   2011     2010     Change     2011     2010     Change  
    (cents per net KWH)             (cents per net KWH)          
 
Fuel
    4.79       5.09       (5.9)       4.77       5.04       (5.4)  
Purchased power
    4.70       7.93       (40.7)       4.86       5.99       (18.9)  
 
In the third quarter 2011, fuel expense was $220.3 million compared to $237.0 million for the corresponding period in 2010. The decrease was primarily due to a 24.0% decrease in KWHs generated from Gulf Power’s coal-fired resources and a 7.5% decrease in the average cost of natural gas per KWH generated.
For year-to-date 2011, fuel expense was $530.8 million compared to $585.2 million for the corresponding period in 2010. The decrease was primarily due to a 21.0% decrease in KWHs generated from Gulf Power’s coal-fired resources and a 15.3% decrease in the average cost of natural gas per KWH generated.
Non-Affiliates
In the third quarter 2011, purchased power expense from non-affiliates was $20.0 million compared to $12.7 million for the corresponding period in 2010. The increase was primarily due to a 168.8% increase in the volume of KWHs purchased, partially offset by a 27.4% decrease in the average cost per KWH purchased.
For year-to-date 2011, purchased power expense from non-affiliates was $37.9 million compared to $34.6 million for the corresponding period in 2010. The increase was primarily due to a 36.4% increase in the volume of KWHs purchased, partially offset by a 12.8% decrease in the average cost per KWH purchased.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and the availability of Southern Company system generation.
Affiliates
In the third quarter 2011, purchased power expense from affiliates was $10.0 million compared to $20.3 million for the corresponding period in 2010. The decrease was primarily due to a 61.6% decrease in the volume of KWHs purchased, partially offset by a 26.7% increase in the average cost per KWH purchased.
For year-to-date 2011, purchased power expense from affiliates was $39.1 million compared to $51.7 million for the corresponding period in 2010. The decrease was primarily due to a 25.0% decrease in the average cost per KWH purchased.
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 or other contractual agreements, all as approved by the FERC.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$6.9   10.4   $25.0   12.4
 
In the third quarter 2011, other operations and maintenance expenses were $74.1 million compared to $67.2 million for the corresponding period in 2010. The increase was primarily due to increases in expenses for labor, routine and planned outage maintenance at generation facilities, energy service projects, and marketing programs. The increased expenses from energy service projects did not have a material impact on earnings since they were offset by associated revenues.
For year-to-date 2011, other operations and maintenance expenses were $227.2 million compared to $202.2 million for the corresponding period in 2010. The increase was primarily due to increases in expenses for routine and planned outage maintenance at generation facilities, labor, and energy service projects. The increased expenses from energy service projects did not have a material impact on earnings since they were offset by associated revenues.
Depreciation and Amortization
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(1.3)   (4.0)   $6.1   6.7
 
In the third quarter 2011, depreciation and amortization was $32.7 million compared to $34.0 million for the corresponding period in 2010. The decrease was primarily due to new depreciation rates implemented in August 2010, partially offset by net additions to transmission and distribution facilities.
For year-to-date 2011, depreciation and amortization was $96.7 million compared to $90.6 million for the corresponding period in 2010. The increase was primarily due to the addition of environmental control projects and other net additions to transmission and distribution facilities.
Allowance for Equity Funds Used During Construction
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$1.0   70.9   $2.6   57.4
 
In the third quarter 2011, AFUDC equity was $2.4 million compared to $1.4 million for the corresponding period in 2010. For year-to-date 2011, AFUDC equity was $7.1 million compared to $4.5 million for the corresponding period in 2010. The increases were primarily due to construction of environmental control projects at generating facilities.
Interest Expense, Net of Amounts Capitalized
             

Third Quarter 2011 vs. Third Quarter 2010
 
Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$1.4   10.1   $4.9   12.9
 
In the third quarter 2011, interest expense, net of amounts capitalized was $15.2 million compared to $13.8 million for the corresponding period in 2010. For year-to-date 2011, interest expense, net of amounts capitalized was $43.2 million compared to $38.3 million for the corresponding period in 2010. The increases were primarily due to increased long-term debt levels resulting from the issuance of additional senior notes.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
             
Third Quarter 2011 vs. Third Quarter 2010
  Year-to-Date 2011 vs. Year-to-Date 2010
 
(change in millions)   (% change)   (change in millions)   (% change)
$(0.2)   (0.5)   $(7.6)   (12.8)
 
In the third quarter 2011, income taxes were $25.5 million compared to $25.7 million for the corresponding period in 2010. For year-to-date 2011, income taxes were $52.5 million compared to $60.1 million for the corresponding period in 2010. The decreases were primarily due to lower pre-tax earnings.
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 constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining 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 or decline in Gulf Power’s service area. Changes in economic conditions impact sales for Gulf Power, and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. 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. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. 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.
Gulf Power has completed a preliminary assessment of the EPA’s proposed Utility Maximum Achievable Control Technology (MACT), water quality, and coal combustion byproduct rules. See “Air Quality” and “Water Quality” below for additional information regarding the proposed Utility MACT and water quality rules. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Gulf Power in Item 7 of the Form 10-K for additional information regarding the proposed coal combustion byproducts rule. Although its analysis is preliminary, Gulf Power estimates the aggregate capital costs for compliance with these rules to be $1.9 billion through 2020 if the rules are adopted as proposed. Included in this amount is $373 million of estimated expenditures included in Gulf Power’s 2011-2013 base level capital budget described herein in anticipation of these rules. See FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” herein for additional information. These costs may arise from existing unit retirements, installation of additional environmental controls, the addition of new generating resources, and changing fuel sources for certain existing units. Gulf Power’s preliminary analysis further indicates that the short timeframe for compliance with these rules could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters will depend on the final form of the proposed rules and the outcome of any legal challenges to the rules and cannot be determined at this time.

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Carbon Dioxide Litigation
New York Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – New York Case” of Gulf Power in Item 7 and Note 3 of the financial statements of Gulf Power under “Environmental Matters – Carbon Dioxide Litigation – New York Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.
Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters – Carbon Dioxide Litigation – Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” of Gulf Power in Item 7 and Note 3 of the financial statements of Gulf Power under “Environmental Matters – Carbon Dioxide Litigation – Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies, including Gulf Power, and includes many of the same defendants that were involved in the earlier case. Gulf Power believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.
Air Quality
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 regulation of air quality.
On May 3, 2011, the EPA published a proposed rule, called Utility MACT, which would impose stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The proposed rule contains numeric emission limits for acid gases, mercury, and total particulate matter. Meeting the proposed limits would likely require additional emission control equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant to a court-approved consent decree, the EPA must issue a final rule by December 16, 2011. Compliance for existing sources would be required three years after the effective date of the final rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension which could be granted by the EPA or the states on a case-

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by-case basis if necessary. If finalized as proposed, compliance with this rule would require significant capital expenditures and compliance costs at many of Gulf Power’s facilities which could affect unit retirement and replacement decisions. In addition, results of operations, cash flows, and financial condition could be affected if the costs are not recovered through regulated rates. Further, there is uncertainty regarding the ability of the electric utility industry to achieve compliance with the requirements of the proposed rule within the compliance period, and the limited compliance period could negatively affect electric system reliability. The outcome of this rulemaking will depend on the requirements in the final rule and the outcome of any legal challenges and cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. The States of Alabama, Florida, Georgia, and Mississippi are subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program. The States of Alabama and Georgia are subject to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for the States of Alabama, Florida, Georgia, and Mississippi. The rule could have significant effects on Gulf Power, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including Gulf Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
Water Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at many of Gulf Power’s existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of Gulf Power’s facilities may be subject to significant additional capital expenditures and compliance costs that could affect future unit retirement and replacement decisions. Also, results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and 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
Florida PSC Matters
Retail Base Rate Case
On July 8, 2011, Gulf Power filed a petition with the Florida PSC requesting an increase in retail rates to the extent necessary to generate additional gross annual revenues in the amount of $93.5 million. The requested increase is expected to provide a reasonable opportunity for Gulf Power to earn a retail rate of return on common equity of 11.7%. The Florida PSC is expected to make a decision on this matter in the first quarter 2012. Gulf Power has calculated its revenue deficiency based on the projected period January 1, 2012 through December 31, 2012 which serves as the test year.
On August 23, 2011, the Florida PSC approved Gulf Power’s request for an interim retail rate increase of $38.5 million per year, effective beginning with billings based on meter readings on and after September 22, 2011 and continuing through the effective date of the Florida PSC’s decision on Gulf Power’s petition for the permanent increase. The interim rates are subject to refund pending the outcome of the permanent retail base rate proceeding.
The ultimate outcome of this matter cannot be determined at this time.
General
On November 1, 2011, the Florida PSC approved Gulf Power’s annual rate clause requests for its fuel, purchased power capacity, conservation, and environmental compliance cost recovery factors for 2012. The net effect of the approved changes is a 1.1% rate decrease for residential customers using 1,000 KWHs per month. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters” of Gulf Power in Item 7 and Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters – General,” respectively, in Item 8 of the Form 10-K for additional information.
Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. If the projected fuel cost over or under recovery balance at year-end exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate an adjustment to the fuel cost recovery factor is being requested.
In previous years, Gulf Power has experienced volatility in pricing of fuel commodities with higher than expected pricing for coal and volatile price swings in natural gas. Under recovered fuel costs at September 30, 2011 totaled $7.5 million, compared to $17.4 million at December 31, 2010. This amount is 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 will have no significant effect on Gulf Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters – Fuel Cost Recovery,” respectively, in Item 8 of the Form 10-K for additional information.
Purchased Power Capacity Recovery
Gulf Power has established purchased power capacity recovery cost rates as approved by the Florida PSC. If the projected purchased power capacity cost over or under recovery balance at year-end exceeds 10% of the projected purchased power capacity revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate an adjustment to the purchased power capacity cost recovery factor is being requested. Gulf Power filed such notice with the Florida PSC on August 19, 2011, but no adjustment to the 2011 factor was requested.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Over recovered purchased power capacity costs at September 30, 2011 totaled $3.5 million compared to $4.4 million at December 31, 2010. This amount is included in other regulatory liabilities, current on Gulf Power’s Condensed Balance Sheets herein. Purchased power capacity 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 will have no significant effect on Gulf Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Purchased Power Capacity Recovery” of Gulf Power in Item 7 and Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters – Purchased Power Capacity Recovery,” respectively, in Item 8 of the Form 10-K for additional information.
Environmental Cost Recovery
In July 2010, Mississippi Power filed a request for a certificate of public convenience and necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $625 million and is scheduled for completion in early 2015. Hearings on the certificate request were held by the Mississippi PSC on January 25, 2011. On May 5, 2011, the Mississippi PSC approved up to $19.5 million (with respect to Mississippi Power’s ownership portion) in additional spending for 2011 for the scrubber project. A decision on a final order is not anticipated prior to issuance of the final Utility MACT rule in December 2011. The ultimate outcome of this matter cannot be determined at this time.
Over recovered environmental costs at September 30, 2011 totaled $16.9 million compared to $10.4 million at December 31, 2010. This amount is included in other regulatory liabilities, current on Gulf Power’s Condensed Balance Sheets herein. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Environmental Cost Recovery” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.
Energy Conservation Cost Recovery
Every five years, the Florida PSC establishes new numeric conservation goals covering a 10-year period for utilities to reduce annual energy and seasonal peak demand using demand-side management (DSM) programs. After the goals are established, utilities develop plans and programs to meet the approved goals. The costs for these programs are recovered through rates established annually in the Energy Conservation Cost Recovery clause.
The most recent goal setting process established new DSM goals for the period 2010-2019. The new goals are significantly larger than the goals established in the previous five-year cycle due to a change in the cost-effectiveness test on which the Florida PSC relies to set the goals. Throughout 2010, Gulf Power engaged in a process at the Florida PSC to develop plans and programs to meet the new DSM goals. The DSM program standards were approved in April 2011, which allow Gulf Power to implement its DSM programs designed to meet the new goals. Higher cost recovery rates and achievement of the new DSM goals may result in reduced sales of electricity which could negatively impact results of operations, cash flows, and financial condition if base rates cannot be adjusted on a timely basis.
See BUSINESS under “Rate Matters – Integrated Resource Planning – Gulf Power” in Item 1 of the Form 10-K for a discussion of Gulf Power’s 10-year site plan filed on an annual basis with the Florida PSC.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters cannot be determined at this time.
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects to be placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Gulf Power through 2013. On March 29, 2011, the IRS issued additional guidance and safe harbors relating to the 50% and 100% bonus depreciation rules. Based on recent discussions with the IRS, Gulf Power estimates the potential increased cash flow for 2011 to be between approximately $40 million and $50 million. The ultimate outcome of this matter cannot be determined at this time.
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, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 ultimate liabilities, if any, arising from such current proceedings would have a material 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.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with GAAP. 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, Unbilled Revenues, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Power’s financial condition remained stable at September 30, 2011. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital” and “Financing Activities” herein for additional information.
Net cash provided from operating activities totaled $325.3 million for the first nine months of 2011 compared to $255.0 million for the corresponding period in 2010. The $70.3 million increase was primarily due to a $41.6 million increase from prepaid income taxes primarily related to bonus depreciation and a $27.9 million increase related to payments from customer receivables. Net cash used for investing activities totaled $243.1 million in the first nine months of 2011 compared to $220.6 million for the corresponding period in 2010. The $22.4 million increase in cash used was primarily due to gross property additions. Net cash used for financing activities totaled $81.3 million for the first nine months of 2011 compared to $59.3 million provided from financing activities for the corresponding period in 2010. The $140.6 million change was primarily due to a $175.0 million decrease in issuances of pollution control revenue bonds and a $110.0 million increase in redemptions of other long-term debt in 2011, partially offset by $139.9 million fewer redemptions of senior notes in 2010. Fluctuations in cash flow from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first nine months of 2011 include a net increase of $161.3 million in property, plant, and equipment, primarily related to environmental control projects; the issuance of $125.0 million in senior notes; an increase of $71.7 million in accumulated deferred income taxes related to property; the issuance of common stock to Southern Company for $50 million; a decrease of $110.0 million in securities due within one year; and a decrease of $36.1 million in prepaid expenses, primarily related to prepaid income taxes.
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 description of Gulf Power’s capital requirements for its construction program, maturities of long-term debt, as well as the related interest, leases, derivative obligations, preference stock dividends, purchase commitments, and trust funding requirements. There are no requirements through September 30, 2012 to fund maturities of long-term debt.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The construction program of Gulf Power is estimated to include a base level investment of $381.5 million, $395.5 million, and $384.1 million for 2011, 2012, and 2013, respectively. Included in these estimated amounts are environmental expenditures to comply with existing statutes and regulations of $175.9 million, $227.8 million, and $214.0 million for 2011, 2012, and 2013, respectively. In addition, Gulf Power estimates that potential incremental investments to comply with anticipated new environmental regulations are up to $17.1 million for 2011, up to $55.6 million for 2012, and up to $107.3 million for 2013. If the EPA’s proposed Utility MACT rule is finalized as proposed, Gulf Power estimates the potential investments for new environmental regulations may exceed these estimates. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental statutes and regulations; changes in generating plants, including unit retirements and replacements, to meet new regulatory requirements; changes in FERC rules and regulations; Florida PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; 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
Gulf Power plans 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, short-term debt, security issuances, a long-term bank note, 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 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, Gulf Power had at September 30, 2011 cash and cash equivalents of approximately $17.3 million and unused committed credit arrangements with banks of $240 million. During the third quarter, Gulf Power reviewed its lines of credit program and made changes resulting in a net decrease of $40 million. The changes also included the renewal of two lines of credit totaling $60 million for an extended term of three years. Of the unused credit arrangements, $20 million expire in 2011, $55 million expire in 2012, and $165 million expire in 2014. Of the credit arrangements expiring on or before September 30, 2012, $55 million contain provisions allowing one-year term loans executable at expiration. Gulf Power expects to renew its credit arrangements, as needed, prior to expiration. During the third quarter 2011, Gulf Power repaid a $30 million draw on a line of credit. These credit arrangements provide liquidity support to Gulf Power’s commercial paper borrowings and $69 million are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At September 30, 2011, Gulf Power had $33 million of commercial paper borrowings outstanding with a weighted average interest rate of 0.2% per annum. During the third quarter 2011, Gulf Power had an average of $58 million of short-term borrowings outstanding with a weighted average interest rate of 0.4% per annum and the maximum amount outstanding was $99 million. Management believes that the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, and cash.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, and energy price risk management. At September 30, 2011, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $125 million. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $538 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Gulf Power’s ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Gulf Power’s market risk exposure relative to interest rate changes for the third quarter 2011 has not changed materially compared with the December 31, 2010 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Gulf Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation and other various cost recovery mechanisms, Gulf Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. Gulf Power continues to manage a financial hedging program for fuel purchased to operate its electric generating fleet implemented per the guidelines of the Florida PSC. As such, Gulf Power had no material change in market risk exposure for the third quarter 2011 when compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter   Year-to-Date
    2011   2011
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (9 )   $ (11 )
Contracts realized or settled
    3       8  
Current period changes(a)
    (11 )     (14 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (17 )   $ (17 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The change in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 was a decrease of $8 million and a decrease of $6 million, respectively, substantially all of which is due to natural gas positions. The change is attributable to both the volume of mmBtu and prices of natural gas. At September 30, 2011, Gulf Power had a net hedge volume of 26.1 million mmBtu with a weighted average contract cost approximately $0.67 per mmBtu above market prices, compared to 22.9 million mmBtu at June 30, 2011 with a weighted average contract cost approximately $0.42 per mmBtu above market prices and compared to 19.6 million mmBtu at December 31, 2010 with a weighted average contract cost approximately $0.67 per mmBtu above market prices.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulatory hedges relate to Gulf Power’s fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clause.
Unrealized pre-tax gains and losses recognized in income for the three and nine months ended September 30, 2011 and 2010 for energy-related derivative contracts that are not hedges were not material.
Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
    September 30, 2011
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
 
 
  (in millions)
Level 1
  $     $     $     $  
Level 2
    (17 )     (10 )     (6 )     (1 )
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (17 )   $ (10 )   $ (6 )   $ (1 )
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Gulf Power. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 and Note 1 under “Financial Instruments” and Note 10 to the financial statements of Gulf Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In January 2011, Gulf Power issued to Southern Company 500,000 shares of common stock, without par value, and realized proceeds of $50 million. The 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 program.
In May 2011, Gulf Power issued $125 million aggregate principal amount of Series 2011A 5.75% Senior Notes due June 1, 2051. The net proceeds from the sale of the Series 2011A Senior Notes were used to repay a $110 million bank note, to repay a portion of Gulf Power’s outstanding short-term indebtedness, and for general corporate purposes, including Gulf Power’s continuous construction program.
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 233,298     $ 230,977     $ 620,777     $ 620,658  
Wholesale revenues, non-affiliates
    78,147       78,409       215,811       223,499  
Wholesale revenues, affiliates
    9,804       13,025       25,407       31,636  
Other revenues
    4,517       4,672       13,088       11,749  
 
                       
Total operating revenues
    325,766       327,083       875,083       887,542  
 
                       
Operating Expenses:
                               
Fuel
    157,961       154,607       402,689       388,979  
Purchased power, non-affiliates
    2,314       2,547       4,660       7,666  
Purchased power, affiliates
    8,504       10,902       36,721       60,113  
Other operations and maintenance
    65,851       65,953       200,730       205,055  
Depreciation and amortization
    19,668       20,106       59,876       57,567  
Taxes other than income taxes
    18,297       17,935       53,029       53,568  
 
                       
Total operating expenses
    272,595       272,050       757,705       772,948  
 
                       
Operating Income
    53,171       55,033       117,378       114,594  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    7,291       1,490       15,413       2,018  
Interest income
    167       49       910       122  
Interest expense, net of amounts capitalized
    (3,856 )     (4,886 )     (15,401 )     (17,011 )
Other income (expense), net
    257       1,099       (759 )     3,272  
 
                       
Total other income and (expense)
    3,859       (2,248 )     163       (11,599 )
 
                       
Earnings Before Income Taxes
    57,030       52,785       117,541       102,995  
Income taxes
    18,578       18,759       38,323       37,631  
 
                       
Net Income
    38,452       34,026       79,218       65,364  
Dividends on Preferred Stock
    433       433       1,299       1,299  
 
                       
Net Income After Dividends on Preferred Stock
  $ 38,019     $ 33,593     $ 77,919     $ 64,065  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 38,019     $ 33,593     $ 77,919     $ 64,065  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(5,630), $4, $(5,624), and $8, respectively
    (9,090 )     7       (9,079 )     13  
 
                       
Comprehensive Income
  $ 28,929     $ 33,600     $ 68,840     $ 64,078  
 
                       
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in thousands)  
Operating Activities:
               
Net income
  $ 79,218     $ 65,364  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    64,329       60,959  
Deferred income taxes
    35,225       (4,557 )
Investment tax credits received
    51,761       14,352  
Allowance for equity funds used during construction
    (15,413 )     (2,018 )
Pension, postretirement, and other employee benefits
    3,327       6,657  
Generation construction screening costs
          (50,554 )
Stock based compensation expense
    1,302       1,053  
Other, net
    (7,642 )     (720 )
Changes in certain current assets and liabilities —
               
-Receivables
    (5,295 )     (21,003 )
-Fossil fuel stock
    2,345       10,163  
-Materials and supplies
    (1,442 )     (222 )
-Prepaid income taxes
    (18,762 )      
-Other current assets
    2,295       (2,503 )
-Accounts payable
    21,711       25,819  
-Accrued taxes
    (3,751 )     7,630  
-Accrued compensation
    (4,514 )     427  
-Over recovered regulatory clause revenues
    (17,754 )     14,939  
-Other current liabilities
    (296 )     (442 )
 
           
Net cash provided from operating activities
    186,644       125,344  
 
           
Investing Activities:
               
Property additions
    (605,710 )     (125,980 )
Cost of removal, net of salvage
    (6,931 )     (7,613 )
Construction payables
    70,909       6,903  
Capital grant proceeds
    139,921        
Distribution of restricted cash
    50,000        
Other investing activities
    (3,399 )     (6,693 )
 
           
Net cash used for investing activities
    (355,210 )     (133,383 )
 
           
Financing Activities:
               
Proceeds —
               
Capital contributions from parent company
    199,782       3,920  
Other long-term debt issuances
    115,000       125,000  
Redemptions —
               
Capital leases
    (1,067 )     (988 )
Other long-term debt
    (130,000 )      
Payment of preferred stock dividends
    (1,299 )     (1,299 )
Payment of common stock dividends
    (56,625 )     (51,450 )
Other financing activities
    (377 )     (614 )
 
           
Net cash provided from financing activities
    125,414       74,569  
 
           
Net Change in Cash and Cash Equivalents
    (43,152 )     66,530  
Cash and Cash Equivalents at Beginning of Period
    160,779       65,025  
 
           
Cash and Cash Equivalents at End of Period
  $ 117,627     $ 131,555  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $5,136 and $1,482 capitalized for 2011 and 2010, respectively)
  $ 13,956     $ 16,726  
Income taxes (net of refunds)
    (33,276 )     11,345  
Noncash transactions — accrued property additions at end of period
    109,732       10,592  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 117,627     $ 160,779  
Restricted cash and cash equivalents
          50,000  
Receivables —
               
Customer accounts receivable
    45,269       37,532  
Unbilled revenues
    28,753       31,010  
Other accounts and notes receivable
    7,765       11,220  
Affiliated companies
    22,282       17,837  
Accumulated provision for uncollectible accounts
    (709 )     (638 )
Fossil fuel stock, at average cost
    109,895       112,240  
Materials and supplies, at average cost
    30,114       28,671  
Other regulatory assets, current
    59,143       63,896  
Prepaid income taxes
    71,749       59,596  
Other current assets
    28,602       19,057  
 
           
Total current assets
    520,490       591,200  
 
           
Property, Plant, and Equipment:
               
In service
    2,445,523       2,392,477  
Less accumulated provision for depreciation
    988,073       971,559  
 
           
Plant in service, net of depreciation
    1,457,450       1,420,918  
Construction work in progress
    676,762       274,585  
 
           
Total property, plant, and equipment
    2,134,212       1,695,503  
 
           
Other Property and Investments
    6,231       5,900  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    28,988       18,065  
Other regulatory assets, deferred
    128,049       132,420  
Other deferred charges and assets
    22,086       33,233  
 
           
Total deferred charges and other assets
    179,123       183,718  
 
           
Total Assets
  $ 2,840,056     $ 2,476,321  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2011     2010  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 241,002     $ 256,437  
Accounts payable —
               
Affiliated
    54,353       51,887  
Other
    148,391       59,295  
Customer deposits
    13,445       12,543  
Accrued taxes —
               
Accrued income taxes
    9,636       4,356  
Other accrued taxes
    42,964       51,709  
Accrued interest
    5,502       5,933  
Accrued compensation
    11,563       16,076  
Other regulatory liabilities, current
    5,523       6,177  
Over recovered regulatory clause liabilities
    59,292       77,046  
Liabilities from risk management activities
    43,179       27,525  
Other current liabilities
    18,651       20,115  
 
           
Total current liabilities
    653,501       589,099  
 
           
Long-term Debt
    461,531       462,032  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    316,675       281,967  
Deferred credits related to income taxes
    11,660       11,792  
Accumulated deferred investment tax credits
    84,449       33,678  
Employee benefit obligations
    115,282       113,964  
Other cost of removal obligations
    121,972       111,614  
Other regulatory liabilities, deferred
    60,574       58,814  
Other deferred credits and liabilities
    30,162       43,213  
 
           
Total deferred credits and other liabilities
    740,774       655,042  
 
           
Total Liabilities
    1,855,806       1,706,173  
 
           
Redeemable 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
    594,677       392,790  
Retained earnings
    328,179       306,885  
Accumulated other comprehensive income (loss)
    (9,077 )     2  
 
           
Total common stockholder’s equity
    951,470       737,368  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,840,056     $ 2,476,321  
 
           
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
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
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 constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel prices, capital expenditures, and restoration following major storms. Mississippi Power has various regulatory mechanisms that operate to address cost recovery. 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 after dividends on preferred stock. 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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$4.4
  13.2   $13.8   21.6
       
Mississippi Power’s net income after dividends on preferred stock for the third quarter 2011 was $38.0 million compared to $33.6 million for the corresponding period in 2010. The increase in net income after dividends on preferred stock for the third quarter 2011 was primarily due to an increase in AFUDC equity and an increase in wholesale energy revenues, partially offset by a decrease in retail base revenues.
Mississippi Power’s net income after dividends on preferred stock for year-to-date 2011 was $77.9 million compared to $64.1 million for the corresponding period in 2010. The increase in net income after dividends on preferred stock for year-to-date 2011 was primarily due to an increase in AFUDC equity, a decrease in other operations and maintenance expenses, and an increase in wholesale energy revenues, partially offset by a decrease in retail base revenues and a decrease in other income (expense), net.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$2.3   1.0   $0.1   N/M
       
N/M — Not meaningful        
In the third quarter 2011, retail revenues were $233.3 million compared to $231.0 million for the corresponding period in 2010. For year-to-date 2011, retail revenues were $620.8 million compared to $620.7 million for the corresponding period in 2010.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2011   2011
 
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 231.0             $ 620.7          
Estimated change in –
                               
Rates and pricing
    (0.2 )     (0.1 )     1.3       0.2  
Sales growth (decline)
    (1.4 )     (0.6 )     2.9       0.5  
Weather
    (2.4 )     (1.1 )     (6.4 )     (1.0 )
Fuel and other cost recovery
    6.3       2.7       2.3       0.4  
 
Retail – current year
  $ 233.3       0.9 %   $ 620.8       0.1 %
         
Revenues associated with changes in rates and pricing in the third quarter 2011 when compared to the corresponding period in 2010 were not material.
Revenues associated with changes in rates and pricing increased year-to-date 2011 when compared to the corresponding period in 2010 due to an increase of $1.3 million related to the ECO Plan rate.
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Environmental Compliance Overview Plan” of Mississippi Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – “Mississippi PSC Matters – Retail Regulatory Matters – Environmental Compliance Overview Plan” herein for additional information.
Revenues attributable to changes in sales decreased in the third quarter 2011 when compared to the corresponding period in 2010, primarily resulting from fewer retail customers and lower sales. Weather-adjusted KWH energy sales to the residential and commercial customers decreased 1.6% and 3.3%, respectively, when compared to the corresponding period in 2010 primarily due to a decrease in residential customers and continuing weak economic conditions. KWH energy sales to industrial customers increased 3.7% due to the continued recovery of some large industrial customers.
Revenues attributable to changes in sales increased for year-to-date 2011 when compared to the corresponding period in 2010 primarily due to an increase in sales to commercial and industrial customers. Weather-adjusted KWH energy sales to residential customers decreased 0.1% when compared to the corresponding period in 2010. Weather-adjusted KWH energy sales to commercial customers increased 2.5% when compared to the corresponding period in 2010. The increase in commercial sales was primarily due to lower commercial demand in early 2010. KWH energy sales to industrial customers increased 4.3% due to increased production for some of the larger customers.
Revenues attributable to changes in weather decreased in the third quarter 2011 when compared to the corresponding period for 2010 primarily due to relatively cooler weather primarily in the month of September compared to the third quarter 2010.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues attributable to changes in weather decreased year-to-date 2011 when compared to the corresponding period for 2010 primarily due to significantly colder weather in the first quarter 2010.
Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2011 when compared to the corresponding periods in 2010 primarily as a result of higher recoverable fuel costs. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel portion of wholesale revenues from energy sold to customers outside Mississippi Power’s service territory. 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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.3)
  (0.3)   $(7.7)   (3.4)
       
Wholesale revenues from non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power and Southern Company system-owned generation, demand for energy within the Southern Company system service territory, and the availability of Southern Company system generation. Increases and decreases in revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income.
In the third quarter 2011, wholesale revenues from non-affiliates were $78.1 million compared to $78.4 million for the corresponding period in 2010. The decrease was primarily due to a $2.6 million decrease in sales and a $0.4 million decrease in capacity revenues, partially offset by a $2.7 million increase associated with higher prices resulting from the higher marginal cost of fuel.
For year-to-date 2011, wholesale revenues from non-affiliates were $215.8 million compared to $223.5 million for the corresponding period in 2010. The decrease was primarily due to a $6.8 million decrease in sales, a $0.6 million decrease associated with lower prices resulting from the lower marginal cost of fuel, and a $0.3 million decrease in capacity revenues.
Wholesale Revenues – Affiliates
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(3.2)   (24.7)   $(6.2)   (19.7)
       
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 third quarter 2011, wholesale revenues from affiliates were $9.8 million compared to $13.0 million for the corresponding period in 2010. The decrease was primarily due to a $2.9 million decrease in energy revenues, of which $2.1 million was associated with decreased sales and $0.8 million was associated with lower prices. Capacity revenues decreased $0.3 million.
For year-to-date 2011, wholesale revenues from affiliates were $25.4 million compared to $31.6 million for the corresponding period in 2010. The decrease was primarily due to a $3.7 million decrease in energy revenues, of which $2.8 million was associated with lower prices and $0.9 million was associated with decreased sales. Capacity revenues decreased $2.5 million.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.2)   (3.3)   $1.4   11.4
       
In the third quarter 2011, other revenues were $4.5 million compared to $4.7 million for the corresponding period in 2010. The decrease was primarily due to a $0.5 million gain on the sale of equipment which occurred in 2010, partially offset by a $0.4 million increase in transmission revenues.
For year-to-date 2011, other revenues were $13.1 million compared to $11.7 million for the corresponding period in 2010. The increase was primarily due to a $1.4 million increase in transmission revenues.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2011   Year-to-Date 2011
    vs.   vs.
    Third Quarter 2010   Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 3.4       2.2     $ 13.7       3.5  
Purchased power — non-affiliates
    (0.2 )     (9.1 )     (3.0 )     (39.2 )
Purchased power — affiliates
    (2.4 )     (22.0 )     (23.4 )     (38.9 )
                       
Total fuel and purchased power expenses
  $ 0.8             $ (12.7 )        
                       
In the third quarter 2011, total fuel and purchased power expenses were $168.8 million compared to $168.0 million for the corresponding period in 2010. The increase was primarily due to a $5.1 million increase in the cost of fuel and purchased power, partially offset by a $4.3 million decrease in total KWHs generated and purchased.
For year-to-date 2011, total fuel and purchased power expenses were $444.1 million compared to $456.8 million for the corresponding period in 2010. The decrease was primarily due to an $11.6 million decrease in the cost of fuel and purchased power and a $1.1 million decrease related to total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL — “Mississippi PSC Matters — Retail Regulatory Matters” herein for additional information.
Details of Mississippi Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2011   2010   Change   2011   2010   Change
 
    (cents per net KWH)           (cents per net KWH)        
Fuel
    4.22       4.08       3.4       4.11       4.21       (2.4 )
Purchased power
    4.05       4.04       0.2       3.60       3.72       (3.2 )
 
In the third quarter 2011, fuel expense was $158.0 million compared to $154.6 million for the corresponding period in 2010. The increase was primarily due to a 3.4% increase in the average cost of fuel generated per KWH primarily resulting from higher coal prices in the third quarter 2011 compared to the corresponding period in 2010, partially offset by a 1.1% decrease in generation from Mississippi Power facilities resulting from lower energy demand.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2011, fuel expense was $402.6 million compared to $388.9 million for the corresponding period in 2010. The increase was primarily due to a 6.1% increase in generation from Mississippi Power facilities resulting from higher energy demand, partially offset by a 2.4% decrease in the average cost of fuel generated per KWH resulting from lower gas prices.
Non-Affiliates
In the third quarter 2011, purchased power expense from non-affiliates was $2.3 million compared to $2.5 million for the corresponding period in 2010. The decrease was primarily the result of a 47.1% decrease in the average cost of purchased power per KWH, partially offset by a 71.8% increase in KWH volume purchased. The decrease in prices was due to a lower marginal cost of fuel while the increase in KWH volume purchased was a result of lower cost opportunity purchases.
For year-to-date 2011, purchased power expense from non-affiliates was $4.7 million compared to $7.7 million for the corresponding period in 2010. The decrease was primarily the result of an 11.1% decrease in KWH volume purchased and a 31.7% decrease in the average cost of purchased power per KWH. The decrease in KWH volume purchased was a result of higher cost opportunity purchases while the decrease in prices was due to a lower marginal cost of fuel.
Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy compared to the cost of 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 third quarter 2011, purchased power expense from affiliates was $8.5 million compared to $10.9 million for the corresponding period in 2010. The decrease was primarily due to a 29.2% decrease in KWH volume purchased, partially offset by a 10.2% increase in the average cost of purchased power per KWH.
For year-to-date 2011, purchased power expense from affiliates was $36.7 million compared to $60.1 million for the corresponding period in 2010. The decrease was primarily due to a 39.3% decrease in KWH volume purchased, partially offset by a 0.7% increase in the average cost of purchased power per KWH.
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
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.1)
  (0.2)   $(4.3)   (2.1)
       
In the third quarter 2011, other operations and maintenance expenses were $65.9 million compared to $66.0 million for the corresponding period in 2010. The decrease was primarily due to a $1.9 million decrease in labor costs, offset by a $1.8 million increase in generation-related environmental expenses.
For year-to-date 2011, other operations and maintenance expenses were $200.7 million compared to $205.0 million for the corresponding period in 2010. The decrease was primarily due to a $3.9 million decrease in generation maintenance expenses for several major scheduled outages and a $3.9 million decrease in labor costs, partially offset by a $1.1 million increase in transmission and distribution expenses related to overhead line maintenance and vegetation management costs, a $1.3 million increase in generation-related environmental expenses, and a $1.1 million increase in administrative and general expenses.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.4)   (2.2)   $2.3   4.0
       
In the third quarter 2011, depreciation and amortization was $19.7 million compared to $20.1 million for the corresponding period in 2010. The decrease was primarily due to a $1.0 million decrease in ECO Plan amortization, partially offset by a $0.7 million increase in depreciation resulting from an increase in plant in service.
For year-to-date 2011, depreciation and amortization was $59.9 million compared to $57.6 million for the corresponding period in 2010. The increase was primarily due to a $2.6 million increase in depreciation resulting from an increase in plant in service and a $0.5 million increase in asset retirement obligations (ARO) amortization resulting from the deferral of the gain on the settlement of an ARO, partially offset by a $0.6 million decrease in ECO Plan amortization.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$5.8   N/M   $13.4   N/M
       
N/M — Not meaningful        
In the third quarter 2011, AFUDC equity was $7.3 million compared to $1.5 million for the corresponding period in 2010. For year-to-date 2011, AFUDC equity was $15.4 million compared to $2.0 million for the corresponding period in 2010. These increases were primarily due to the construction of the Kemper IGCC which began in June 2010.
See Note 3 to the financial statements of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “Integrated Coal Gasification Combined Cycle” herein for additional information regarding the Kemper IGCC.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(1.0)   (21.1)   $(1.6)   (9.5)
       
In the third quarter 2011, interest expense, net of amounts capitalized was $3.9 million compared to $4.9 million for the corresponding period in 2010. The decrease was primarily due to a $0.9 million increase in capitalized AFUDC debt primarily associated with the Kemper IGCC, a $0.3 million increase in capitalized interest on the Kemper IGCC regulatory asset, a $0.2 million decrease in interest expense related to the assessment of interest in conjunction with a tax audit, and a $0.2 million decrease due to the redemption of long-term debt in March 2011, partially offset by a $0.6 million increase in interest expense associated with the issuances of new long-term debt in September 2010, December 2010, April 2011, and September 2011.
For year-to-date 2011, interest expense, net of amounts capitalized was $15.4 million compared to $17.0 million for the corresponding period in 2010. The decrease was primarily due to a $3.3 million increase in capitalized AFUDC debt primarily associated with the Kemper IGCC, a $0.3 million increase in capitalized interest on the Kemper IGCC regulatory asset, and a $0.3 million decrease due to the redemption of long-term debt in March 2011, partially offset by a $1.6 million increase in interest expense associated with the issuances of new long-term debt in September 2010, December 2010, April 2011, and September 2011, and a $0.5 million increase in amortized debt issuance cost.

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See Note 3 to the financial statements of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “Integrated Coal Gasification Combined Cycle” herein for additional information regarding the Kemper IGCC.
Other Income (Expense), Net
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.8)   (76.6)   $(4.1)   N/M
       
N/M — Not meaningful            
In the third quarter 2011, other income (expense), net was $0.3 million compared to $1.1 million for the corresponding period in 2010. The decrease was primarily due to a $0.7 million decrease in amounts collected from customers for contributions in aid of construction and a $0.5 million decrease in customer projects, partially offset by a $0.5 million decrease in miscellaneous expenses.
For year-to-date 2011, other income (expense), net was $(0.8) million compared to $3.3 million for the corresponding period in 2010. The decrease was primarily due to a $2.9 million decrease in amounts collected from customers for contributions in aid of construction and a $1.7 million decrease in customer projects, partially offset by a $0.5 million decrease in miscellaneous expenses.
Income Taxes
             
Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
(change in millions)   (% change)   (change in millions)   (% change)
$(0.2)   (1.0)   $0.7   1.8
       
In the third quarter 2011, income taxes were $18.6 million compared to $18.8 million for the corresponding period in 2010. The decrease was primarily due to a $2.2 million decrease due to increased AFUDC equity, which is non-taxable, and a $0.3 million decrease due to higher State of Mississippi manufacturing investment tax credits, partially offset by a $1.5 million increase resulting from higher pre-tax earnings and a $0.5 million increase due to a higher unrecognized tax benefits reserve.
For year-to-date 2011, income taxes were $38.3 million compared to $37.6 million for the corresponding period in 2010. The increase was primarily due to a $5.5 million increase resulting from higher pre-tax earnings, a $1.0 million increase due to a higher unrecognized tax benefits reserve, and a $0.3 million increase due to the actualization of the 2010 tax return in the third quarter 2011, partially offset by a $5.1 million decrease due to increased AFUDC equity, which is non-taxable, and a $1.1 million decrease due to higher State of Mississippi manufacturing investment tax credits.
See Note (G) to the Condensed Financial Statements herein under “Effective Tax Rate” for additional information.
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 constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining 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 or decline in Mississippi Power’s service area. Changes in economic conditions impact

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sales for Mississippi Power and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. 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.
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. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. 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.
Mississippi Power has completed a preliminary assessment of the EPA’s proposed Utility Maximum Achievable Control Technology (MACT), water quality, and coal combustion byproduct rules. See “Air Quality” and “Water Quality” below for additional information regarding the proposed Utility MACT and water quality rules. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Coal Combustion Byproducts” of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the proposed coal combustion byproducts rule. Although its analysis is preliminary, Mississippi Power estimates that the aggregate capital costs for compliance with these rules could range from $1.0 billion to $2.0 billion through 2020 if the rules are adopted as proposed. Included in this amount is $313 million of estimated expenditures included in Mississippi Power’s 2011-2013 base level capital budget described herein in anticipation of these rules. See FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” herein for additional information. These costs may arise from existing unit retirements, installation of additional environmental controls, the addition of new generating resources, and changing fuel sources for certain existing units. Mississippi Power’s preliminary analysis further indicates that the short timeframe for compliance with these rules could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters will depend on the final form of the proposed rules and the outcome of any legal challenges to the rules and cannot be determined at this time.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA against certain Southern Company subsidiaries. The EPA’s action against Alabama Power alleged that Alabama Power violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On March 14, 2011, the U.S. District Court for the Northern District of Alabama granted Alabama Power’s motion for summary judgment on all remaining claims and dismissed the case with prejudice. The EPA has appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. The ultimate outcome of this matter cannot be determined at this time.

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Carbon Dioxide Litigation
New York Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — New York Case” of Mississippi Power in Item 7 and Note 3 of the financial statements of Mississippi Power under “Environmental Matters — Carbon Dioxide Litigation — New York Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.
Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” of Mississippi Power in Item 7 and Note 3 of the financial statements of Mississippi Power under “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies (including Alabama Power, Georgia Power, Gulf Power, and Southern Power) and includes many of the same defendants that were involved in the earlier case. Mississippi Power was not named as a defendant in the case. The ultimate outcome of this matter cannot be determined at this time.
Air Quality
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 regulation of air quality.
On May 3, 2011, the EPA published a proposed rule, called Utility MACT, which would impose stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The proposed rule contains numeric emission limits for acid gases, mercury, and total particulate matter. Meeting the proposed limits would likely require additional emission control equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant to a court-approved consent decree, the EPA must issue a final rule by December 16, 2011. Compliance for

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existing sources would be required three years after the effective date of the final rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized as proposed, compliance with this rule would require significant capital expenditures and compliance costs at many of Mississippi Power’s facilities which could affect unit retirement and replacement decisions. In addition, results of operations, cash flows, and financial condition could be affected if the costs are not recovered through regulated rates. Further, there is uncertainty regarding the ability of the electric utility industry to achieve compliance with the requirements of the proposed rule within the compliance period, and the limited compliance period could negatively affect electric system reliability. The outcome of this rulemaking will depend on the requirements in the final rule and the outcome of any legal challenges and cannot be determined at this time.
In October 2008, the EPA approved a revision to Alabama’s State Implementation Plan (SIP) requirements related to opacity which granted some flexibility to affected sources while requiring compliance with Alabama’s very strict opacity limits through use of continuous opacity monitoring system data. On April 6, 2011, the EPA attempted to rescind its previous approval of the Alabama SIP revision. Mississippi Power’s jointly-owned facility with Alabama Power in Greene County, Alabama is impacted by this decision. On April 8, 2011, Alabama Power filed an appeal of that decision with the U.S. Court of Appeals for the Eleventh Circuit and requested the court to stay the effectiveness of the EPA’s attempted rescission pending judicial review. The EPA’s decision became effective May 6, 2011 and the court denied Alabama Power’s requested stay on May 12, 2011. Unless the court resolves Alabama Power’s appeal in its favor, the EPA’s rescission will continue to affect Mississippi Power’s operations with respect to the Greene County, Alabama plant. The EPA’s rescission has affected unit availability and increased maintenance and compliance costs. The final outcome of this matter cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. The States of Alabama and Mississippi are subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program, and the State of Alabama is subject to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for the States of Alabama and Mississippi. The rule could have significant effects on Mississippi Power, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including Mississippi Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
Water Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Water Quality” of Mississippi Power in Item 7 of the Form 10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at

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many of Mississippi Power’s existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of Mississippi Power’s facilities may be subject to significant additional capital expenditures and compliance costs that could affect future unit retirement and replacement decisions. Also, results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.
FERC Matters
Wholesale Rate Filing
On November 2, 2011, Mississippi Power filed a request with the FERC for revised rates under its wholesale electric tariff. The requested revised rates provide for an increase in annual base wholesale revenues in the amount of approximately $32 million, effective January 1, 2012. In this filing, Mississippi Power is also (i) seeking approval to establish a regulatory asset for the portion of non-capitalizable Kemper IGCC-related costs which have been and will continue to be incurred during the construction period for the Kemper IGCC, (ii) seeking authorization to defer as a regulatory asset, for the 10-year period ending October 2021, the difference between the revenue requirement under the purchase option of the combined cycle generating facility at Plant Daniel (Facility) (assuming a remaining 30-year life) and the revenue requirement assuming the continuation of the operating lease regulatory treatment with the accumulated deferred balance at the end of the deferral being amortized into wholesale rates over the remaining life of the Facility, and (iii) seeking authority to defer in a regulatory asset costs related to the retirement or partial retirement of generating units as a result of the environmental compliance rules which are expected to be issued in December 2011. Mississippi Power is currently in negotiations with all of its customers who have service covered under the tariff. The ultimate outcome of these matters cannot be determined at this time. See Note 3 to the financial statements of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and “Integrated Coal Gasification Combined Cycle” herein for additional information regarding the Kemper IGCC. See FINANCIAL CONDITION AND LIQUIDITY — “Off-Balance Sheet Financing Arrangements” herein for additional information regarding the purchase of the Facility.
Mississippi PSC Matters
Retail Regulatory Matters
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 additional information regarding Mississippi Power’s base rates.
In November 2010, Mississippi Power filed its annual PEP filing for 2011, which indicated a rate increase of 1.936%, or $16.1 million, annually. On January 10, 2011, the Mississippi Public Utilities Staff (MPUS) contested the filing. On June 7, 2011, the Mississippi PSC issued an order approving a joint stipulation between the MPUS and Mississippi Power resulting in no change in rates.
On March 15, 2011, Mississippi Power submitted its annual PEP lookback filing for 2010, which recommended no surcharge or refund. On May 2, 2011, Mississippi Power received a letter from the MPUS disputing certain items in the 2010 PEP lookback filing. The ultimate outcome of this matter cannot be determined at this time.

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System Restoration Rider
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 for additional information.
On January 31, 2011, Mississippi Power submitted its 2011 System Restoration Rider rate filing to the Mississippi PSC, which proposed that Mississippi Power be allowed to accrue approximately $3.6 million to the property damage reserve in 2011. On May 5, 2011, the filing was approved by the Mississippi PSC.
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 14, 2011, Mississippi Power submitted its ECO Plan notice which proposed an immaterial decrease in annual revenues. In addition, Mississippi Power proposed to change the ECO Plan collection period to more appropriately match ECO Plan revenues with ECO Plan expenditures. On April 7, 2011, due to changes in ECO Plan cost projections, Mississippi Power submitted a revised 2011 ECO Plan which changed the requested annual revenues to a $0.9 million decrease. On May 5, 2011, hearings on the revised ECO Plan were held and the filing was approved by the Mississippi PSC with the new rates effective in May 2011.
In July 2010, Mississippi Power filed a request for a certificate of public convenience and necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $625 million, with Mississippi Power’s portion being $312.5 million. As of September 30, 2011, total project expenditures were $35.8 million, with Mississippi Power’s portion being $17.9 million. The project is scheduled for completion in early 2015. Mississippi Power’s portion of the cost, if approved by the Mississippi PSC, is expected to be recovered through the ECO Plan. Hearings on the certificate request were held by the Mississippi PSC on January 25, 2011. On May 5, 2011, in conjunction with the ECO Plan hearings, the Mississippi PSC approved up to $19.5 million (with respect to Mississippi Power’s ownership portion) in additional spending for 2011 for the scrubber project. A decision on a final order is not anticipated prior to issuance of the final Utility MACT rule in December 2011. The ultimate outcome of this matter cannot be determined at this time.
Certificated New Plant
On April 27, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing Certificated New Plant-A (CNP-A), a new proposed cost recovery mechanism designed specifically to recover financing costs during the construction phase of the Kemper IGCC. Annual CNP-A rate filings will be made with the first filing occurring by November 15, 2011. If approved by the Mississippi PSC, recovery through CNP-A will remain in place thereafter until the end of the calendar year that the Kemper IGCC is placed into commercial service, which is projected to be 2014. On August 9, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing Certificated New Plant-B (CNP-B) to govern rates effective from the first calendar year after the Kemper IGCC is placed into commercial service through the first seven full calendar years of its operation. Under the proposed CNP-B, Mississippi Power’s allowed cost of capital would be adjusted based on certain operational performance indicators. The ultimate outcome of this matter cannot be determined at this time.

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Storm Damage Cost Recovery
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters — Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.
In March 2009, Mississippi Power filed with the Mississippi PSC its final accounting of the restoration cost relating to Hurricane Katrina and the storm operations center. On August 4, 2011, the Mississippi PSC issued an order approving this filing. The final net retail receivable of approximately $3.2 million was received on October 21, 2011.
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. Mississippi Power establishes, annually, a retail fuel cost recovery factor that is approved by the Mississippi PSC. Mississippi Power is required to file for an adjustment to the retail fuel cost recovery factor annually; such filing occurred in November 2010. The Mississippi PSC approved the retail fuel cost recovery factor in December 2010, with the new rates effective in January 2011. The retail fuel cost recovery factor will result in an annual decrease in an amount equal to 5.0% of total 2010 retail revenue. At September 30, 2011, the amount of over recovered retail fuel costs included in the balance sheets was $41.4 million compared to $55.2 million at December 31, 2010. Mississippi Power also has a wholesale Municipal and Rural Associations (MRA) and a Market Based (MB) fuel cost recovery factor. Effective January 1, 2011, the wholesale MRA fuel rate decreased, resulting in an annual decrease in an amount equal to 3.5% of total 2010 MRA revenue. Effective February 1, 2011, the wholesale MB fuel rate decreased, resulting in an annual decrease in an amount equal to 7.0% of total 2010 MB revenue. At September 30, 2011, the amount of over recovered wholesale MRA and MB fuel costs included in the balance sheets was $14.6 million and $2.3 million compared to $17.5 million and $4.4 million, respectively, at December 31, 2010. In addition, at September 30, 2011, the amount of over recovered MRA emissions allowance cost included in the balance sheets was $1.0 million. See Note 3 to the financial statements of Mississippi Power under “FERC Matters” in Item 8 of the Form 10-K for additional information. 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, this decrease to the billing factors will have no significant effect on Mississippi Power’s revenues or net income, but will decrease annual cash flow.
In October 2010, the Mississippi PSC engaged an independent professional audit firm to conduct an audit of Mississippi Power’s fuel-related expenditures included in the retail fuel adjustment clause and energy cost management clause (ECM) for 2010. The audit was completed in the first quarter 2011 with no audit findings. The 2011 audit of fuel-related expenditures began in the second quarter 2011. The ultimate outcome of this matter cannot be determined at this time.
On April 1, 2011, a portion of Mississippi Power’s MB customers transitioned to a PPA with South Mississippi Electric Power Association (SMEPA). On June 21, 2011, Mississippi Power and SMEPA reached an agreement to allocate $3.7 million of the over recovered fuel balance at March 31, 2011 to the PPA. This amount was subsequently refunded to SMEPA on June 27, 2011. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Other Matters” of Mississippi Power in Item 7 of the Form 10-K for additional information.

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Plant Daniel Combined Cycle Facility
See FINANCIAL CONDITION AND LIQUIDITY — “Off-Balance Sheet Financing Arrangements” herein for additional information regarding the purchase of the Facility. In connection with the purchase of the Facility, Mississippi Power filed a request on July 25, 2011 for an accounting order from the Mississippi PSC. If the accounting order is approved as requested, the retail revenue requirements under the purchase option will be comparable to those otherwise required under operating lease accounting treatment for the extended lease term, with any differences deferred as a regulatory asset over the 10-year period ending October 2021. At the conclusion of the proposed deferral period in 2021, the unamortized deferral balance will be amortized into rates over the remaining life of the Facility. The ultimate outcome of this matter cannot be determined at this time.
Integrated Coal Gasification Combined Cycle
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Integrated Coal Gasification Combined Cycle” and “PSC Matters — Mississippi Baseload Construction Legislation” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K for information regarding the Kemper IGCC.
In June 2010, the Mississippi Chapter of the Sierra Club (Sierra Club) filed an appeal of the Mississippi PSC’s June 2010 decision to grant the Certificate of Public Convenience and Necessity for the Kemper IGCC with the Chancery Court of Harrison County, Mississippi (Chancery Court). Subsequently, in July 2010, the Sierra Club also filed an appeal directly with the Mississippi Supreme Court. In October 2010, the Mississippi Supreme Court dismissed the Sierra Club’s direct appeal. On February 28, 2011, the Chancery Court issued a judgment affirming the Mississippi PSC’s order authorizing the construction of the Kemper IGCC. On March 1, 2011, the Sierra Club appealed the Chancery Court’s decision to the Mississippi Supreme Court.
In May 2009, Mississippi Power received notification from the IRS formally certifying that the IRS allocated $133 million of Internal Revenue Code Section 48A tax credits (Phase I) to Mississippi Power. On April 19, 2011, Mississippi Power received notification from the IRS formally certifying that the IRS allocated $279 million of Internal Revenue Code Section 48A tax credits (Phase II) to Mississippi Power. The utilization of Phase I and Phase II credits is dependent upon meeting the IRS certification requirements, including an in-service date no later than May 11, 2014 for the Phase I credits and April 19, 2016 for the Phase II credits. In order to remain eligible for the Phase II tax credits, Mississippi Power plans to capture and sequester (via enhanced oil recovery) at least 65% of the carbon dioxide (CO2) produced by the plant during operations in accordance with the recapture rules for Section 48A investment tax credits. Through September 30, 2011, Mississippi Power received or accrued tax benefits totaling $73.9 million for these tax credits, which will be amortized as a reduction to depreciation and amortization over the life of the Kemper IGCC.
In February 2008, Mississippi Power requested that the DOE transfer the remaining funds previously granted under the Clean Coal Power Initiative Round 2 (CCPI2) from a cancelled IGCC project of one of Southern Company’s subsidiaries that would have been located in Orlando, Florida. In December 2008, an agreement was reached to assign the remaining funds ($270 million) to the Kemper IGCC. Mississippi Power will receive grant funds of $245 million during the construction of the Kemper IGCC and $25 million during its initial operation. Mississippi Power had received $158.6 million through September 30, 2011 and subsequently received an additional $20.9 million on October 19, 2011 associated with this grant.
On March 10, 2011, the Sierra Club filed a lawsuit in the U.S. District Court for the District of Columbia against the DOE regarding the National Environmental Policy Act review process asking for a preliminary and permanent injunction on the issuance of CCPI2 funds and loan guarantees and a stay to any related construction activities based upon alleged deficiencies in the DOE’s environmental impact statement. Mississippi Power intervened in this lawsuit on May 18, 2011.

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In March 2010, the Mississippi Department of Environmental Quality (MDEQ) issued the Prevention of Significant Deterioration (PSD) air permit modification for the plant, which modifies the original PSD air permit issued in October 2008. The Sierra Club requested a formal evidentiary hearing regarding the issuance of the modified permit. On April 4, 2011, the MDEQ Permit Board held an evidentiary hearing wherein it unanimously affirmed the PSD air permit. On June 30, 2011, the Sierra Club appealed the final PSD air permit issued by the MDEQ to the Chancery Court of Kemper County, Mississippi. Mississippi Power has intervened as a party in this appeal.
On March 4, 2011, Mississippi Power and Denbury Onshore (Denbury), a subsidiary of Denbury Resources Inc., entered into a contract pursuant to which Denbury will purchase 70% of the CO2 captured from the Kemper IGCC. On May 19, 2011, Mississippi Power and Treetop Midstream Services, LLC (Treetop), an affiliate of Tellus Operating Group, LLC and a subsidiary of Tenrgys, LLC, entered into a contract pursuant to which Treetop will purchase 30% of the CO2 captured from the Kemper IGCC.
On April 27, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing CNP-A, a new proposed cost recovery mechanism designed specifically to recover financing costs during the construction phase of the Kemper IGCC. On August 9, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing CNP-B to govern rates effective from the first calendar year after the Kemper IGCC is placed into commercial service through the first seven full calendar years of its operation. Under the proposed CNP-B, Mississippi Power’s allowed cost of capital would be adjusted based on certain operational performance indicators. See “Certificated New Plant” herein for additional information.
On June 7, 2011, consistent with the treatment of non-capital costs during the pre-construction period, the Mississippi PSC granted Mississippi Power the authority to defer all non-capital Kemper IGCC-related costs to a regulatory asset during the construction period. The amortization period for the regulatory asset will be determined by the Mississippi PSC at a later date. In addition, Mississippi Power is authorized to accrue carrying costs for 2011 on the unamortized balance of such regulatory assets at a rate and in a manner to be determined by the Mississippi PSC in connection with future proceedings regarding the cost recovery mechanism for the Kemper IGCC.
On September 9, 2011, Mississippi Power filed a request for confirmation of the Kemper IGCC’s Certificate of Public Convenience and Necessity with the Mississippi PSC authorizing the acquisition, construction, and operation of approximately 61 miles of CO2 pipeline infrastructure at an estimated capital cost of $141 million.
The Kemper IGCC will use locally mined lignite (an abundant, lower heating value coal) from a proposed mine adjacent to the plant as fuel. In conjunction with the plant, Mississippi Power will own a lignite mine and equipment and will acquire mineral reserves located around the plant site in Kemper County. The estimated capital cost of the mine is approximately $245.0 million. On January 18, 2011, Liberty Fuels Company, LLC, a subsidiary of The North American Coal Corporation, which will develop, construct, and manage the mining operations, submitted an application to the MDEQ for a surface mining permit for the mine.
As of September 30, 2011, Mississippi Power had spent a total of $664.9 million on the Kemper IGCC, including regulatory filing costs. Of this total, $463.8 million was included in construction work in progress (net of $179.5 million of CCPI2 grant funds), $19.0 million was recorded in other regulatory assets, $1.6 million was recorded in other deferred charges and assets, and $1.0 million was previously expensed.
The ultimate outcome of these matters cannot be determined at this time.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters cannot be determined at this time.
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects to be placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Mississippi Power through 2013. On March 29, 2011, the IRS issued additional guidance and safe harbors relating to the 50% and 100% bonus depreciation rules. Based on recent discussions with the IRS, Mississippi Power estimates the potential increased cash flow for 2011 to be between approximately $20 million and $25 million. The ultimate outcome of this matter cannot be determined at this time.
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, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 ultimate liabilities, if any, arising from such current proceedings would have a material 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with GAAP. 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, Plant Daniel Operating Lease, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Mississippi Power’s financial condition remained stable at September 30, 2011. Mississippi Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital” and “Financing Activities” herein for additional information.
Net cash provided from operating activities totaled $186.6 million for the first nine months of 2011 compared to $125.3 million for the corresponding period in 2010. The $61.3 million increase in cash provided from operating activities is primarily due to a $37.4 million increase in investment tax credits related to the Kemper IGCC and a $50.6 million decrease in the use of funds related to the Kemper IGCC generation construction screening costs incurred during the first five months of 2010. The Mississippi PSC issued an order in June 2010 approving the Kemper IGCC. These increases in cash were partially offset by a $32.6 million decrease in over recovered regulatory clause revenues related to lower fuel rates in 2011 and 2010.
Net cash used for investing activities totaled $355.2 million for the first nine months of 2011 compared to $133.4 million for the corresponding period in 2010. The $221.8 million increase in net cash used for investing activities is primarily due to an increase in property additions of $479.7 million primarily related to the Kemper IGCC, partially offset by a $50.0 million decrease in restricted cash, a construction payable increase of $64.0 million, and the receipt of $139.9 million capital grant proceeds related to CCPI2 and smart grid investment grants.
Net cash provided from financing activities totaled $125.4 million for the first nine months of 2011 compared to $74.6 million for the corresponding period in 2010. The $50.8 million increase in net cash provided from financing activities was primarily due to a $195.9 million increase in capital contributions from Southern Company, partially offset by the redemption of $50.0 million in revenue bonds, an $80.0 million maturity of long-term debt, and a $10.0 million decrease in proceeds from other long-term debt. Fluctuations in cash flow from financing activities vary from year to year based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first nine months of 2011 include a decrease in cash and cash equivalents of $43.2 million primarily due to an $80.0 million long-term debt maturity and increased capital spending, partially offset by the receipt of $135.5 million in DOE grant funds. Restricted cash and cash equivalents decreased $50.0 million due to the redemption of revenue bonds in February 2011. Total property, plant, and equipment increased $438.7 million primarily due to the increase in construction work in progress related to the Kemper IGCC. Other accounts payable increased $89.1 million primarily due to increases in construction projects. Accumulated deferred income taxes increased

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$34.7 million primarily due to an increase in property related deferred tax liabilities due to 100% bonus depreciation. Accumulated deferred investment tax credits increased $50.8 million primarily related to the Kemper IGCC. Paid-in capital increased $201.9 million primarily due to $200.0 million in capital contributions from Southern Company in the first nine months of 2011.
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 $241 million will be required through September 30, 2012 to fund maturities of long-term debt.
The construction program of Mississippi Power is estimated to include a base level investment of $818 million, $1.0 billion, and $878 million for 2011, 2012, and 2013, respectively. Included in these estimated amounts are expenditures related to the Kemper IGCC of $685 million, $813 million, and $616 million in 2011, 2012, and 2013, respectively. Also included in these estimated amounts are environmental expenditures to comply with existing statutes and regulations of $20 million, $93 million, and $127 million for 2011, 2012, and 2013, respectively. In addition, Mississippi Power estimates that potential incremental investments to comply with anticipated new environmental regulations are $0 for 2011, up to $18 million for 2012, and up to $55 million for 2013. If the EPA’s proposed Utility MACT rule is finalized as proposed, Mississippi Power estimates that the potential incremental investments in 2012 and 2013 for new environmental regulations will be closer to the upper end of the estimates set forth above. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental statutes and regulations; changes in generating plants, including unit retirement and replacement decisions, to meet new regulatory requirements; changes in FERC rules and regulations; Mississippi PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
On July 20, 2011, Mississippi Power provided notice to Juniper Capital L.P. of its intent to purchase the Facility at the end of the initial lease and, on October 20, 2011, Mississippi Power purchased the Facility. See “Off-Balance Sheet Financing Arrangements” herein for additional information.
Sources of Capital
Except as described below with respect to potential DOE loan guarantees and DOE CCPI2 grant funds, 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 borrowings, external security offerings, and capital 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. Mississippi Power received $200 million in capital contributions from Southern Company in the first nine months of 2011. 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 has applied to the DOE for federal loan guarantees to finance a portion of the eligible construction costs of the Kemper IGCC. Mississippi Power is in advanced due diligence with the DOE. There can be no assurance that the DOE will issue federal loan guarantees to Mississippi Power. In addition, Mississippi Power has been awarded DOE CCPI2 grant funds of $245 million to be used for the construction of the Kemper IGCC and $25 million to be used

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the initial operation of the Kemper IGCC. Mississippi Power had received $158.6 million as of September 30, 2011 and subsequently received an additional $20.9 million on October 19, 2011 associated with this grant.
Mississippi Power’s current liabilities sometimes 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 September 30, 2011 approximately $117.6 million of cash and cash equivalents and $296 million of unused committed credit arrangements with banks. Of the unused credit arrangements, $16 million expire in 2011, $115 million expire in 2012, and $165 million expire in 2014. Of the credit arrangements expiring on or before September 30, 2012, $41 million contain provisions allowing for two-year term loans executable at expiration and $25 million contain provisions allowing for one-year term loans executable at expiration. Mississippi Power expects to renew its credit arrangements, as needed, prior to expiration. The credit arrangements provide liquidity support to Mississippi Power’s commercial paper program and $40 million are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At September 30, 2011, Mississippi Power had no commercial paper borrowings outstanding. During the third quarter 2011, Mississippi Power had an average of $6 million of commercial paper outstanding with a weighted average interest rate of 0.2% per annum and the maximum amount outstanding was $23 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper, lines of credit, and cash.
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 relating to Mississippi Power’s lease of the Facility.
Mississippi Power was required to provide notice of its intent to either renew the lease or purchase the Facility by July 22, 2011. On July 20, 2011, Mississippi Power provided notice to the lessor of its intent to purchase the Facility. Mississippi Power’s right to purchase the Facility was approved by the Mississippi PSC in its order dated January 7, 1998, as amended on February 19, 1999, which granted Mississippi Power a Certificate of Public Convenience and Necessity for the Facility.
On October 20, 2011, Mississippi Power purchased the Facility for approximately $85 million in cash and the assumption of debt obligations of the lessor related to the Facility, which mature in 2021, have a face value of $270 million and a fixed stated interest rate of 7.13%, and are secured by the Facility and certain personal property, accounts, and proceeds related thereto. Accounting rules require that the Facility be reflected on Mississippi Power’s financial statements at the time of the purchase at the fair value of the consideration rendered. Based on interest rates as of October 20, 2011, the fair value of the debt assumed was approximately $346 million. Accordingly, the Facility will be reflected in Mississippi Power’s financial statements at approximately $431 million. Mississippi Power intends to maintain its traditional capital structure by adding equity to support the additional debt.
In connection with the purchase of the Facility, Mississippi Power filed a request on July 25, 2011 for an accounting order from the Mississippi PSC. If the accounting order is approved as requested, the retail revenue requirements under the purchase option will be comparable to those otherwise required under operating lease accounting treatment for the extended lease term, with any differences deferred as a regulatory asset over the 10-year period ending October 2021. At the conclusion of the proposed deferral period in 2021, the unamortized deferral balance will be amortized into rates over the remaining life of the Facility. On November 2, 2011, Mississippi Power filed a request with the FERC seeking authorization to defer as a regulatory asset, for the 10-year period ending October 2021, the difference between the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenue requirement under the purchase of the Facility (assuming a remaining 30-year life) and the revenue requirement assuming the continuation of the operating lease regulatory treatment. At the conclusion of the proposed deferral period in 2021, the accumulated deferred balance will be amortized into wholesale rates over the remaining life of the Facility. The ultimate outcome of these matters cannot be determined at this time.
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- and/or Baa3. These contracts are for physical electricity sales, fuel purchases, fuel transportation and storage, emissions allowances, and energy price risk management. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $328 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Mississippi Power’s ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Mississippi Power’s market risk exposure relative to interest rate changes for the third quarter 2011 has not changed materially compared with the December 31, 2010 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Mississippi Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation and other various cost recovery mechanisms, Mississippi Power continues to have limited exposure to market volatility in interest rates, foreign currency, commodity fuel prices, and prices of electricity. Mississippi Power continues to manage retail fuel-hedging programs implemented per the guidelines of the Mississippi PSC and wholesale fuel-hedging programs under agreements with wholesale customers. As such, Mississippi Power had no material change in market risk exposure for the third quarter 2011 when compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter   Year-to-Date
    2011   2011
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (33 )   $ (44 )
Contracts realized or settled
    9       25  
Current period changes(a)
    (11 )     (16 )
     
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (35 )   $ (35 )
     
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The change in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 was a decrease of $2 million and an increase of $9 million, respectively, substantially all of which is due to natural gas positions. The change is attributable to both the volume of mmBtu and the price of natural gas. At September 30, 2011, Mississippi Power had a net hedge volume of 30.7 million mmBtu with a weighted average contract cost approximately $1.52 per mmBtu above market prices, compared to 25.6 million mmBtu at June 30, 2011 with a

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
weighted average contract cost approximately $1.60 per mmBtu above market prices and compared to 24.0 million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.92 per mmBtu above market prices.
Regulatory hedges relate to Mississippi Power’s fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the ECM.
Unrealized pre-tax gains and losses recognized in income for the three and nine months ended September 30, 2011 and 2010 for energy-related derivative contracts that are not hedges were not material.
Mississippi Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
    September 30, 2011
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
 
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (35 )     (27 )     (8 )      
Level 3
                       
         
Fair value of contracts outstanding at end of period
  $ (35 )   $ (27 )   $ (8 )   $  
         
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Mississippi Power. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Mississippi Power in Item 7 and Note 1 under “Financial Instruments” and Note 10 to the financial statements of Mississippi Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In February 2011, Mississippi Power redeemed a $50 million series of revenue bonds issued in December 2010.
In March 2011, Mississippi Power’s $80 million long-term bank note with a variable interest rate based on one-month LIBOR matured.
In April 2011, Mississippi Power entered into a one-year $75 million aggregate principal amount long-term floating rate bank loan with a variable interest rate based on one-month LIBOR. The proceeds of this loan were used to repay maturing long-term and short-term indebtedness and for other general corporate purposes, including Mississippi Power’s continuous construction program.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In September 2011, Mississippi Power entered into a one-year $40 million aggregate principal amount floating rate bank loan that bears interest based on one-month LIBOR. The proceeds were used to repay outstanding short-term debt and for general corporate purposes, including Mississippi Power’s continuous construction program.
In September 2011, Mississippi Power entered into a one-year extension of a $125 million aggregate principal amount floating rate bank loan that bears interest based on one-month LIBOR.
In September 2011, Mississippi Power entered into forward-starting interest rate swaps to mitigate exposure to interest rate changes related to anticipated debt issuances. The notional amount of the swaps totaled $600 million.
Subsequent to September 30, 2011, Mississippi Power issued $150 million aggregate principal amount of Series 2011A 2.35% Senior Notes due October 15, 2016 and $150 million aggregate principal amount of Series 2011B 4.75% Senior Notes due October 15, 2041. The net proceeds were used by Mississippi Power to repay at maturity all of the outstanding $50 million aggregate principal amount of Mississippi Business Finance Corporation Taxable Revenue Bonds, 6.62% Series 1999B due 2011 (Escatawpa Funding, Limited Partnership Project), to repay at maturity all of the outstanding $15.6 million aggregate principal amount of Mississippi Business Finance Corporation Taxable Revenue Bonds, Series 2005 due 2011 (Escatawpa Funding, Limited Partnership Project), to pay amounts in connection with the purchase of the Facility as described herein under “Off-Balance Sheet Financing Arrangements,” and for general corporate purposes, including Mississippi Power’s continuous construction program. Mississippi Power also settled hedges totaling $150 million related to the Series 2011A issuance at a gain of approximately $1.4 million. This gain will be amortized to interest expense, in earnings, over five years. Mississippi Power settled hedges totaling $150 million related to the Series 2011B issuance at a loss of approximately $0.54 million. This loss will be amortized to interest expense, in earnings, over 10 years.
Subsequent to September 30, 2011, Mississippi Power assumed the obligations of the lessor related to $270 million aggregate principal amount of Mississippi Business Finance Corporation Taxable Revenue Bonds, 7.13% Series 1999A due October 21, 2021, issued for the benefit of the lessor as described under “Off-Balance Sheet Financing Arrangements” herein. These bonds are secured by the Facility and certain personal property, accounts, and proceeds related thereto.
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Wholesale revenues, non-affiliates
  $ 274,980     $ 261,551     $ 705,106     $ 568,877  
Wholesale revenues, affiliates
    85,177       93,062       239,020       287,603  
Other revenues
    2,408       2,217       5,435       5,314  
 
                       
Total operating revenues
    362,565       356,830       949,561       861,794  
 
                       
Operating Expenses:
                               
Fuel
    141,968       120,466       345,841       294,658  
Purchased power, non-affiliates
    25,159       24,939       53,765       59,103  
Purchased power, affiliates
    11,423       31,454       48,700       79,874  
Other operations and maintenance
    39,571       34,886       122,372       112,132  
Depreciation and amortization
    31,558       29,361       92,530       87,362  
Taxes other than income taxes
    4,178       4,071       13,506       14,314  
 
                       
Total operating expenses
    253,857       245,177       676,714       647,443  
 
                       
Operating Income
    108,708       111,653       272,847       214,351  
Other Income and (Expense):
                               
Interest expense, net of amounts capitalized
    (19,886 )     (18,801 )     (56,489 )     (58,408 )
Other income (expense), net
    (158 )     (209 )     (359 )     (104 )
 
                       
Total other income and (expense)
    (20,044 )     (19,010 )     (56,848 )     (58,512 )
 
                       
Earnings Before Income Taxes
    88,664       92,643       215,999       155,839  
Income taxes
    32,593       30,067       77,584       46,972  
 
                       
Net Income
  $ 56,071     $ 62,576     $ 138,415     $ 108,867  
 
                       
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (in thousands)     (in thousands)  
Net Income
  $ 56,071     $ 62,576     $ 138,415     $ 108,867  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(135), $1,125, $265, and $1,536, respectively
    (206 )     1,759       402       2,400  
Reclassification adjustment for amounts included in net income, net of tax of $1,106, $1,018, $3,261, and $3,011, respectively
    1,685       1,590       4,946       4,703  
 
                       
Total other comprehensive income (loss)
    1,479       3,349       5,348       7,103  
 
                       
Comprehensive Income
  $ 57,550     $ 65,925     $ 143,763     $ 115,970  
 
                       
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 Nine Months  
    Ended September 30,  
    2011     2010  
    (in thousands)  
Operating Activities:
               
Net income
  $ 138,415     $ 108,867  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization, total
    102,756       97,469  
Deferred income taxes
    474       10,001  
Convertible investment tax credits received
    62,298       22,150  
Deferred revenues
    8,114       18,846  
Mark-to-market adjustments
    1,479       2,435  
Other, net
    3,790       2,364  
Changes in certain current assets and liabilities —
               
-Receivables
    (24,799 )     (35,588 )
-Fossil fuel stock
    305       6,097  
-Materials and supplies
    (1,826 )     3,216  
-Prepaid income taxes
    24,436       1,668  
-Other current assets
    219       598  
-Accounts payable
    (2,634 )     (1,988 )
-Accrued taxes
    27,417       31,069  
-Accrued interest
    (11,601 )     (12,194 )
-Other current liabilities
    (661 )     21  
 
           
Net cash provided from operating activities
    328,182       255,031  
 
           
Investing Activities:
               
Property additions
    (200,157 )     (211,519 )
Change in construction payables
    (14,667 )     31,021  
Payments pursuant to long-term service agreements
    (46,065 )     (30,936 )
Other investing activities
    (3,211 )     3,752  
 
           
Net cash used for investing activities
    (264,100 )     (207,682 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (220,903 )     20,216  
Proceeds —
               
Capital contributions
    125,596       5,638  
Senior notes
    300,000        
Repayments — Other long-term debt
    (3,441 )      
Payment of common stock dividends
    (68,400 )     (80,325 )
Other financing activities
    (5,629 )     426  
 
           
Net cash provided from (used for) financing activities
    127,223       (54,045 )
 
           
Net Change in Cash and Cash Equivalents
    191,305       (6,696 )
Cash and Cash Equivalents at Beginning of Period
    14,204       7,152  
 
           
Cash and Cash Equivalents at End of Period
  $ 205,509     $ 456  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $12,112 and $7,704 capitalized for 2011 and 2010, respectively)
  $ 65,201     $ 63,560  
Income taxes (net of refunds)
    (26,555 )     (8,158 )
Noncash transactions — accrued property additions at end of period
    36,971       36,576  
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 September 30,     At December 31,  
Assets   2011     2010  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 205,509     $ 14,204  
Receivables —
               
Customer accounts receivable
    73,979       77,033  
Other accounts receivable
    2,062       1,979  
Affiliated companies
    50,371       19,673  
Fossil fuel stock, at average cost
    13,529       13,663  
Materials and supplies, at average cost
    35,332       33,934  
Prepaid service agreements — current
    34,087       41,627  
Prepaid income taxes
    320       53,860  
Other prepaid expenses
    3,941       4,161  
Assets from risk management activities
    663       2,160  
Other current assets
          19  
 
           
Total current assets
    419,793       262,313  
 
           
Property, Plant, and Equipment:
               
In service
    3,162,965       3,143,919  
Less accumulated provision for depreciation
    628,547       536,107  
 
           
Plant in service, net of depreciation
    2,534,418       2,607,812  
Construction work in progress
    619,655       427,788  
 
           
Total property, plant, and equipment
    3,154,073       3,035,600  
 
           
Other Property and Investments:
               
Goodwill
    1,839       1,839  
Other intangible assets, net of amortization of $1,280 and $693 at September 30, 2011 and December 31, 2010, respectively
    47,839       48,426  
 
           
Total other property and investments
    49,678       50,265  
 
           
Deferred Charges and Other Assets:
               
Prepaid long-term service agreements
    105,953       69,740  
Other deferred charges and assets — affiliated
    3,091       3,275  
Other deferred charges and assets — non-affiliated
    24,611       16,541  
 
           
Total deferred charges and other assets
    133,655       89,556  
 
           
Total Assets
  $ 3,757,199     $ 3,437,734  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2011     2010  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 575,510     $  
Notes payable — affiliated
          65,883  
Notes payable — non-affiliated
    48,884       203,904  
Accounts payable —
               
Affiliated
    64,739       69,783  
Other
    46,078       45,985  
Accrued taxes —
               
Accrued income taxes
    17,472       812  
Other accrued taxes
    12,619       2,775  
Accrued interest
    18,375       29,977  
Liabilities from risk management activities
    5,035       5,773  
Other current liabilities
    5,516       3,923  
 
           
Total current liabilities
    794,228       428,815  
 
           
Long-term Debt
    1,023,967       1,302,619  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    312,861       307,989  
Deferred convertible investment tax credits
    113,280       80,401  
Deferred capacity revenues — affiliated
    38,114       30,533  
Other deferred credits and liabilities — affiliated
    3,859       4,635  
Other deferred credits and liabilities — non-affiliated
    3,081       16,203  
 
           
Total deferred credits and other liabilities
    471,195       439,761  
 
           
Total Liabilities
    2,289,390       2,171,195  
 
           
Redeemable Noncontrolling Interest
    3,630       3,319  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
               
Authorized - 1,000,000 shares
               
Outstanding - 1,000 shares
           
Paid-in capital
    1,026,565       900,969  
Retained earnings
    446,285       376,270  
Accumulated other comprehensive loss
    (8,671 )     (14,019 )
 
           
Total common stockholder’s equity
    1,464,179       1,263,220  
 
           
Total Liabilities and Stockholder’s Equity
  $ 3,757,199     $ 3,437,734  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2011 vs. THIRD QUARTER 2010
AND
YEAR-TO-DATE 2011 vs. YEAR-TO-DATE 2010
OVERVIEW
Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation assets and sell electricity at market-based prices in the wholesale market. Southern Power continues to execute its 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.
Effective March 15, 2011, Southern Company transferred its ownership in its wholly-owned subsidiary, Southern Renewable Energy, Inc. (SRE) to Southern Power. SRE was formed to construct, acquire, own, and manage renewable generation assets and sell electricity at market-based prices in the wholesale market. As a transfer of net assets among entities under common control, the assets and liabilities of SRE were transferred at historical cost. The consolidated financial statements of Southern Power have been revised to include the financial condition and the results of operations of SRE since its inception in January 2010.
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), contract availability, 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). Contract availability measures the percentage of scheduled hours that a unit was available. Net income is the primary measure of Southern Power’s financial performance. 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
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)   (change in millions)     (% change)  
$(6.5)
    (10.4)   $29.5     27.1  
 
Southern Power’s net income for the third quarter 2011 was $56.1 million compared to $62.6 million for the corresponding period in 2010. The decrease was primarily due to higher fuel expenses, higher other operations and maintenance expenses, higher depreciation and amortization, and higher income taxes. The decrease was partially offset by higher energy and capacity revenues under new PPAs that began in December 2010 and January 2011, net of revenue reductions from PPAs expiring in December 2010 and May 2011.
Southern Power’s net income for year-to-date 2011 was $138.4 million compared to $108.9 million for the corresponding period in 2010. The increase was primarily due to higher energy and capacity revenues under new PPAs that began in June, July, and December 2010 and January 2011. The increase was partially offset by lower energy and capacity revenues under existing PPAs and the expiration of PPAs in May 2010, December 2010, and May 2011, as well as lower revenues from energy sales that were not covered by PPAs and lower energy and capacity revenues from power sales to affiliates under the IIC. The increase was also partially offset by higher fuel expenses, higher other operations and maintenance expenses, and higher income taxes.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues Non-Affiliates
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)     (change in millions)     (% change)  
$13.4   5.1     $136.2     23.9  
 
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 prices of wholesale energy compared to the cost of Southern Power’s energy. Increases and decreases in revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income.
Wholesale revenues from non-affiliates for the third quarter 2011 were $275.0 million compared to $261.6 million for the corresponding period in 2010. The increase was primarily due to $52.6 million of energy and capacity revenues under new non-affiliate PPAs that began in December 2010 and January 2011 and $4.1 million of higher revenues from energy sales that were not covered by PPAs. The increase was partially offset by $38.9 million of lower energy and capacity revenues associated with the expiration of non-affiliate PPAs in December 2010 and $4.4 million of lower energy and capacity revenues under existing non-affiliate PPAs.
Wholesale energy sales to non-affiliates for year-to-date 2011 were $705.1 million compared to $568.9 million for the corresponding period in 2010. The increase was primarily due to $237.5 million of energy and capacity revenues under new non-affiliate PPAs that began in June, July, and December 2010 and January 2011. The increase was partially offset by $71.7 million of lower revenues associated with the expiration of non-affiliate PPAs in December 2010, $4.4 million of lower energy and capacity revenues under existing PPAs, and $25.2 million of lower revenues from energy sales that were not covered by PPAs as a result of significantly more favorable weather in the first quarter 2010 compared to the corresponding period in 2011.
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.
Wholesale Revenues Affiliates
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)     (change in millions)     (% change)  
$(7.9)   (8.5)   $(48.6)   (16.9)
 
Wholesale 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. Increases and decreases in revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income.
Wholesale revenues from affiliates for the third quarter 2011 were $85.2 million compared to $93.1 million for the corresponding period in 2010. The decrease was primarily the result of $18.0 million of lower energy and capacity revenues associated with the expiration of affiliate PPAs in May 2011. The decrease was partially offset by $10.2 million related to higher revenues from power sales to affiliates under the IIC.
Wholesale revenues from affiliates for year-to-date 2011 were $239.0 million compared to $287.6 million for the corresponding period in 2010. The decrease was primarily the result of $68.2 million of lower energy and capacity revenues associated with the expiration of affiliate PPAs in May 2010 and May 2011 and $11.8 million related to lower revenues from power sales to affiliates under the IIC. The decrease was partially offset by $30.8 million of higher energy and capacity revenues associated with new affiliate PPAs that began in June 2010.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
                                 
    Third Quarter 2011 vs. Third Quarter 2010   Year-to-Date 2011 vs. Year-to-Date 2010
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 21.5       17.8       $51.2       17.4  
Purchased power — non-affiliates
    0.2       0.9       (5.3 )     (9.0 )
Purchased power — affiliates
    (20.0 )     (63.7)       (31.2 )     (39.0 )
 
                       
Total fuel and purchased power expenses
  $ 1.7             $ 14.7          
 
                       
Southern Power PPAs generally provide that the purchasers are responsible for substantially all of the cost of fuel. Consequently, any increase or decrease in fuel costs is generally accompanied by an increase or decrease in related fuel revenues and does not have a significant impact on net income. Southern Power is responsible for the cost of fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the market or sold to affiliates under the IIC.
In the third quarter 2011, total fuel and purchased power expenses were $178.6 million compared to $176.9 million for the corresponding period in 2010. Fuel and purchased power expenses increased $26.4 million due to a 19.3% increase in volume of KWHs generated and purchased. The increase was partially offset by a decrease of $24.7 million due to a 30.5% decrease in the average cost of purchased power and a 5.8% decrease in the average cost of natural gas.
For year-to-date 2011, total fuel and purchased power expenses were $448.3 million compared to $433.6 million for the corresponding period in 2010. Fuel and purchased power expenses increased $106.1 million due to a 26.9% increase in the volume of KWHs generated and purchased. The increase was partially offset by a decrease of $91.4 million due to a 32.7% decrease in the average cost of purchased power and a 10.6% decrease in the average cost of natural gas.
In the third quarter 2011, fuel expense was $142.0 million compared to $120.5 million for the corresponding period in 2010. Fuel expense increased $30.2 million due to an increase in the volume of KWHs generated partially offset by $8.7 million due to a 5.8% decrease in the average cost of natural gas.
For year-to-date 2011, fuel expense was $345.8 million compared to $294.7 million for the corresponding period in 2010. Fuel expense increased $92.6 million due to an increase in the volume of KWHs generated partially offset by $41.4 million due to a 10.6% decrease in the average cost of natural gas.
In the third quarter 2011, purchased power expenses were $36.6 million compared to $56.4 million for the corresponding period in 2010. Purchased power expenses decreased $16.0 million due to a 30.5% decrease in the average cost of purchased power and $3.8 million due to a decrease in the volume of KWHs purchased.
For year-to-date 2011, purchased power expenses were $102.5 million compared to $139.0 million for the corresponding period in 2010. Purchased power expenses decreased $50.0 million due to a 32.7% decrease in the average cost of purchased power partially offset by a $13.5 million increase associated with an increase in the volume of KWHs purchased.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)     (change in millions)     (% change)  
$4.7   13.4     $10.3     9.1  
                 
In the third quarter 2011, other operations and maintenance expenses were $39.6 million compared to $34.9 million for the corresponding period in 2010. The increase was primarily due to an increase of $1.5 million related to generating plant outages and maintenance and a $1.4 million increase in administrative and general expenses primarily due to expenses associated with strategic planning, legal expenses, and additional expenses in 2011 due to information technology upgrades.
For year-to-date 2011, other operations and maintenance expenses were $122.4 million compared to $112.1 million for the corresponding period in 2010. The increase was primarily due to $8.9 million related to generating plant outages and maintenance.
Interest Expense, Net of Amounts Capitalized
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)     (change in millions)     (% change)  
$1.1   5.8     $(1.9)   (3.3)
                 
In the third quarter 2011, interest expense, net of amounts capitalized was $19.9 million compared to $18.8 million for the corresponding period in 2010. The increase was primarily due to a $0.3 million increase in interest expense associated with the issuance of new long-term debt in September 2011, $0.3 million associated with settlements and changes in tax positions from prior periods, and $0.2 million associated with interest rate swaps on senior notes.
For year-to-date 2011, interest expense, net of amounts capitalized was $56.5 million compared to $58.4 million for the corresponding period in 2010. The decrease was primarily due to $4.4 million of additional capitalized interest associated with the construction of the Cleveland County combustion turbine units and the Nacogdoches biomass plant. This decrease was partially offset by $0.7 million associated with settlements and changes in tax positions from prior periods, $0.5 million associated with interest rate swaps on senior notes, $0.5 million associated with an affiliate loan related to SRE in the first quarter 2011, and a $0.3 million increase in interest expense associated with the issuance of new long-term debt in September 2011.
See FUTURE EARNINGS POTENTIAL — “Construction Projects” herein for additional information.
Income Taxes
                         
Third Quarter 2011 vs. Third Quarter 2010     Year-to-Date 2011 vs. Year-to-Date 2010  
(change in millions)   (% change)     (change in millions)     (% change)  
$2.5   8.4     $30.6     65.2  
                 
In the third quarter 2011, income taxes were $32.6 million compared to $30.1 million for the corresponding period in 2010. This increase was primarily due to a $2.5 million decrease in tax benefits from the federal production activities deduction and a $0.8 million increase related to the impact of investment tax credits (ITCs) recognized in 2010 associated with the construction of the Cimarron solar plant. This increase was partially offset by $1.0 million associated with lower pre-tax earnings.
For year-to-date 2011, income taxes were $77.6 million compared to $47.0 million for the corresponding period in 2010. The increase was primarily due to higher pre-tax earnings and a $2.6 million increase related to the impact of ITCs recognized in 2010 associated with the construction of the Cimarron solar plant.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
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 Southern Power’s future earnings potential. The level of Southern Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale business. These factors include Southern Power’s ability to achieve sales growth while containing costs, regulatory matters, creditworthiness of customers, total available generating capacity, the successful remarketing of capacity as current contracts expire, and Southern Power’s ability to execute its acquisition strategy and to construct generating facilities. Other factors that could influence future earnings include weather, demand, generation patterns, and operational limitations. Recessionary conditions have lowered demand and have negatively impacted capacity revenues under Southern Power’s PPAs where the amounts purchased are based on demand. Southern Power is unable to predict whether demand under these PPAs will return to pre-recession levels. The timing and extent of the economic recovery is uncertain and will impact future earnings. 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.
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 development by federal and state environmental regulatory agencies of additional control strategies for emissions 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
Kivalina Case
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” of Southern Power in Item 7 and Note 3 to the financial statements of Southern Power under “Environmental Matters — Carbon Dioxide Litigation — Kivalina Case” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in a similar case, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
Other Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” of Southern Power in Item 7 and Note 3 of the financial statements of Southern Power under “Environmental Matters — Carbon Dioxide Litigation — Other Litigation” in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation. On May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought a previous common law nuisance case involving substantially similar allegations. The earlier case was ultimately dismissed by the trial and appellate courts on procedural grounds. The current litigation was filed against numerous chemical, coal, oil, and utility companies, including Southern Power, and includes many of the same defendants that were involved in the earlier case. Southern Power believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Air Quality
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Air Quality” of Southern Power in Item 7 of the Form 10-K for additional information regarding regulation of air quality.
In April 2010, the EPA proposed an Industrial Boiler Maximum Achievable Control Technology rule that would establish emissions limits for various hazardous air pollutants typically emitted from industrial boilers, including biomass boilers and start-up boilers. The EPA published the final rule on March 21, 2011 and, at the same time, issued a notice of intent to reconsider the final rule to allow for additional public review and comment. The EPA has announced plans to finalize the rule by April 30, 2012. The effects of the regulatory proceedings will depend on the final form of the revised regulations and the outcome of any legal challenges and cannot be determined at this time.
On August 8, 2011, the EPA published the final Cross State Air Pollution Rule (CSAPR) requiring reductions of sulfur dioxide and nitrogen oxide emissions from power plants in 27 states located in the eastern half of the U.S. The CSAPR addresses interstate emissions of sulfur dioxide and nitrogen oxides that interfere with downwind states’ ability to meet or maintain national ambient air quality standards for ozone and/or particulate matter. The CSAPR takes effect quickly, with the first phase of compliance beginning January 1, 2012. The CSAPR replaces the 2005 Clean Air Interstate Rule. Each of the states within Southern Power’s service area is subject to the CSAPR’s summer ozone season nitrogen oxide allowance trading program, and the States of Alabama, Georgia, North Carolina, and Texas are subject to the annual sulfur dioxide and nitrogen oxide allowance trading programs for particulate matter. The CSAPR establishes unique emissions budgets for each state. The rule could have effects on Southern Power, including changes to the dispatch and operation of units and unit availability, depending on the cost and availability of emissions allowances. The final CSAPR has been challenged by numerous states, trade associations, and individual companies (including Southern Power), and many of those parties have also asked the EPA to reconsider the rule. In addition, on October 14, 2011, the EPA published proposed technical revisions to the CSAPR, including adjustments to certain state emissions budgets and delaying implementation of key limitations on interstate trading from January 2012 to January 2014. The ultimate outcome will depend on the outcome of any legal and administrative proceedings and proposed revisions and cannot be determined at this time.
Water Quality
On April 20, 2011, the EPA published a proposed rule that establishes standards for reducing effects on fish and other aquatic life caused by cooling water intake structures at existing power plants and manufacturing facilities. The rule also addresses cooling water intake structures for new units at existing facilities. The rule focuses on reducing adverse effects on fish and other aquatic life due to impingement (trapped by water flow velocity against a facility’s cooling water intake structure screens) and entrainment (drawn through a facility’s cooling water system after entering through the cooling water intake structure). Affected cooling water intake structures would have to comply with national impingement standards and entrainment reduction requirements. The rule’s proposed impingement standards could require changes to cooling water intake structures at some of Southern Power’s existing generating facilities, including those with cooling towers. In addition, new generating units constructed at existing plants would have to meet the national impingement standards and closed cycle cooling towers would have to be installed. The EPA has agreed in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some of Southern Power’s facilities may be subject to additional capital expenditures and compliance costs. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Projects
Cleveland County Units 1-4
In December 2008, Southern Power announced that it will build an electric generating plant in Cleveland County, North Carolina. The plant will consist of four combustion turbine natural gas generating units with a total generating capacity of 720 MWs. The units are expected to begin commercial operation in 2012. Costs incurred through September 30, 2011 were $242.5 million. The total estimated construction cost is expected to be between $350 million and $400 million.
Nacogdoches Biomass Plant
In October 2009, Southern Power acquired all of the outstanding membership interests of Nacogdoches Power LLC (Nacogdoches) from American Renewables LLC, the original developer of the project. Nacogdoches is constructing a biomass generating plant in Sacul, Texas with an estimated capacity of 100 MWs. The generating plant will be fueled from wood waste. Construction commenced in 2009 and the plant is expected to begin commercial operation in 2012. Costs incurred through September 30, 2011 were $371.9 million. The total estimated cost of the project is expected to be between $475 million and $500 million.
Power Sales Agreements
In June 2011, Southern Power entered into three PPAs with Georgia Power. Under the first agreement, Southern Power will provide Georgia Power with a total of 625 MWs of annual capacity for the period from June 2015 through May 2030 from Plant Franklin for the first seven months of the contract term and Plant Harris thereafter. Under the second agreement, Southern Power will provide Georgia Power with a total of 75 MWs of annual capacity for the period from January 2015 through May 2030 from Plant Dahlberg. Under the third agreement, Southern Power will provide Georgia Power with a total of 298 MWs of annual capacity for the period from January 2015 through May 2030 from the West Georgia generating facility. These contracts are subject to approval by the Georgia PSC and by the FERC. The PPAs also include an early termination provision through March 27, 2012 that allows Georgia Power to terminate one or more of the PPAs if Georgia Power does not need to retire certain coal-fired units as a result of EPA rules and regulations. Early termination will result in payment by Georgia Power of a fee of up to $20 million.
In August 2011, Southern Power entered into a PPA with an energy marketing firm to provide a total of 250 MWs of annual capacity from January 2016 through December 2025 from Plant Franklin.
Income Tax Matters
Legislation
On September 8, 2011, President Obama introduced the American Jobs Act (AJA). A major incentive in the AJA includes an extension of 100% bonus depreciation for property acquired and placed in service in 2012. Additional proposals are expected related to tax reform, which could include a reduction in the corporate income tax rate and a broadening of the tax base. The ultimate outcome of these matters 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, have become more frequent. The ultimate outcome of such pending or 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 of Southern Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Power’s financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 GAAP. 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 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, Impairment of Long Lived Assets and Intangibles, Acquisition Accounting, Contingent Obligations, Depreciation, and ITCs.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Power’s financial condition remained stable at September 30, 2011. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements as needed to meet future capital and liquidity needs. See “Sources of Capital” herein for additional information on lines of credit.
Net cash provided from operating activities totaled $328.2 million for the first nine months of 2011, compared to $255.0 million for the corresponding period in 2010. This increase was mainly due to an increase in cash received for convertible ITCs and bonus depreciation. Net cash used for investing activities totaled $264.1 million for the first nine months of 2011, compared to $207.7 million for the corresponding period in 2010. This increase was primarily due to an increase in construction work in progress related to construction activities at Cleveland County and Nacogdoches. Net cash provided from financing activities totaled $127.2 million for the first nine months of 2011, compared to $54.0 million used for the corresponding period in 2010, primarily due to a capital contribution for funding of construction-related activities and the issuance of new long-term debt in September 2011, partially offset by a $155.0 million reduction of commercial paper and a $65.9 million repayment of an affiliate loan related to SRE.
Significant asset changes in the balance sheet for the first nine months of 2011 include an increase in cash and cash equivalents due to a capital contribution for funding of construction-related activities and the issuance of new long-term debt in September 2011, an increase in accounts receivable from affiliated companies primarily due to higher energy sales under PPAs due to seasonality, an increase in construction work in progress due to Cleveland County and Nacogdoches construction activities, and a decrease in prepaid income taxes mainly due to the receipt of an income tax refund from the IRS related to convertible ITCs and bonus depreciation.
Significant liability and stockholder’s equity changes in the balance sheet for the first nine months of 2011 include an increase in securities due within one year due to a maturity of long-term debt in July 2012, a decrease in notes payable due to a repayment of an affiliate loan related to SRE, a reclassification of a long-term senior note to current, partially offset by the issuance of new long-term debt in September 2011, and an increase in deferred convertible ITCs due to additional spending on the Nacogdoches project.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, scheduled maturities of long-term debt, interest, leases, derivative obligations, purchase commitments, and long-term service agreements. Approximately $575 million will be required through September 30, 2012 to fund maturities of long-term debt.
The construction program is subject to periodic review and revision; these amounts include estimates for potential plant acquisitions and new construction as well as ongoing capital improvements. Planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power’s ability to execute its growth strategy. Actual construction costs may vary from these estimates because of changes in factors such as: business conditions; environmental statutes and regulations; FERC rules and regulations; load projections; legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital.
Sources of Capital
Southern Power may use operating cash flows, external funds, equity capital, or loans 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, short-term bank loans, or utilization of credit arrangements from banks. However, the amount, type, and timing of any future 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 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 to meet cash needs which can fluctuate significantly due to the seasonality of the business. To meet liquidity and capital resource requirements, Southern Power had at September 30, 2011 cash and cash equivalents of approximately $205.5 million and committed credit arrangements with banks of $500 million, all of which expire in 2016. During May 2011, Southern Power terminated its existing credit arrangement and entered into a $500 million credit arrangement expiring in 2016. Borrowings under this credit arrangement may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program. See Note 6 to the financial statements of Southern Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. 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 September 30, 2011, Southern Power had $49 million of commercial paper borrowings outstanding with a weighted average interest rate of 0.4% per annum. During the third quarter 2011, Southern Power had an average of $179 million of commercial paper outstanding with a weighted average interest rate of 0.4% per annum and the maximum amount outstanding was $256 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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 BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, and energy price risk management. At September 30, 2011, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- and/or Baa3 rating were approximately $436 million. At September 30, 2011, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Baa3 were approximately $1.2 billion. Included in these amounts are certain agreements that could require collateral in the event that one or more Southern Company system Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Power’s ability to access capital markets, particularly the short-term debt market.
In addition, through the acquisition of Plant Rowan, Southern Power assumed a PPA with North Carolina Municipal Power Agency No. 1 (NCMPA1) that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power’s credit. The NCMPA1 PPA requires credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses, if any, resulting from a credit downgrade.
Market Price Risk
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 takes 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 risk management practices. Southern Power’s policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress tests, and sensitivity analysis.
Southern Power’s market risk exposure relative to interest rate changes for the third quarter 2011 has not changed materially compared with the December 31, 2010 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Southern Power is not aware of any facts or circumstances that would significantly affect exposure on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
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, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.
The changes in fair value of energy-related derivative contracts for the three and nine months ended September 30, 2011 were as follows:
                 
    Third Quarter     Year-to-Date  
    2011     2011  
    Changes     Changes  
    Fair Value  
    (in millions)  
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (3.3 )   $ (3.5 )
Contracts realized or settled
    2.3       2.9  
Current period changes(a)
    (3.3 )     (3.7 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (4.3 )   $ (4.3 )
 
 
(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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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The changes in the fair value positions of the energy-related derivative contracts for the three and nine months ended September 30, 2011 were a decrease of $1.0 million and a decrease of $0.8 million, respectively, which are due to both power and natural gas positions. These changes are attributable to both the volume and prices of power and natural gas as follows:
                         
    September 30,     June 30,     December 31,  
    2011     2011     2010  
 
Power (net sold)
                       
                         
MWHs (in millions)
    0.3       0.7       0.9  
Weighted average contract cost per MWH above (below) market prices (in dollars)
  $(3.95 )   $(2.39 )   $(2.33 )
                         
Natural gas (net purchase)
                       
                         
Commodity — million mmBtu
    6.8       9.2       13.0  
Commodity — Weighted average contract cost per mmBtu above (below) market prices (in dollars)
  $0.55     $0.24     $0.11  
                         
The fair value of energy-related derivative contracts by hedge designation reflected in the financial statements as assets (liabilities) consists of the following:
                 
Asset (Liability) Derivatives     September 30,
2011
      December 31,
2010
 
    (in millions)
Cash flow hedges
  $(0.3 )   $(1.0 )
Not designated
    (4.0 )     (2.5 )
                 
Total fair value
  $(4.3 )   $(3.5 )
                 
Gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are initially deferred in OCI 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.
Total net unrealized pre-tax gains (losses) recognized in the statements of income for the three and nine months ended September 30, 2011 for energy-related derivative contracts that were not hedges were $(0.6) million and $(1.5) million, respectively, and will continue to be marked to market until the settlement date. For the three and nine months ended September 30, 2010, the total net unrealized pre-tax gains (losses) recognized in the statements of income were $(3.7) million and $(2.4) million, respectively.
Southern Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2011 were as follows:
                                 
            September 30, 2011        
            Fair Value Measurements        
    Total             Maturity        
    Fair Value     Year 1     Years 2&3     Years 4&5  
            (in millions)          
Level 1
  $     $     $     $  
Level 2
    (4.3 )     (4.4 )     (0.4 )     0.5  
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (4.3 )   $ (4.4 )   $ (0.4 )   $ 0.5  
 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Southern Power. Regulations to implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives, such as margin and reporting requirements, which could affect both the use and cost of over-the-counter derivatives. The impact, if any, cannot be determined until regulations are finalized.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Southern Power in Item 7 and Note 1 under “Financial Instruments” and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
During the nine months ended September 30, 2011, Southern Power paid $3.4 million on a long-term loan related to SRE.
In September 2011, Southern Power issued $300 million aggregate principal amount of Series 2011A 5.150% Senior Notes due September 15, 2041. The net proceeds from the sale of the Series 2011A Senior Notes were used to repay outstanding short-term debt and for general corporate purposes, including Southern Power’s continuous construction program.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern 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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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
 
   
Alabama Power
  A, B, C, E, F, G, H
 
   
Georgia Power
  A, B, C, E, F, G, H
 
   
Gulf Power
  A, B, C, E, F, G, H
 
   
Mississippi Power
  A, B, C, E, F, G, H
 
   
Southern Power
  A, B, C, E, G, H

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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 each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2010 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, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended September 30, 2011 and 2010. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP 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 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 are not necessarily indicative of the operating results to be expected for the full year.
 
      Effective March 15, 2011, Southern Company transferred its ownership in its wholly-owned subsidiary, Southern Renewable Energy, Inc. (SRE), to Southern Power. SRE was formed to construct, acquire, own, and manage renewable generation assets and sell electricity at market-based prices in the wholesale market. As a transfer of net assets among entities under common control, the assets and liabilities of SRE were transferred at historical cost. The consolidated financial statements of Southern Power have been revised to include the financial condition and the results of operations of SRE since its inception in January 2010.
 
      Southern Company made separate guarantees to two counterparties regarding performance of contractual commitments by SRE. Southern Power assumed the guarantees in connection with the transfer of SRE. The total original notional amount of the guarantees was $120 million, approximately $12 million of which was outstanding at September 30, 2011. Of this amount, approximately $3 million is expected to expire in the first quarter 2012 and approximately $9 million is expected to expire in 2037.
 
      Leveraged Leases
 
      Southern Company has several leveraged lease agreements, with terms ranging up to 45 years, which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. Southern Company reviews all important lease assumptions at least annually, or more frequently if events or changes in circumstances indicate that a change in assumptions has occurred or may occur. These assumptions include the effective tax rate, the residual value, the credit quality of the lessees, and the timing of expected tax cash flows. See Note 1 to the financial statements of Southern Company under “Leveraged Leases” in Item 8 of the Form 10-K for additional information.
 
      The recent financial and operational performance of one of Southern Company’s lessees and the associated generation assets has raised potential concerns on the part of Southern Company as to the credit quality of the lessee and the residual value of the asset. Southern Company will continue to monitor the performance of the underlying assets and to evaluate the ability of the lessee to continue to make the required lease payments. While there are strategic options that Southern Company may pursue to recover its investment in the leveraged lease, the potential impairment loss that would be incurred if there is an abandonment of the project is expected to be approximately $80 million on an after-tax basis. The ultimate outcome of this matter cannot be determined at this time.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Certain prior years’ data presented in the financial statements have been reclassified to conform to the current year presentation.
  (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, such as regulation of air emissions and water discharges. 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 U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, have become more frequent. The ultimate outcome of such pending or potential litigation against each registrant and any of 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 each registrant in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on such registrant’s financial statements.
 
      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 NSR provisions of the Clean Air Act and related state laws at certain coal-fired generating facilities. After Alabama Power was dismissed from the original action, the EPA filed a separate action in January 2001 against Alabama Power in the U.S. District Court for the Northern District of Alabama. In these lawsuits, the EPA alleges that NSR violations occurred at eight coal-fired generating facilities operated by Alabama Power and Georgia Power, including facilities co-owned by Mississippi Power and Gulf Power. The civil actions request penalties and injunctive relief, including an order requiring installation of the best available control technology at the affected units. The EPA concurrently issued notices of violation to Gulf Power and Mississippi Power relating to Gulf Power’s Plant Crist and Mississippi Power’s Plant Watson. In early 2000, the EPA filed a motion to amend its complaint to add Gulf Power and Mississippi Power as defendants based on the allegations in the notices of violation. However, in March 2001, the court denied the motion based on lack of jurisdiction, and the EPA has not re-filed. The action against Georgia Power has been administratively closed since the spring of 2001, and the case has not been reopened. The separate action against Alabama Power is ongoing.
 
      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 a portion of the Alabama Power lawsuit relating to the alleged NSR violations at Plant Miller. In September 2010, the EPA dismissed five of its eight remaining claims against Alabama Power, leaving only three claims for summary disposition or trial, including the claim relating to a facility co-owned by Mississippi Power. On March 14, 2011, the U.S. District Court for the Northern District of Alabama granted Alabama Power’s motion for summary judgment on all remaining claims and dismissed the case with prejudice. The EPA has appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit.
 
      Southern Company believes that the traditional operating companies 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 $37,500 per day, per violation at each generating unit, depending on the date of the alleged violation. An adverse outcome 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

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
    penalties. Such expenditures could affect future results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates. The ultimate outcome of these matters cannot be determined at this time.
 
      Carbon Dioxide Litigation
 
      New York Case
 
      In July 2004, three environmental groups and attorneys general from several states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed complaints in the U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. 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. The plaintiffs did not seek monetary damages in connection with their claims. Southern Company believes these claims are without merit. 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 in September 2009 that court reversed and remanded the case to the district court. In December 2010, Southern Company and the other defendants appealed the case to the U.S. Supreme Court. On June 20, 2011, the U.S. Supreme Court held that the plaintiffs’ federal common law claims against Southern Company and four other electric utilities were displaced by the Clean Air Act and EPA regulations addressing greenhouse gas emissions and remanded the case for consideration of whether federal law may also preempt the remaining state law claims. On October 6, 2011, the U.S. Court of Appeals for the Second Circuit granted the plaintiffs’ motion to remand the case to the district court for voluntary dismissal. It is anticipated that the district court will issue an order dismissing the case; however, the ultimate outcome cannot be determined at this time.
 
      Kivalina Case
 
      In February 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 allege that the village is being destroyed by erosion 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 some of 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 is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit. In September 2009, the U.S. District Court for the Northern District of California granted the defendants’ motions to dismiss the case based on lack of jurisdiction and ruled the claims were barred by the political question doctrine and by the plaintiffs’ failure to establish legal standing by showing that the defendants’ conduct caused the injury alleged. In November 2009, the plaintiffs filed an appeal with the U.S. Court of Appeals for the Ninth Circuit, challenging the district court’s order dismissing the case. On August 31, 2011, at the request of the plaintiffs as a result of the U.S. Supreme Court’s decision in the New York case discussed above, the U.S. Court of Appeals for the Ninth Circuit lifted the stay that had been issued. The ultimate outcome of this matter cannot be determined at this time.
 
      Other Litigation
 
      Common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas emissions have become more frequent, and, as illustrated by the New York and Kivalina cases, courts have been debating whether private parties and states have standing to bring such claims. In another common law nuisance case, the U.S. District Court for the Southern District of Mississippi dismissed private party claims against certain oil, coal, chemical, and utility companies alleging damages as a result of Hurricane Katrina. The court ruled that the parties lacked standing to bring the claims and the claims were barred by the political question doctrine. In October 2009, the U.S. Court of Appeals for the

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      Fifth Circuit reversed the district court and held that the plaintiffs did have standing to assert their nuisance, trespass, and negligence claims and none of the claims were barred by the political question doctrine. In May 2010, however, the U.S. Court of Appeals for the Fifth Circuit dismissed the plaintiffs’ appeal of the case based on procedural grounds, reinstating the district court decision in favor of the defendants. On January 10, 2011, the U.S. Supreme Court denied the plaintiffs’ petition to reinstate the appeal. This case is now concluded. However, on May 27, 2011, a class action complaint alleging damages as a result of Hurricane Katrina was filed in the U.S. District Court for the Southern District of Mississippi by the same plaintiffs who brought the previous common law nuisance case involving substantially similar allegations. The current litigation was filed against numerous chemical, coal, oil, and utility companies (including Alabama Power, Georgia Power, Gulf Power, and Southern Power) and includes many of the same defendants that were involved in the earlier case. Each Southern Company entity named in the lawsuit believes these claims are without merit. The ultimate outcome of this matter cannot be determined at this time.
 
      Environmental Remediation
 
      The registrants must comply with 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’s environmental remediation liability as of September 30, 2011 was $14 million. Georgia Power has been designated or identified as a potentially responsible party (PRP) 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 cleanup and 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; however, they are not expected to have a material impact on Georgia Power’s or Southern Company’s financial statements.
 
      In September 2008, the EPA advised Georgia Power that it has been designated as a PRP at the Ward Transformer Superfund site located in Raleigh, North Carolina. Numerous other entities have also received notices regarding this site from the EPA. In addition, in April 2009, two PRPs filed separate actions in the U.S. District Court for the Eastern District of North Carolina against numerous other PRPs, including Georgia Power, seeking contribution from the defendants for expenses incurred by the plaintiffs related to work performed at a portion of the site. Discovery is on-going in these cases.
 
      On September 29, 2011, the EPA issued a Unilateral Administrative Order (UAO) to Georgia Power and 22 other parties, ordering specific remedial action of certain areas at the Ward Transformer Superfund site. Georgia Power does not believe it is a liable party under CERCLA based on its alleged connection to the site. As a result, on November 7, 2011, Georgia Power filed a response with the EPA indicating that Georgia Power is not willing to undertake the work set forth in the UAO because Georgia Power has sufficient cause to believe it is not a liable party.
 
      The EPA may seek to enforce a UAO in court pursuant to its enforcement authority under CERCLA and may seek recovery of its costs in undertaking removal or remedial action. If the court determines that a respondent failed to comply with the UAO without sufficient cause, the EPA may also seek civil penalties of up to $37,500 per day for the violation and punitive damages of up to three times the costs incurred by the EPA as a result of the party’s failure to comply with the UAO.
 
      The ultimate outcome of these matters will depend upon further environmental assessment, the ultimate number of PRPs, and a determination regarding Georgia Power’s status as a liable party under CERCLA and cannot be determined at this time. As a result, Southern Company and Georgia Power also cannot estimate the potential financial statement impacts at this time.
 
      Gulf Power’s environmental remediation liability includes estimated costs of environmental remediation projects of approximately $62 million as of September 30, 2011. These estimated costs relate to site closure criteria by the Florida

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      Department of Environmental Protection (FDEP) for potential impacts to soil and 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 PRP 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 bankrupt 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 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 impact of this matter will depend upon further environmental assessment and the ultimate number of PRPs. The remediation expenses incurred by Mississippi Power are expected to be recovered through the ECO Plan.
 
      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 have a material impact on their respective financial statements.
 
      Right of Way Litigation
 
      Southern Company and certain of its subsidiaries, including Mississippi Power, 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 Mississippi Power believe they have complied with applicable laws and that the plaintiffs’ claims are without merit.
 
      Mississippi Power has entered into agreements with plaintiffs in approximately 95% 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 the related cases have been dismissed. 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 Mississippi Power, were named as defendants in a lawsuit brought in Troup County, Georgia, Superior Court by Interstate Fiber Network Inc. a subsidiary of telecommunications company ITC DeltaCom, Inc. 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. Southern Company and Mississippi Power 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. In August 2010, the defendants filed a motion to dismiss the suit for lack of prosecution. The court denied the defendants’ motion to dismiss the claim. On March 25, 2011, the plaintiffs filed an amended complaint asserting claims for breach of contract for failing to make the defendants’ facilities fully available to the plaintiffs and for failing to indemnify the plaintiffs in defending the underlying landowner litigation. An adverse outcome in this matter is not expected to be material to Southern Company or Mississippi Power; however, the final outcome cannot now be determined.

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      Nuclear Fuel Disposal Cost Litigation
 
      See Note 3 to the financial statements of Southern Company, Alabama Power, and Georgia Power under “Nuclear Fuel Disposal Costs” in Item 8 of the Form 10-K for information regarding the litigation brought by Alabama Power and Georgia Power against the government for breach of contracts related to the disposal of spent nuclear fuel.
 
      In July 2007, the U.S. Court of Federal Claims awarded Georgia Power approximately $30 million, based on its ownership interests, and awarded Alabama Power approximately $17 million, representing substantially all of the direct costs of the expansion of spent nuclear fuel storage facilities at Plants Farley, Hatch, and Vogtle from 1998 through 2004.
 
      In November 2007, the government’s motion for reconsideration was denied. In January 2008, the government filed an appeal and, in February 2008, filed a motion to stay the appeal, which the U.S. Court of Appeals for the Federal Circuit granted in April 2008. In May 2010, the U.S. Court of Appeals for the Federal Circuit lifted the stay.
 
      On March 11, 2011, the U.S. Court of Appeals for the Federal Circuit issued an order in which it affirmed the damage award to Alabama Power, but remanded the Georgia Power portion of the proceeding back to the U.S. Court of Federal Claims for reconsideration of the damages amount in light of the spent nuclear fuel acceptance rates adopted in a separate proceeding by the U.S. Court of Appeals for the Federal Circuit. The Georgia Power portion remains pending. On July 7, 2011, Alabama Power and the government entered into a stipulation for the entry of a separate judgment in favor of Alabama Power. On July 12, 2011, the court entered final judgment in favor of Alabama Power and subsequently the judgment was paid.
 
      In April 2008, a second claim against the government was filed for damages incurred after December 31, 2004 (the court-mandated cut-off in the original claim) due to the government’s alleged continuing breach of contract. The complaint does not contain any specific dollar amount for recovery of damages. Damages will continue to accumulate until the issue is resolved or the storage is provided. No amounts have been recognized in the financial statements as of September 30, 2011 for the second claim.
 
      The final outcome of these matters cannot be determined at this time, but no material impact on net income is expected as any damage amounts collected from the government are expected to be credited to cost of service for the benefit of customers.
 
      Sufficient pool storage capacity for spent fuel is available at Plant Vogtle to maintain full-core discharge capability for both units into 2014. Construction of an on-site dry storage facility at Plant Vogtle is expected to begin in sufficient time to maintain pool full-core discharge capability. At Plants Hatch and Farley, on-site dry spent fuel storage facilities are operational and can be expanded to accommodate spent fuel through the expected life of each plant.
 
      Income Tax Matters
 
      Georgia State Income Tax Credits
 
      Georgia Power’s 2005 through 2009 income tax filings for the State of Georgia included state income tax credits for increased activity through Georgia ports. Georgia Power also filed similar claims for the years 2002 through 2004. In July 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. On June 10, 2011, Georgia Power and the Georgia Department of Revenue agreed to a settlement resolving the claims. As a result, Georgia Power recorded additional tax benefits of approximately $64 million and, in accordance with the 2010 ARP, also recorded a related regulatory liability of approximately $62 million. In addition, Georgia Power recorded a reduction of approximately $23 million in related interest expense. See Notes 3 and 5 to the financial statements of Southern Company and Georgia Power in Item 8 of the Form 10-K under “Income Tax Matters” and “Unrecognized Tax Benefits,” respectively, and Note (G) herein for additional information.

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      State PSC Matters
 
      Alabama Power
 
      Environmental Accounting Order
 
      Proposed environmental regulations could result in significant additional compliance costs that could affect future unit retirement and replacement decisions. On September 7, 2011, the Alabama PSC approved an order allowing for the establishment of a regulatory asset to record the unrecovered investment costs associated with any such decisions, including the unrecovered plant asset balance and the unrecovered costs associated with site removal and closure. These costs would be amortized over the affected unit’s remaining useful life, as established prior to the decision regarding early retirement.
 
      Retail Rate Adjustments
 
      See Note 3 to the financial statements of Southern Company and Alabama Power under “Retail Regulatory Matters — Alabama Power — Natural Disaster Reserve” and “Retail Regulatory Matters — Natural Disaster Reserve,” respectively, in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power. On July 12, 2011, the Alabama PSC issued an order to eliminate a tax-related adjustment under Alabama Power’s rate structure effective with October 2011 billings. Alabama Power anticipates the elimination of this adjustment will result in additional revenues of approximately $30 million for the remainder of 2011 and is expected to have an annual effect of approximately $150 million beginning in 2012.
 
      In accordance with the order, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues from the elimination of the tax-related adjustment to replenish the NDR, which was impacted as a result of operations and maintenance expenses incurred in connection with the April 2011 storms in Alabama. Alabama Power expects that the additional revenue in 2012 will preclude the need for a rate adjustment under Rate Stabilization and Equalization (Rate RSE). Accordingly, Alabama Power agreed to a moratorium on any increase in 2012 under Rate RSE.
 
      Natural Disaster Reserve
 
      See Note 3 to the financial statements of Southern Company and Alabama Power under “Retail Regulatory Matters — Alabama Power — Natural Disaster Reserve” and “Retail Regulatory Matters — Natural Disaster Reserve,” respectively, in Item 8 of the Form 10-K for additional information.
 
      During the first half of 2011, multiple storms caused varying degrees of damage to Alabama Power’s transmission and distribution facilities. The most significant storm occurred on April 27, 2011, causing over 400,000 of Alabama Power’s 1.4 million customers to be without electrical service. The estimated cost of repairing the damage to facilities and restoring electrical service to customers, as a result of these storms, is approximately $45 million for operations and maintenance expenses and approximately $163 million for capital-related expenditures. Alabama Power maintains a reserve for operations and maintenance expenses to cover the cost of damages from major storms to Alabama Power’s transmission and distribution facilities.
 
      At September 30, 2011, the NDR had an accumulated balance of $75 million, which is included in Southern Company’s and Alabama Power’s Condensed Balance Sheets herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in the Condensed Statements of Income herein.
 
      In accordance with the order discussed above that was issued by the Alabama PSC on July 12, 2011 to eliminate a tax-related adjustment under Alabama Power’s rate structure, Alabama Power will make additional accruals to the NDR in the fourth quarter 2011 of an amount equal to such additional 2011 revenues, which are expected to be approximately $30 million.

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      Retail Fuel Cost Recovery
 
      See Note 3 to the financial statements of Southern Company and Alabama Power under “Retail Regulatory Matters — Alabama Power — Fuel Cost Recovery” and “Retail Regulatory Matters — Fuel Cost Recovery,” respectively, 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 September 30, 2011 totaled $39 million as compared to $4 million at December 31, 2010. These under recovered fuel costs at September 30, 2011 are included in deferred under recovered regulatory clause revenues on Southern Company’s and Alabama Power’s Condensed Balance Sheets herein. 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 any recovery of the under recovered fuel costs.
 
      Georgia Power
 
      Fuel Cost Recovery
 
      See Note 3 to the financial statements of Southern Company and Georgia Power under “Retail Regulatory Matters — Georgia Power — Fuel Cost Recovery” and “Retail Regulatory Matters — Fuel Cost Recovery,” respectively, in Item 8 of the Form 10-K for additional information. On May 24, 2011, the Georgia PSC approved Georgia Power’s request to decrease fuel rates by 0.61%. The decrease reduced Georgia Power’s annual billings by approximately $43 million effective June 1, 2011. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company’s or Georgia Power’s revenues or net income, but will affect cash flow.
 
      Nuclear Construction
 
      See Note 3 to the financial statements of Southern Company and Georgia Power under “Retail Regulatory Matters — Georgia Power — Nuclear Construction” and “Construction — Nuclear,” respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power’s construction of Plant Vogtle Units 3 and 4, which are expected to attain commercial operation in 2016 and 2017, respectively.
 
      In December 2010, Westinghouse submitted a revision to the supporting documents for the AP1000 Design Certification Amendment (DCA) to the NRC. On January 24, 2011, the Advisory Committee on Reactor Safeguards endorsed the issuance of the Construction and Operating Licenses (COLs) for Plant Vogtle Units 3 and 4. In addition, on March 25, 2011, the NRC submitted to the EPA the final environmental impact statement for Plant Vogtle Units 3 and 4. On September 27 and 28, 2011, the NRC held the mandatory hearing for the COLs and Georgia Power’s request for a second limited work authorization. On October 18, 2011, the Atomic Safety and Licensing Board (ASLB) denied the remaining motions seeking to re-open the Plant Vogtle Units 3 and 4 licensing proceeding; however, on October 27, 2011, the petitioners requested reconsideration of this decision and, on November 2, 2011, further appealed to the NRC to admit their contentions, should they again be denied by the ASLB. The remaining steps in the regulatory process are to address the status of these petitions and to obtain the NRC approvals of the DCA and the COLs, which Georgia Power expects in late 2011. Issuance of the COLs by the NRC staff generally would be expected to occur 10 days after the NRC’s decision. However, due to certain administrative procedural requirements, it is possible that the effective date of the DCA and issuance of the COLs could occur in early 2012. In this case, the NRC could approve Georgia Power’s request for a second limited work authorization, which would allow Georgia Power to perform additional construction activities related to the nuclear island in late 2011.
 
      In connection with its certification of Plant Vogtle Units 3 and 4, the Georgia PSC ordered Georgia Power and the Georgia PSC Public Interest Advocacy Staff to work together to develop a risk sharing or incentive mechanism that would provide some level of protection to ratepayers in the event of significant cost overruns, but also not penalize Georgia Power’s earnings if and when overruns are due to mandates from governing agencies. In May 2011, the Georgia PSC initiated a separate proceeding to address the issue. On August 2, 2011, the Georgia PSC voted to approve a settlement agreement between Georgia Power and the Georgia PSC Public Interest Advocacy Staff whereby the proposed risk

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      sharing mechanisms were withdrawn. On August 16, 2011, the Georgia PSC voted to approve Georgia Power’s fourth semi-annual construction monitoring report including total costs of $1.3 billion for Plant Vogtle Units 3 and 4 incurred through December 31, 2010. Georgia Power will continue to file construction monitoring reports by February 28 and August 31 of each year during the construction period.
 
      In December 2010, the Georgia PSC approved the NCCR tariff, which became effective January 1, 2011. The NCCR tariff was established to recover financing costs for nuclear construction projects by including the related construction work in progress accounts in rate base during the construction period in accordance with the Georgia Nuclear Energy Financing Act. With respect to Plant Vogtle Units 3 and 4, this legislation allows Georgia Power to recover projected financing costs of approximately $1.7 billion during the construction period beginning in 2011, which reduces the projected in-service cost to approximately $4.4 billion. Georgia Power is collecting and amortizing to earnings approximately $91 million of financing costs capitalized in 2009 and 2010 over the five-year period ending December 31, 2015, in addition to the ongoing financing costs. At September 30, 2011, approximately $78 million of these 2009 and 2010 costs were included in construction work in progress.
 
      Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and 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 (collectively, Owners), and a consortium consisting of Westinghouse and Stone & Webster, Inc. have established both informal and formal dispute resolution procedures in order to resolve issues that commonly arise during the course of constructing a project of this magnitude. Southern Nuclear, on behalf of the Owners, has initiated both formal and informal claims through these procedures, including ongoing claims. During the course of construction activities, issues have materialized that may impact the project budget and schedule, including potential costs associated with compressing the project schedule to meet the projected commercial operation dates. The Owners have successfully used both the informal and formal procedures to resolve disputes and expect to resolve any existing and future disputes through these procedures as well.
 
      There are other pending technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4, including petitions filed at the NRC in response to the events in Japan. Similar additional challenges at the state and federal level are expected as construction proceeds.
 
      The ultimate outcome of these matters cannot be determined at this time.
 
      Other Construction
 
      Georgia Power is currently constructing Plant McDonough Units 4, 5, and 6 which are expected to be placed into service in January 2012, May 2012, and January 2013, respectively. The Georgia PSC has approved Georgia Power’s quarterly construction monitoring reports, including actual project expenditures incurred, through December 31, 2010. Georgia Power filed its second quarter 2011 construction monitoring report on August 26, 2011, including actual project expenditures incurred through June 30, 2011 as well as a request to approve a 4.6% increase in the current certified amount. The Georgia PSC is scheduled to issue its decision on February 16, 2012. Georgia Power will continue to file quarterly construction monitoring reports throughout the construction period. The ultimate outcome of this matter cannot be determined at this time.
 
    2011 Integrated Resource Plan Update
 
      See Note 3 to the financial statements of Southern Company and Georgia Power under “Retail Regulatory Matters — Georgia Power — Retail Rate Plans” and “Retail Regulatory Matters — Rate Plans,” respectively, in Item 8 of the Form 10-K for additional information regarding potential rules and regulations being developed by the EPA, including the Utility Maximum Available Control Technology (MACT) rule for coal- and oil-fired electric utility steam generating units, revisions to effluent guidelines for steam electric power plants, and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; and the 2010 ARP.

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      On August 4, 2011, Georgia Power filed an update to its IRP (2011 IRP Update). The filing included Georgia Power’s application to decertify Plant Branch Units 1 and 2 as of December 31, 2013 and October 1, 2013, the compliance dates for the respective units under the Georgia Multi-Pollutant Rule. However, as a result of the considerable uncertainty regarding pending state and federal environmental regulations, Georgia Power is continuing to defer decisions to add controls, switch fuel, or retire its remaining fossil generating units where environmental controls have not yet been installed, representing approximately 2,600 MWs of capacity. Georgia Power expects to update its economic analysis of these units once the Utility MACT rule is finalized. Georgia Power currently expects that certain units, representing approximately 600 MWs of capacity, are more likely than others to switch fuel or be controlled in time to comply with the Utility MACT rule. However, even if the updated economic analysis shows more positive benefits associated with adding controls or switching fuel for more units, it is unlikely that all of the required controls could be completed by 2015, the expected effective date of the Utility MACT rule. As a result, Georgia Power currently cannot rely on the availability of approximately 2,000 MWs of capacity in 2015. As such, the 2011 IRP Update also includes Georgia Power’s application requesting that the Georgia PSC certify the purchase of a total of 1,562 MWs of capacity beginning in 2015, from four PPAs selected through the 2015 request for proposal process.
 
      Under the terms of the 2010 ARP, any costs associated with changes to Georgia Power’s approved environmental operating or capital budgets resulting from new or revised environmental regulations through 2013 that are approved by the Georgia PSC in connection with an updated IRP will be deferred as a regulatory asset to be recovered over a time period deemed appropriate by the Georgia PSC. In connection with the retirement decision, Georgia Power reclassified the retail portion of the net carrying value of Plant Branch Units 1 and 2 from plant in service, net of depreciation, to other utility plant, net. Georgia Power is continuing to depreciate these units using the current composite straight-line rates previously approved by the Georgia PSC and upon actual retirement has requested that the Georgia PSC approve the continued deferral and amortization of the units’ remaining net carrying value. As a result of this regulatory treatment, the de-certification of Plant Branch Units 1 and 2 is not expected to have a significant impact on Southern Company’s or Georgia Power’s financial statements.
 
      The Georgia PSC is expected to vote on these requests in March 2012. The ultimate outcome of these matters cannot be determined at this time.
 
      Gulf Power
 
      Retail Base Rate Case
 
      On July 8, 2011, Gulf Power filed a petition with the Florida PSC requesting an increase in retail rates to the extent necessary to generate additional gross annual revenues in the amount of $93.5 million. The requested increase is expected to provide a reasonable opportunity for Gulf Power to earn a retail rate of return on common equity of 11.7%. The Florida PSC is expected to make a decision on this matter in the first quarter 2012. Gulf Power has calculated its revenue deficiency based on the projected period January 1, 2012 through December 31, 2012 which serves as the test year.
 
      On August 23, 2011, the Florida PSC approved Gulf Power’s request for an interim retail rate increase of $38.5 million per year, effective beginning with billings based on meter readings on and after September 22, 2011 and continuing through the effective date of the Florida PSC’s decision on Gulf Power’s petition for the permanent increase. The interim rates are subject to refund pending the outcome of the permanent retail base rate proceeding.
 
      The ultimate outcome of this matter cannot be determined at this time.
 
      Fuel Cost Recovery
 
      Gulf Power has established fuel cost recovery rates approved by the Florida PSC. If the projected fuel cost over or under recovery balance at year-end exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate an adjustment to the fuel cost recovery factor is being requested.

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      In previous years, Gulf Power has experienced volatility in pricing of fuel commodities with higher than expected pricing for coal and volatile price swings in natural gas. Under recovered fuel costs at September 30, 2011 totaled $7.5 million, compared to $17.4 million at December 31, 2010. This amount is included in under recovered regulatory clause revenues on Southern Company’s and 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 will have no significant effect on Southern Company’s or Gulf Power’s revenues or net income, but will affect cash flow. See Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters — Fuel Cost Recovery,” respectively, in Item 8 of the Form 10-K for additional information.
 
      Purchased Power Capacity Recovery
 
      Gulf Power has established purchased power capacity recovery cost rates as approved by the Florida PSC. If the projected purchased power capacity cost over or under recovery balance at year-end exceeds 10% of the projected purchased power capacity revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate an adjustment to the purchased power capacity cost recovery factor is being requested. Gulf Power filed such notice with the Florida PSC on August 19, 2011, but no adjustment to the 2011 factor was requested.
 
      Over recovered purchased power capacity costs at September 30, 2011 totaled $3.5 million compared to $4.4 million at December 31, 2010. This amount is included in other regulatory liabilities, current on Southern Company’s and Gulf Power’s Condensed Balance Sheets herein. Purchased power capacity 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 will have no significant effect on Southern Company’s and Gulf Power’s revenues or net income, but will affect cash flow.
 
      See Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters — Purchased Power Capacity Recovery,” respectively, in Item 8 of the Form 10-K for additional information.
 
      Environmental Cost Recovery
 
      In July 2010, Mississippi Power filed a request for a certificate of public convenience and necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $625 million and is scheduled for completion in early 2015. Hearings on the certificate request were held by the Mississippi PSC on January 25, 2011. On May 5, 2011, the Mississippi PSC approved up to $19.5 million (with respect to Mississippi Power’s ownership portion) in additional spending for 2011 for the scrubber project. A decision on a final order is not anticipated prior to issuance of the final Utility MACT rule in December 2011. The ultimate outcome of this matter cannot be determined at this time.
 
      Over recovered environmental costs at September 30, 2011 totaled $16.9 million compared to $10.4 million at December 31, 2010. This amount is included in other regulatory liabilities, current on Southern Company’s and Gulf Power’s Condensed Balance Sheets herein. See Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters — Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.
 
      Energy Conservation Cost Recovery
 
      Every five years, the Florida PSC establishes new numeric conservation goals covering a 10-year period for utilities to reduce annual energy and seasonal peak demand using demand-side management (DSM) programs. After the goals are established, utilities develop plans and programs to meet the approved goals. The costs for these programs are recovered through rates established annually in the Energy Conservation Cost Recovery clause.

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      The most recent goal setting process established new DSM goals for the period 2010-2019. The new goals are significantly larger than the goals established in the previous five-year cycle due to a change in the cost-effectiveness test on which the Florida PSC relies to set the goals. Throughout 2010, Gulf Power engaged in a process at the Florida PSC to develop plans and programs to meet the new DSM goals. The DSM program standards were approved in April 2011, which allow Gulf Power to implement its DSM programs designed to meet the new goals. Higher cost recovery rates and achievement of the new DSM goals may result in reduced sales of electricity which could negatively impact results of operations, cash flows, and financial condition if base rates cannot be adjusted on a timely basis.
 
      Mississippi Power
 
      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 additional information regarding Mississippi Power’s base rates.
 
      In November 2010, Mississippi Power filed its annual PEP filing for 2011, which indicated a rate increase of 1.936%, or $16.1 million, annually. On January 10, 2011, the Mississippi Public Utilities Staff (MPUS) contested the filing. On June 7, 2011, the Mississippi PSC issued an order approving a joint stipulation between the MPUS and Mississippi Power resulting in no change in rates.
 
      On March 15, 2011, Mississippi Power submitted its annual PEP lookback filing for 2010, which recommended no surcharge or refund. On May 2, 2011, Mississippi Power received a letter from the MPUS disputing certain items in the 2010 PEP lookback filing. The ultimate outcome of this matter cannot be determined at this time.
 
      System Restoration Rider
 
      See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters — System Restoration Rider” in Item 8 of the Form 10-K for additional information regarding the System Restoration Rider.
 
      On January 31, 2011, Mississippi Power submitted its 2011 System Restoration Rider rate filing to the Mississippi PSC, which proposed that Mississippi Power be allowed to accrue approximately $3.6 million to the property damage reserve in 2011. On May 5, 2011, the filing was approved by the Mississippi PSC.
 
      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 14, 2011, Mississippi Power submitted its ECO Plan notice which proposed an immaterial decrease in annual revenues. In addition, Mississippi Power proposed to change the ECO Plan collection period to more appropriately match ECO Plan revenues with ECO Plan expenditures. On April 7, 2011, due to changes in ECO Plan cost projections, Mississippi Power submitted a revised 2011 ECO Plan which changed the requested annual revenues to a $0.9 million decrease. On May 5, 2011, hearings on the revised ECO Plan were held and the filing was approved by the Mississippi PSC with the new rates effective in May 2011.
 
      In July 2010, Mississippi Power filed a request for a certificate of public convenience and necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $625 million, with Mississippi Power’s portion being $312.5 million. As of September 30, 2011, total project expenditures were $35.8 million, with Mississippi Power’s portion being $17.9 million. The project is scheduled for completion in early 2015.

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      Mississippi Power’s portion of the cost, if approved by the Mississippi PSC, is expected to be recovered through the ECO Plan. Hearings on the certificate request were held by the Mississippi PSC on January 25, 2011. On May 5, 2011, in conjunction with the ECO Plan hearings, the Mississippi PSC approved up to $19.5 million (with respect to Mississippi Power’s ownership portion) in additional spending for 2011 for the scrubber project. A decision on a final order is not anticipated prior to issuance of the final Utility MACT rule in December 2011. The ultimate outcome of this matter cannot be determined at this time.
 
      Fuel Cost Recovery
 
      See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters — Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Mississippi Power’s fuel cost recovery. Mississippi Power establishes, annually, a retail fuel cost recovery factor that is approved by the Mississippi PSC. Mississippi Power is required to file for an adjustment to the retail fuel cost recovery factor annually; such filing occurred in November 2010. The Mississippi PSC approved the retail fuel cost recovery factor in December 2010, with the new rates effective in January 2011. The retail fuel cost recovery factor will result in an annual decrease in an amount equal to 5.0% of total 2010 retail revenue. At September 30, 2011, the amount of over recovered retail fuel costs included in the balance sheets was $41.4 million compared to $55.2 million at December 31, 2010. Mississippi Power also has a wholesale Municipal and Rural Associations (MRA) and a Market Based (MB) fuel cost recovery factor. Effective January 1, 2011, the wholesale MRA fuel rate decreased, resulting in an annual decrease in an amount equal to 3.5% of total 2010 MRA revenue. Effective February 1, 2011, the wholesale MB fuel rate decreased, resulting in an annual decrease in an amount equal to 7.0% of total 2010 MB revenue. At September 30, 2011, the amount of over recovered wholesale MRA and MB fuel costs included in the balance sheets was $14.6 million and $2.3 million compared to $17.5 million and $4.4 million, respectively, at December 31, 2010. In addition, at September 30, 2011, the amount of over recovered MRA emissions allowance cost included in the balance sheets was $1.0 million. See Note 3 to the financial statements of Mississippi Power under “FERC Matters” in Item 8 of the Form 10-K for additional information. 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, this decrease to the billing factors will have no significant effect on Southern Company’s or Mississippi Power’s revenues or net income, but will decrease annual cash flow.
 
      Integrated Coal Gasification Combined Cycle
 
      See Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters — Mississippi Power Integrated Coal Gasification Combined Cycle” and of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K for information regarding Mississippi Power’s construction of the Kemper IGCC.
 
      In June 2010, the Mississippi Chapter of the Sierra Club (Sierra Club) filed an appeal of the Mississippi PSC’s June 2010 decision to grant the Certificate of Public Convenience and Necessity for the Kemper IGCC with the Chancery Court of Harrison County, Mississippi (Chancery Court). Subsequently, in July 2010, the Sierra Club also filed an appeal directly with the Mississippi Supreme Court. In October 2010, the Mississippi Supreme Court dismissed the Sierra Club’s direct appeal. On February 28, 2011, the Chancery Court issued a judgment affirming the Mississippi PSC’s order authorizing the construction of the Kemper IGCC. On March 1, 2011, the Sierra Club appealed the Chancery Court’s decision to the Mississippi Supreme Court.
 
      In May 2009, Mississippi Power received notification from the IRS formally certifying that the IRS allocated $133 million of Internal Revenue Code Section 48A tax credits (Phase I) to Mississippi Power. On April 19, 2011, Mississippi Power received notification from the IRS formally certifying that the IRS allocated $279 million of Internal Revenue Code Section 48A tax credits (Phase II) to Mississippi Power. The utilization of Phase I and Phase II credits is dependent upon meeting the IRS certification requirements, including an in-service date no later than May 11, 2014 for the Phase I credits and April 19, 2016 for the Phase II credits. In order to remain eligible for the Phase II tax credits, Mississippi Power plans to capture and sequester (via enhanced oil recovery) at least 65% of the carbon dioxide (CO2) produced by the plant during operations in accordance with the recapture rules for Section 48A investment tax credits. Through

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      September 30, 2011, Mississippi Power received or accrued tax benefits totaling $73.9 million for these tax credits, which will be amortized as a reduction to depreciation and amortization over the life of the Kemper IGCC.
 
      In February 2008, Mississippi Power requested that the DOE transfer the remaining funds previously granted under the Clean Coal Power Initiative Round 2 (CCPI2) from a cancelled IGCC project of one of Southern Company’s subsidiaries that would have been located in Orlando, Florida. In December 2008, an agreement was reached to assign the remaining funds ($270 million) to the Kemper IGCC. Mississippi Power will receive grant funds of $245 million during the construction of the Kemper IGCC and $25 million during its initial operation. Mississippi Power had received $158.6 million through September 30, 2011 and subsequently received an additional $20.9 million on October 19, 2011 associated with this grant.
 
      On March 10, 2011, the Sierra Club filed a lawsuit in the U.S. District Court for the District of Columbia against the DOE regarding the National Environmental Policy Act review process asking for a preliminary and permanent injunction on the issuance of CCPI2 funds and loan guarantees and a stay to any related construction activities based upon alleged deficiencies in the DOE’s environmental impact statement. Mississippi Power intervened in this lawsuit on May 18, 2011.
 
      In March 2010, the Mississippi Department of Environmental Quality (MDEQ) issued the Prevention of Significant Deterioration (PSD) air permit modification for the plant, which modifies the original PSD air permit issued in October 2008. The Sierra Club requested a formal evidentiary hearing regarding the issuance of the modified permit. On April 4, 2011, the MDEQ Permit Board held an evidentiary hearing wherein it unanimously affirmed the PSD air permit. On June 30, 2011, the Sierra Club appealed the final PSD air permit issued by the MDEQ to the Chancery Court of Kemper County, Mississippi. Mississippi Power has intervened as a party in this appeal.
 
      On March 4, 2011, Mississippi Power and Denbury Onshore (Denbury), a subsidiary of Denbury Resources Inc., entered into a contract pursuant to which Denbury will purchase 70% of the CO2 captured from the Kemper IGCC. On May 19, 2011, Mississippi Power and Treetop Midstream Services, LLC (Treetop), an affiliate of Tellus Operating Group, LLC and a subsidiary of Tenrgys, LLC, entered into a contract pursuant to which Treetop will purchase 30% of the CO2 captured from the Kemper IGCC.
 
      On April 27, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing Certificated New Plant-A (CNP-A), a new proposed cost recovery mechanism designed specifically to recover financing costs during the construction phase of the Kemper IGCC. Annual CNP-A rate filings will be made with the first filing occurring by November 15, 2011. If approved by the Mississippi PSC, recovery through CNP-A will remain in place thereafter until the end of the calendar year that the Kemper IGCC is placed into commercial service, which is projected to be 2014. On August 9, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule detailing Certificated New Plant-B (CNP-B) to govern rates effective from the first calendar year after the Kemper IGCC is placed into commercial service through the first seven full calendar years of its operation. Under the proposed CNP-B, Mississippi Power’s allowed cost of capital would be adjusted based on certain operational performance indicators.
 
      On June 7, 2011, consistent with the treatment of non-capital costs during the pre-construction period, the Mississippi PSC granted Mississippi Power the authority to defer all non-capital Kemper IGCC-related costs to a regulatory asset during the construction period. The amortization period for the regulatory asset will be determined by the Mississippi PSC at a later date. In addition, Mississippi Power is authorized to accrue carrying costs for 2011 on the unamortized balance of such regulatory assets at a rate and in a manner to be determined by the Mississippi PSC in connection with future proceedings regarding the cost recovery mechanism for the Kemper IGCC.
 
      On September 9, 2011, Mississippi Power filed a request for confirmation of the Kemper IGCC’s Certificate of Public Convenience and Necessity with the Mississippi PSC authorizing the acquisition, construction, and operation of approximately 61 miles of CO2 pipeline infrastructure at an estimated capital cost of $141 million.
 
      The Kemper IGCC will use locally mined lignite (an abundant, lower heating value coal) from a proposed mine adjacent to the plant as fuel. In conjunction with the plant, Mississippi Power will own a lignite mine and equipment

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      and will acquire mineral reserves located around the plant site in Kemper County. The estimated capital cost of the mine is approximately $245.0 million. On January 18, 2011, Liberty Fuels Company, LLC, a subsidiary of The North American Coal Corporation, which will develop, construct, and manage the mining operations, submitted an application to the MDEQ for a surface mining permit for the mine.
 
      As of September 30, 2011, Mississippi Power had spent a total of $664.9 million on the Kemper IGCC, including regulatory filing costs. Of this total, $463.8 million was included in construction work in progress (net of $179.5 million of CCPI2 grant funds), $19.0 million was recorded in other regulatory assets, $1.6 million was recorded in other deferred charges and assets, and $1.0 million was previously expensed.
 
      The ultimate outcome of these matters cannot be determined at this time.
 
      Plant Daniel Combined Cycle Generating Units
 
      See Note 7 to the financial statements of Southern Company and Mississippi Power under “Operating Leases” and “Operating Leases — Plant Daniel Combined Cycle Generating Units,” respectively, in Item 8 of the Form 10-K for information relating to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel (Facility).
 
      Mississippi Power was required to provide notice of its intent to either renew the lease or purchase the Facility by July 22, 2011. On July 20, 2011, Mississippi Power provided notice to the lessor of its intent to purchase the Facility. Mississippi Power’s right to purchase the Facility was approved by the Mississippi PSC in its order dated January 7, 1998, as amended on February 19, 1999, which granted Mississippi Power a Certificate of Public Convenience and Necessity for the Facility.
 
      On October 20, 2011, Mississippi Power purchased the Facility for approximately $85 million in cash and the assumption of debt obligations of the lessor related to the Facility, which mature in 2021, have a face value of $270 million and a fixed stated interest rate of 7.13%, and are secured by the Facility and certain personal property, accounts, and proceeds related thereto. Accounting rules require that the Facility be reflected on Southern Company’s and Mississippi Power’s financial statements at the time of the purchase at the fair value of the consideration rendered. Based on interest rates as of October 20, 2011, the fair value of the debt assumed was approximately $346 million. Accordingly, the Facility will be reflected in Southern Company’s and Mississippi Power’s financial statements at approximately $431 million. Mississippi Power intends to maintain its traditional capital structure by adding equity to support the additional debt.
 
      In connection with the purchase of the Facility, Mississippi Power filed a request on July 25, 2011 for an accounting order from the Mississippi PSC. If the accounting order is approved as requested, the retail revenue requirements under the purchase option will be comparable to those otherwise required under operating lease accounting treatment for the extended lease term, with any differences deferred as a regulatory asset over the 10-year period ending October 2021. At the conclusion of the proposed deferral period in 2021, the unamortized deferral balance will be amortized into rates over the remaining life of the Facility. On November 2, 2011, Mississippi Power filed a request with the FERC seeking authorization to defer as a regulatory asset, for the 10-year period ending October 2021, the difference between the revenue requirement under the purchase of the Facility (assuming a remaining 30-year life) and the revenue requirement assuming the continuation of the operating lease regulatory treatment. At the conclusion of the proposed deferral period in 2021, the accumulated deferred balance will be amortized into wholesale rates over the remaining life of the Facility. The ultimate outcome of these matters cannot be determined at this time.

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  (C)   FAIR VALUE MEASUREMENTS
 
      As of September 30, 2011, assets and liabilities measured at fair value on a recurring basis during the period, together with the level of the fair value hierarchy in which they fall, were as follows:
                                 
    Fair Value Measurements Using    
    Quoted Prices            
    in Active   Significant        
    Markets for   Other   Significant    
    Identical   Observable   Unobservable    
    Assets   Inputs   Inputs    
As of September 30, 2011:   (Level 1)   (Level 2)   (Level 3)   Total
    (in millions)
Southern Company
                               
Assets:
                               
Energy-related derivatives
  $     $ 3     $     $ 3  
Interest rate derivatives
          16             16  
Foreign currency derivatives
          3             3  
Nuclear decommissioning trusts(a)
    487       671             1,158  
Cash equivalents and restricted cash
    1,286                   1,286  
Other investments
    4       53       13       70  
 
Total
  $ 1,777     $ 746     $ 13     $ 2,536  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 154     $     $ 154  
Interest rate derivatives
          27             27  
Foreign currency derivatives
          2             2  
 
Total
  $     $ 183     $     $ 183  
 
 
                               
Alabama Power
                               
Assets:
                               
Nuclear decommissioning trusts:(b)
                               
Domestic equity
  $ 228     $ 53     $     $ 281  
Foreign equity
    23       23             46  
U.S. Treasury and government agency securities
    16       9             25  
Corporate bonds
          112             112  
Mortgage and asset backed securities
          29             29  
Other
          8             8  
Cash equivalents and restricted cash
    445                   445  
 
Total
  $ 712     $ 234     $     $ 946  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 29     $     $ 29  
Interest rate derivatives
          12             12  
 
Total
  $     $ 41     $     $ 41  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
                                 
    Fair Value Measurements Using    
    Quoted Prices            
    in Active   Significant        
    Markets for   Other   Significant    
    Identical   Observable   Unobservable    
    Assets   Inputs   Inputs    
As of September 30, 2011:   (Level 1)   (Level 2)   (Level 3)   Total
    (in millions)
Georgia Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 2     $     $ 2  
Nuclear decommissioning trusts:(c)
                               
Domestic equity
    125       1             126  
Foreign equity
    95                   95  
U.S. Treasury and government agency securities
          68             68  
Municipal bonds
          57             57  
Corporate bonds
          153             153  
Mortgage and asset backed securities
          96             96  
Other
          62             62  
Cash equivalents
    45                   45  
 
Total
  $ 265     $ 439     $     $ 704  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 68     $     $ 68  
 
 
                               
Gulf Power
                               
Assets:
                               
Cash equivalents
  $ 14     $     $     $ 14  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 17     $     $ 17  
 
 
                               
Mississippi Power
                               
Assets:
                               
Foreign currency derivatives
  $     $ 3     $     $ 3  
Cash equivalents
    85                   85  
 
Total
  $ 85     $ 3     $     $ 88  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 35     $     $ 35  
Interest rate derivatives
          15             15  
Foreign currency derivatives
          2             2  
 
Total
  $     $ 52     $     $ 52  
 
 
                               
Southern Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 1     $     $ 1  
Cash equivalents
    196                   196  
 
Total
  $ 196     $ 1     $     $ 197  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 5     $     $ 5  
 
     
(a)   For additional detail, see the nuclear decommissioning trusts sections for Alabama Power and Georgia Power in this table.
(b)   Excludes receivables related to investment income, pending investment sales, and payables related to pending investment purchases.
(c)   Includes the investment securities pledged to creditors and cash collateral received, and excludes receivables related to investment income, pending investment sales, and payables related to pending investment purchases and the securities lending program. As of September 30, 2011, approximately $53 million of the fair market value of Georgia Power’s nuclear decommissioning trust funds’ securities were on loan and pledged to creditors under the funds’ managers’ securities lending program.

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      Valuation Methodologies
 
      The energy-related derivatives primarily consist of over-the-counter financial products for natural gas and physical power products including, from time to time, basis swaps. These are standard products used within the energy industry and are valued using the market approach. The inputs used are mainly from observable market sources, such as forward natural gas prices, power prices, implied volatility, and LIBOR interest rates. Interest rate and foreign currency derivatives are also standard over-the-counter financial products valued using the market approach. Inputs for interest rate derivatives include LIBOR interest rates, interest rate futures contracts, and occasionally implied volatility of interest rate options. Inputs for foreign currency derivatives are from observable market sources. See Note (H) herein for additional information on how these derivatives are used.
 
      “Other investments” include investments in funds that are valued using the market approach and income approach. Securities that are traded in the open market are valued at the closing price on their principal exchange as of the measurement date. Discounts are applied in accordance with GAAP when certain trading restrictions exist. For investments that are not traded in the open market, the price paid will have been determined based on market factors including comparable multiples and the expectations regarding cash flows and business plan execution. As the investments mature or if market conditions change materially, further analysis of the fair market value of the investment is performed. This analysis is typically based on a metric, such as multiple of earnings, revenues, earnings before interest and income taxes, or earnings adjusted for certain cash changes. These multiples are based on comparable multiples for publicly traded companies or other relevant prior transactions.
 
      For fair value measurements of investments within the nuclear decommissioning trusts and rabbi trust funds, specifically the fixed income assets using significant other observable inputs and unobservable inputs, the primary valuation technique used is the market approach. External pricing vendors are designated for each of the asset classes in the nuclear decommissioning trusts and rabbi trust funds with each security discriminately assigned a primary pricing source, based on similar characteristics.
 
      A market price secured from the primary source vendor is then used in the valuation of the assets within the trusts. As a general approach, market pricing vendors gather market data (including indices and market research reports) and integrate relative credit information, observed market movements, and sector news into proprietary pricing models, pricing systems, and mathematical tools. Dealer quotes and other market information including live trading levels and pricing analysts’ judgment are also obtained when available.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      As of September 30, 2011, the fair value measurements of investments calculated at net asset value per share (or its equivalent), as well as the nature and risks of those investments, were as follows:
                                 
    Fair     Unfunded     Redemption     Redemption  
As of September 30, 2011:   Value     Commitments     Frequency     Notice Period  
    (in millions)  
Southern Company
                               
Nuclear decommissioning trusts:
                               
Corporate bonds — commingled funds
  $ 37     None   Daily     1 to 3 days  
Other — commingled funds
    62     None   Daily   Not applicable
Trust owned life insurance
    82     None   Daily   15 days
Cash equivalents and restricted cash:
                               
Money market funds
    1,286     None   Daily   Not applicable
 
         
 
Alabama Power
                               
Nuclear decommissioning trusts:
                               
Trust owned life insurance
  $ 82     None   Daily   15 days
Cash equivalents and restricted cash:
                               
Money market funds
    445     None   Daily   Not applicable
 
         
 
Georgia Power
                               
Nuclear decommissioning trusts:
                               
Corporate bonds — commingled funds
  $ 37     None   Daily     1 to 3 days  
Other — commingled funds
    62     None   Daily   Not applicable
Cash equivalents:
                               
Money market funds
    45     None   Daily   Not applicable
 
         
 
Gulf Power
                               
Cash equivalents:
                               
Money market funds
  $ 14     None   Daily   Not applicable
 
         
 
Mississippi Power
                               
Cash equivalents:
                               
Money market funds
  $ 85     None   Daily   Not applicable
 
         
 
Southern Power
                               
Cash equivalents:
                               
Money market funds
  $ 196     None   Daily   Not applicable
 
         

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      The NRC requires licensees of commercial nuclear power reactors to establish a plan for providing reasonable assurance of funds for future decommissioning. Alabama Power and Georgia Power have external trust funds (the Funds) to comply with the NRC’s regulations. The commingled funds in the nuclear decommissioning trusts are invested primarily in a diversified portfolio of high grade money market instruments, including, but not limited to, commercial paper, notes, repurchase agreements, and other evidences of indebtedness with a maturity not exceeding 13 months from the date of purchase. The commingled funds will, however, maintain a dollar-weighted average portfolio maturity of 90 days or less. The assets may be longer term investment grade fixed income obligations having a maximum five-year final maturity with put features or floating rates with a reset rate date of 13 months or less. The primary objective for the commingled funds is a high level of current income consistent with stability of principal and liquidity. The corporate bonds — commingled funds represent the investment of cash collateral received under the Funds’ managers’ securities lending program that can only be sold upon the return of the loaned securities. See Note 1 to the financial statements of Southern Company and Georgia Power under “Nuclear Decommissioning” in Item 8 of the Form 10-K for additional information.
 
      Alabama Power’s nuclear decommissioning trust includes investments in Trust-Owned Life Insurance (TOLI). The taxable nuclear decommissioning trust invests in the TOLI in order to minimize the impact of taxes on the portfolio and can draw on the value of the TOLI through death proceeds, loans against the cash surrender value, and/or the cash surrender value, subject to legal restrictions. The amounts reported in the table above reflect the fair value of investments the insurer has made in relation to the TOLI agreements. The nuclear decommissioning trust does not own the underlying investments, but the fair value of the investments approximates the cash surrender value of the TOLI policies. The investments made by the insurer are in commingled funds. The commingled funds primarily include investments in domestic and international equity securities and predominantly high-quality fixed income securities. These fixed income securities include U.S. Treasury and government agency fixed income securities, non-U.S. government and agency fixed income securities, domestic and foreign corporate fixed income securities, and, to some degree, mortgage and asset backed securities. The passively managed funds seek to replicate the performance of a related index. The actively managed funds seek to exceed the performance of a related index through security analysis and selection.
 
      Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. For the three and nine months ended September 30, 2011, the decrease in fair value of the funds, which includes reinvested interest and dividends, is recorded in the regulatory liability and was $64 million and $32 million, respectively, for Alabama Power, $34 million and $7 million, respectively, for Georgia Power, and $98 million and $39 million, respectively, for Southern Company.
 
      The money market funds are short-term investments of excess funds in various money market mutual funds, which are portfolios of short-term debt securities. The money market funds are regulated by the SEC and typically receive the highest rating from credit rating agencies. Regulatory and rating agency requirements for money market funds include minimum credit ratings and maximum maturities for individual securities and a maximum weighted average portfolio maturity. Redemptions are available on a same day basis up to the full amount of the investment in the money market funds.
 
      Changes in the fair value measurement of the Level 3 items using significant unobservable inputs for Southern Company at September 30, 2011 were as follows:
                 
    Level 3
    Other
    Three Months Ended   Nine Months Ended
    September 30, 2011   September 30, 2011
    (in millions)
Beginning balance
  $ 17     $ 19  
Purchases
          1  
Total gains (losses) — realized/unrealized:
               
Included in earnings
          (5 )
Included in OCI
    (4 )     (2 )
 
Ending balance at September 30, 2011
  $ 13     $ 13  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      At September 30, 2011, other financial instruments for which the carrying amount did not equal fair value were as follows:
                 
    Carrying Amount   Fair Value
    (in millions)
Long-term debt*:
               
Southern Company
  $ 20,532     $ 22,215  
Alabama Power
  $ 6,232     $ 6,910  
Georgia Power
  $ 8,620     $ 9,327  
Gulf Power
  $ 1,235     $ 1,359  
Mississippi Power
  $ 702     $ 739  
Southern Power
  $ 1,599     $ 1,694  
 
*   Includes securities due within one year.
      The fair values were based on closing market prices (Level 1) or closing prices of comparable instruments (Level 2).
(D) STOCKHOLDERS’ EQUITY
      Earnings per Share
 
      For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to awards outstanding under the stock option and performance share plans. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for further information on the stock option and performance share plans. The effects of both stock options and performance share award units were determined using the treasury stock method. Shares used to compute diluted earnings per share were as follows:
                                 
    Three Months   Three Months   Nine Months   Nine Months
    Ended   Ended   Ended   Ended
    September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
    (in millions)
As reported shares
    860       836       854       829  
Effect of options
    8       6       7       4  
 
Diluted shares
    868       842       861       833  
 
      Stock options that were not included in the diluted earnings per share calculation because they were anti-dilutive were 0.4 million and 6.7 million for the three months ended September 30, 2011 and 2010, respectively, and 0.4 million and 13.7 million for the nine months ended September 30, 2011 and 2010, respectively. Assuming an average stock price of $40.14 (the highest exercise price of the anti-dilutive options outstanding in 2011), there would be no effect on stock options for the three and nine months ended September 30, 2011. Assuming an average stock price of $38.01 (the highest exercise price of the anti-dilutive options outstanding in 2010), the effect of options would have increased by 0.4 million and 0.8 million shares for the three and nine months ended September 30, 2010, respectively.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS:(Continued)
      Changes in Stockholders’ Equity
 
      The following table presents year-to-date changes in stockholders’ equity of Southern Company:
                                         
                            Preferred and    
    Number of   Common   Preference   Total 
    Common Shares   Stockholders’   Stock of   Stockholders’
    Issued   Treasury   Equity   Subsidiaries   Equity
    (in thousands)           (in millions)  
Balance at December 31, 2010
    843,814       (474 )   $ 16,202     $ 707     $ 16,909  
Net income after dividends on preferred and preference stock
                1,942             1,942  
Other comprehensive income (loss)
                (11 )           (11 )
Stock issued
    18,634             692             692  
Cash dividends on common stock
                (1,193 )           (1,193 )
Other
          (45 )     1             1  
 
Balance at September 30, 2011
    862,448       (519 )   $ 17,633     $ 707     $ 18,340  
 
 
                                       
Balance at December 31, 2009
    820,152       (505 )   $ 14,878     $ 707     $ 15,585  
Net income after dividends on preferred and preference stock
                1,822             1,822  
Other comprehensive income (loss)
                16             16  
Stock issued
    18,994             650             650  
Cash dividends on common stock
                (1,114 )           (1,114 )
Other
          30       3             3  
 
Balance at September 30, 2010
    839,146       (475 )   $ 16,255     $ 707     $ 16,962  
 
(E) FINANCING
      Bank Credit Arrangements
 
      Bank credit arrangements provide liquidity support to the registrants’ commercial paper borrowings and the traditional operating companies’ variable rate pollution control revenue bonds. See Note 6 to the financial statements of each registrant under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.
 
      The following table outlines the credit arrangements by company as of September 30, 2011:
                                                                         
                    Executable                           Expires Within
                    Term-Loans   Expires   One Year(a)
                                                    2013           No
                    One   Two                   And   Term   Term
Company   Total   Unused   Year   Years   2011   2012   Beyond   Out   Out
    (in millions)
Southern Company
  $ 1,000     $ 1,000     $     $     $     $     $ 1,000     $     $  
Alabama Power
    1,296       1,296       111             60       121       1,115       111       71  
Georgia Power
    1,750       1,745                               1,750              
Gulf Power
    240       240       55             20       55       165       55       20  
Mississippi Power
    296       296       25       41       16       115       165       66       65  
Southern Power
    500       500                               500              
Other
    50       50       25                   25       25       25        
 
Total
  $ 5,132     $ 5,127     $ 216     $ 41     $ 96     $ 316     $ 4,720     $ 257     $ 156  
 
     
  (a)   Reflects facilities expiring on or before September 30, 2012.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      In May 2011, Southern Company, Alabama Power, Georgia Power, and Southern Power each replaced their multi-year credit arrangements that were to expire in 2012 with new five-year credit arrangements that will expire in 2016. These new credit arrangements provide for borrowings by Southern Company, Alabama Power, Georgia Power, and Southern Power of up to $1.0 billion, $800 million, $1.5 billion, and $500 million, respectively.
 
      Subsequent to September 30, 2011, Alabama Power replaced a $20 million credit arrangement expiring in 2011 with a $30 million credit arrangement which will expire in 2014.
 
      These credit arrangements generally have covenants that limit debt levels to 65% of total capitalization, as defined in the agreements. For purposes of these definitions, debt excludes long-term debt payable to affiliated trusts and other hybrid securities.
    (F) RETIREMENT BENEFITS
      Southern Company has a defined benefit, trusteed, pension plan covering substantially all employees. The qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No contributions to the qualified pension plan are expected for the year ending December 31, 2011. Southern Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, Southern Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional operating companies fund related other postretirement trusts to the extent required by their respective regulatory commissions.
 
      See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power in Item 8 of the Form 10-K for additional information.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Components of the net periodic benefit costs for the three and nine months ended September 30, 2011 and 2010 were as follows:
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
Pension Plans   Company   Power   Power   Power   Power
    (in millions)
Three Months Ended September 30, 2011
                                       
Service cost
  $ 46     $ 11     $ 14     $ 2     $ 3  
Interest cost
    97       24       36       4       4  
Expected return on plan assets
    (152 )     (44 )     (59 )     (6 )     (7 )
Net amortization
    14       3       5             1  
 
Net cost (income)
  $ 5     $ (6 )   $ (4 )   $     $ 1  
 
 
                                       
Nine Months Ended September 30, 2011
                                       
Service cost
  $ 138     $ 32     $ 43     $ 6     $ 7  
Interest cost
    292       72       108       13       13  
Expected return on plan assets
    (456 )     (130 )     (176 )     (20 )     (19 )
Net amortization
    40       10       14       1       2  
 
Net cost (income)
  $ 14     $ (16 )   $ (11 )   $     $ 3  
 
 
                                       
Three Months Ended September 30, 2010
                                       
Service cost
  $ 43     $ 10     $ 13     $ 2     $ 2  
Interest cost
    98       25       36       5       4  
Expected return on plan assets
    (138 )     (42 )     (54 )     (6 )     (5 )
Net amortization
    11       3       4             1  
 
Net cost (income)
  $ 14     $ (4 )   $ (1 )   $ 1     $ 2  
 
 
                                       
Nine Months Ended September 30, 2010
                                       
Service cost
  $ 129     $ 31     $ 40     $ 6     $ 6  
Interest cost
    293       73       109       13       13  
Expected return on plan assets
    (413 )     (126 )     (164 )     (18 )     (16 )
Net amortization
    32       8       11       1       2  
 
Net cost (income)
  $ 41     $ (14 )   $ (4 )   $ 2     $ 5  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
Postretirement Benefits   Company   Power   Power   Power   Power
    (in millions)
Three Months Ended September 30, 2011
                                       
Service cost
  $ 6     $ 1     $ 1     $     $  
Interest cost
    23       6       11       1       1  
Expected return on plan assets
    (16 )     (6 )     (8 )            
Net amortization
    5       2       3              
 
Net cost (income)
  $ 18     $ 3     $ 7     $ 1     $ 1  
 
 
                                       
Nine Months Ended September 30, 2011
                                       
Service cost
  $ 16     $ 4     $ 5     $ 1     $ 1  
Interest cost
    69       18       31       3       3  
Expected return on plan assets
    (48 )     (19 )     (23 )     (1 )     (1 )
Net amortization
    15       5       8              
 
Net cost (income)
  $ 52     $ 8     $ 21     $ 3     $ 3  
 
 
                                       
Three Months Ended September 30, 2010
                                       
Service cost
  $ 6     $ 2     $ 3     $     $  
Interest cost
    25       7       11       1       2  
Expected return on plan assets
    (15 )     (7 )     (8 )            
Net amortization
    5       2       2              
 
Net cost (income)
  $ 21     $ 4     $ 8     $ 1     $ 2  
 
 
                                       
Nine Months Ended September 30, 2010
                                       
Service cost
  $ 19     $ 5     $ 7     $ 1     $ 1  
Interest cost
    75       20       33       3       4  
Expected return on plan assets
    (47 )     (19 )     (23 )     (1 )     (1 )
Net amortization
    15       5       8              
 
Net cost (income)
  $ 62     $ 11     $ 25     $ 3     $ 4  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (G)   EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS
 
      Effective Tax Rate
 
      See Note 5 to the financial statements of each registrant in Item 8 of the Form 10-K for information on the effective income tax rate.
 
      Southern Company
 
      Southern Company’s effective tax rate was 36.1% for the nine months ended September 30, 2011, compared to 33.1% for the corresponding period in 2010. Southern Company’s effective tax rate is lower than the statutory rate primarily due to its employee stock dividend deduction and non-taxable AFUDC equity. Southern Company’s effective tax rate increased primarily due to no production activities deduction and no Georgia state income tax credits for activity through Georgia ports available to Southern Company for the nine months ended September 30, 2011, compared to the production activities deduction and additional Georgia state income tax credits recognized as of September 30, 2010.
 
      Alabama Power
 
      Alabama Power’s effective tax rate was 39.0% for the nine months ended September 30, 2011, compared to 36.9% for the corresponding period in 2010. The increase was due to an increase in Alabama state income taxes as a result of a decrease in the state income tax deduction for federal income taxes paid.
 
      Georgia Power
 
      Georgia Power’s effective tax rate was 35.8% for the nine months ended September 30, 2011, compared to 32.3% for the corresponding period in 2010. The increase was primarily due to the inclusion of Plant Vogtle Units 3 and 4 construction work in progress in rate base effective January 1, 2011, which reduced the amount of AFUDC equity capitalized, and the impact of Georgia state income tax credits discussed above under “Southern Company.”
 
      Gulf Power
 
      Gulf Power’s effective tax rate was 36.6% for the nine months ended September 30, 2011, compared to 36.4% for the corresponding period in 2010. The increase was not material.
 
      Mississippi Power
 
      Mississippi Power’s effective tax rate was 32.6% for the nine months ended September 30, 2011, compared to 36.5% for the corresponding period in 2010. The decrease was primarily due to an increase in non-taxable AFUDC equity related to the Kemper IGCC construction.
 
      Southern Power
 
      Southern Power’s effective tax rate was 35.9% for the nine months ended September 30, 2011, compared to 30.1% for the corresponding period in 2010. The increase was primarily due to the impact of a decrease in investment tax credits and no production activities deduction, combined with higher net income.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Unrecognized Tax Benefits
 
      Changes during 2011 for unrecognized tax benefits were as follows:
                                                 
    Southern   Alabama   Georgia   Gulf   Mississippi   Southern
    Company   Power   Power   Power   Power   Power
 
                    (in millions)                
Unrecognized tax benefits as of December 31, 2010
  $ 296     $ 43     $ 237     $ 4     $ 4     $ 2  
Tax positions from current periods
    43       2       7       1       1       1  
Tax positions from prior periods
    (108 )     (18 )     (87 )     (2 )     (1 )      
Reductions due to settlements
    (112 )           (112 )                  
Reductions due to expired statute of limitations
                                   
 
Balance as of September 30, 2011
  $ 119     $ 27     $ 45     $ 3     $ 4     $ 3  
 
      The tax positions from current periods relate primarily to the MC Asset Recovery litigation settlement refund claim, the tax accounting method change for repairs – generation assets, and the production activities deduction. See Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Effective Tax Rate” for additional information. The tax positions decrease from prior periods and reductions due to settlements relate to the settlement of the Georgia state tax credit litigation on June 10, 2011. See Note (B) under “Income Tax Matters — Georgia State Income Tax Credits” herein for additional information. In addition, the tax positions decrease from prior periods also relates to the uncertain tax position for the tax accounting method change for repairs – transmission and distribution assets. See “Tax Method of Accounting for Repairs” below for additional information.
 
      The impact on the effective tax rate, if recognized, is as follows:
                                 
                            As of
                            December 31,
    As of September 30, 2011   2010
    Georgia   Other   Southern   Southern
    Power   Registrants   Company   Company
 
            (in millions)        
Tax positions impacting the effective tax rate
  $ 28     $ 12     $ 76     $ 217  
Tax positions not impacting the effective tax rate
    17       25       43       79  
 
Balance of unrecognized tax benefits
  $ 45     $ 37     $ 119     $ 296  
 
      The tax positions impacting the effective tax rate primarily relate to the production activities deduction tax position and the MC Asset Recovery litigation settlement refund claim. See Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Effective Tax Rate” for additional information. The tax positions not impacting the effective tax rate relate to the timing difference associated with the tax accounting method change for repairs - generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact.
 
      Accrued interest for unrecognized tax benefits was as follows:
                         
    Georgia   Other   Southern
    Power   Registrants   Company
 
    (in millions)        
Interest accrued as of December 31, 2010
  $ 27     $ 2     $ 29  
Interest reclassified due to settlements
    (24 )           (24 )
Interest accrued during the period
    2       1       4  
 
Balance as of September 30, 2011
  $ 5     $ 3     $ 9  
 
      All of the registrants classify interest on tax uncertainties as interest expense. The interest reclassified due to settlements is primarily associated with the Georgia state tax credit litigation settled on June 10, 2011. See Note (B) under “Income Tax Matters — Georgia State Income Tax Credits” herein for additional information.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      None of the registrants accrued any penalties on uncertain tax positions.
      It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of Southern Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs - generation assets, as well as the conclusion or settlement of federal and state audits, could also impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.
 
      Tax Method of Accounting for Repairs
      Southern Company submitted a tax accounting method change for repair costs associated with its subsidiaries’ generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $141 million for Alabama Power, $133 million for Georgia Power, $8 million for Gulf Power, $5 million for Mississippi Power, $6 million for Southern Power, and $297 million for Southern Company on a consolidated basis. On August 19, 2011, the IRS issued Revenue Procedure 2011-43, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs – transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. Due to uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs – generation assets. The ultimate outcome of this matter cannot be determined at this time.
  (H)   DERIVATIVES
 
      Southern Company, the traditional operating companies, and Southern Power are exposed to market risks, primarily commodity price risk, interest rate risk, and occasionally foreign currency risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company’s policies in areas such as counterparty exposure and risk management practices. Each company’s policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities.
      Energy-Related Derivatives
      The traditional operating companies and Southern Power enter into energy-related derivatives to hedge exposures to electricity, gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional operating companies have limited exposure to market volatility in commodity fuel prices and prices of electricity. Each of the traditional operating companies manages fuel-hedging programs, implemented per the guidelines of their respective state PSCs, through the use of financial derivative contracts which is expected to continue to mitigate price volatility. Southern Power has limited exposure to market volatility in commodity fuel prices and prices of electricity because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.
      To mitigate residual risks relative to movements in electricity prices, the electric utilities may enter into physical fixed-price or heat rate contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the electric utilities may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Energy-related derivative contracts are accounted for in one of three methods:
    Regulatory Hedges — Energy-related derivative contracts which are designated as regulatory hedges relate primarily to the traditional operating companies’ fuel hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.
 
    Cash Flow Hedges — Gains and losses on energy-related derivatives designated as cash flow hedges, which are mainly used to hedge anticipated purchases and sales, are initially deferred in OCI before being recognized in the statements of income in the same period as the hedged transactions are reflected in earnings.
 
    Not Designated — Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
      Some energy-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the electric industry. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual price of the underlying goods being delivered.
      At September 30, 2011, the net volume of energy-related derivative contracts for power and natural gas positions for the registrants, together with the longest hedge date over which the respective entity is hedging its exposure to the variability in future cash flows for forecasted transactions and the longest date for derivatives not designated as hedges, were as follows:
                                                 
    Power   Gas
            Longest   Longest   Net   Longest   Longest
    Net Sold   Hedge   Non-Hedge   Purchased   Hedge   Non-Hedge
    MWHs   Date   Date   mmBtu   Date   Date
 
    (in millions)                   (in millions)                
Southern Company
    0.3             2011       160       2015       2015  
Alabama Power
                      31       2015        
Georgia Power
                      66       2015        
Gulf Power
                      26       2015        
Mississippi Power
                      31       2015        
Southern Power
    0.3             2011       7       2012       2015  
 
      In addition to the volumes discussed in the above table, the traditional operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature was 2.95 million mmBtu for Southern Company, 2.69 million mmBtu for Georgia Power, and was immaterial for the other registrants.
      For cash flow hedges, the amounts expected to be reclassified from OCI to revenue and fuel expense for the next 12-month period ending September 30, 2012 are immaterial for all registrants.
 
      Interest Rate Derivatives
      Southern Company and certain subsidiaries also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the effective portion of the derivatives’ fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings with any ineffectiveness recorded directly to earnings. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives’ fair value gains or losses and hedged items’ fair value gains or losses are both recorded directly to earnings, providing an offset with any difference representing ineffectiveness.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
At September 30, 2011, the following interest rate derivatives were outstanding:
                                         
    Notional   Interest Rate   Interest Rate   Hedge
Maturity
  Fair Value
Gain (Loss)
    Amount   Received   Paid   Date   September 30, 2011
 
    (in millions)               (in millions)
Cash flow hedges of existing debt                        
Southern Company
  $ 300     3-month LIBOR + 0.40% spread     1.24 %*   October 2011   $  
Cash flow hedges of forecasted debt                        
Alabama Power
    300     3-month LIBOR     2.90 %*   December 2022     (12 )
Mississippi Power
    150     3-month LIBOR     2.37 %*   September 2021     (4 )
Mississippi Power
    150     3-month LIBOR     1.25 %*   September 2016      
Mississippi Power
    300     3-month LIBOR     2.66 %*   April 2022     (11 )
 
                                       
Fair value hedges of existing debt                        
 
                  3-month LIBOR +                
Southern Company
    350       4.15 %   1.96%* spread   May 2014     16  
                                 
Total
  $ 1,550                             $ (11 )
                                 
  *   Weighted Average
      The following table reflects the estimated pre-tax gains (losses) that will be reclassified from OCI to interest expense for the next 12-month period ending September 30, 2012, together with the longest date that total deferred gains and losses are expected to be amortized into earnings.
                 
    Estimated Gain (Loss)to    
    be Reclassified for the   Total Deferred
    12 Months Ending   Gains (Losses)
Registrant   September 30, 2012   Amortized Through
 
    (in millions)        
Southern Company
  $ (16 )     2037  
Alabama Power
          2035  
Georgia Power
    (3 )     2037  
Gulf Power
    (1 )     2020  
Mississippi Power
    (1 )     2022  
Southern Power
    (11 )     2016  
 
      Foreign Currency Derivatives
      Southern Company and certain subsidiaries may enter into foreign currency derivatives to hedge exposure to changes in foreign currency exchange rates arising from purchases of equipment denominated in a currency other than U.S. dollars. Derivatives related to a firm commitment in a foreign currency transaction are accounted for as fair value hedges where the derivatives’ fair value gains or losses and the hedged items’ fair value gains or losses are both recorded directly to earnings. Derivatives related to a forecasted transaction are accounted for as a cash flow hedge where the effective portion of the derivatives’ fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings. Any ineffectiveness is recorded directly to earnings. The derivatives employed as hedging instruments are structured to minimize ineffectiveness.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      At September 30, 2011, the following foreign currency derivatives were outstanding:
                                 
                            Fair Value Gain
    Notional   Average   Hedge   (Loss)
    Amount   Forward Rate   Maturity Date   September 30, 2011
 
    (in millions)                   (in millions)
 
Fair value hedges of firm commitments                
Mississippi Power
  EUR28.3   1.297 Dollars per Euro   Various through March 2014   $ 1  
      Derivative Financial Statement Presentation and Amounts
      At September 30, 2011, the fair value of energy-related derivatives, interest rate derivatives, and foreign currency derivatives was reflected in the balance sheets as follows:
                                                 
Asset Derivatives at September 30, 2011
    Fair Value
Derivative Category and Balance Sheet   Southern   Alabama   Georgia   Gulf Power   Mississippi   Southern
Location   Company   Power   Power   Power   Power   Power
 
    (in millions)                                        
Derivatives designated as hedging instruments for regulatory purposes
                                               
Energy-related derivatives:
                                               
Other current assets
  $ 1     $     $ 1     $     $          
Other deferred charges and assets
    1             1                      
 
Total derivatives designated as hedging instruments for regulatory purposes
  $ 2     $     $ 2     $     $       N/A  
 
 
                                               
Derivatives designated as hedging instruments in cash flow and fair value hedges
                                               
Interest rate derivatives:
                                               
Other current assets
  $ 6     $     $     $     $     $  
Other deferred charges and assets
    10                                
Foreign currency derivatives:
                                               
Other current assets
    3                         3        
 
Total derivatives designated as hedging instruments in cash flow and fair value hedges
  $ 19     $     $     $     $ 3     $  
 
 
                                               
Derivatives not designated as hedging instruments
                                               
Energy-related derivatives:
                                               
Other current assets*
  $ 1     $     $     $     $     $  
Assets from risk management activities
                                  1  
 
Total derivatives not designated as hedging instruments
  $ 1     $     $     $     $     $ 1  
 
 
                                               
Total asset derivatives
  $ 22     $     $ 2     $     $ 3     $ 1  
 
  *   Southern Company includes “Assets from risk management activities” in “Other current assets” where applicable.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
                                                 
Liability Derivatives at September 30, 2011
    Fair Value
Derivative Category and Balance Sheet   Southern   Alabama   Georgia   Gulf   Mississippi   Southern
Location   Company   Power   Power   Power   Power   Power
 
    (in millions)
Derivatives designated as hedging instruments for regulatory purposes
                                               
Energy-related derivatives:
                                               
Liabilities from risk management activities
  $ 114     $ 24     $ 53     $ 10     $ 27          
Other deferred credits and liabilities
    35       5       15       7       8          
 
Total derivatives designated as hedging instruments for regulatory purposes
  $ 149     $ 29     $ 68     $ 17     $ 35       N/A  
   
Derivatives designated as hedging instruments in cash flow and fair value hedges
                                               
Interest rate derivatives:
                                               
Liabilities from risk management activities
  $ 15     $     $     $     $ 15     $  
Other deferred credits and liabilities
    12       12                          
Foreign currency derivatives:
                                               
Liabilities from risk management activities
    2                         2        
 
Total derivatives designated as hedging instruments in cash flow and fair value hedges
  $ 29     $ 12     $     $     $ 17     $  
   
Derivatives not designated as hedging instruments
                                               
Energy-related derivatives:
                                               
Liabilities from risk management activities
  $ 5     $     $     $     $     $ 5  
   
Total liability derivatives
  $ 183     $ 41     $ 68     $ 17     $ 52     $ 5  
 
      All derivative instruments are measured at fair value. See Note (C) herein for additional information.
      At September 30, 2011, the pre-tax effect of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred on the balance sheet was as follows:
                                         
Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet
Derivative Category and Balance Sheet   Southern   Alabama   Georgia   Gulf   Mississippi
Location   Company   Power   Power   Power   Power
 
    (in millions)
Energy-related derivatives:
                                       
Other regulatory assets, current
  $ (114 )   $ (24 )   $ (53 )   $ (10 )   $ (27 )
Other regulatory assets, deferred
    (35 )     (5 )     (15 )     (7 )     (8 )
Other regulatory liabilities, current
    1                          
Other current liabilities*
                1              
Other regulatory liabilities, deferred
    1                          
Other deferred credits and liabilities**
                1              
 
Total energy-related derivative gains (losses)
  $ (147 )   $ (29 )   $ (66 )   $ (17 )   $ (35 )
 
  *   Georgia Power includes “Other regulatory liabilities, current” in “Other current liabilities.”
 
  **   Georgia Power includes “Other regulatory liabilities, deferred” in “Other deferred credits and liabilities.”
      For the three months and nine months ended September 30, 2011, the pre-tax gains from interest rate derivatives designated as fair value hedging instruments on Southern Company’s statements of income were $5 million and $7 million, respectively. For the three months and nine months ended September 30, 2010, the pre-tax gains from interest rate derivatives designated as fair value hedging instruments on Southern Company’s statements of income were $9 million and $17 million, respectively. These amounts were offset with changes in the fair value of the hedged debt.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      For the three months and nine months ended September 30, 2011, the pre-tax (losses) from foreign currency derivatives designated as fair value hedging instruments on Southern Company’s and Mississippi Power’s statements of income were $(3) million and $(2) million, respectively. For each of the three months and nine months ended September 30, 2010, the pre-tax gains from foreign currency derivatives designated as fair value hedging instruments on Southern Company’s and Mississippi Power’s statements of income were $5 million. These amounts were offset with changes in the fair value of the purchase commitment related to equipment purchases; therefore, there is no impact on Southern Company’s or Mississippi Power’s statements of income.
      For the three months ended September 30, 2011 and September 30, 2010, the pre-tax effect of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:
                                            
    Gain (Loss)        
    Recognized in OCI     Gain (Loss) Reclassified from Accumulated OCI into  
Derivatives in Cash Flow   on Derivative     Income (Effective Portion)  
Hedging Relationships   (Effective Portion)     Statements of Income Location   Amount  
    2011     2010             2011     2010  
  (in millions)         (in millions)  
Southern Company
                                       
Energy-related derivatives
  $     $ 3     Fuel   $     $  
Interest rate derivatives
    (27 )     (1 )   Interest expense, net of amounts capitalized     (5 )     (7 )
 
Total
  $ (27 )   $ 2             $ (5 )   $ (7 )
 
Alabama Power
                                       
Interest rate derivatives
  $ (12 )   $     Interest expense, net of amounts capitalized   $     $  
 
Georgia Power
                                       
Interest rate derivatives
  $     $     Interest expense, net of amounts capitalized   $ (1 )   $ (3 )
 
Gulf Power
                                       
Interest rate derivatives
  $     $     Interest expense, net of amounts capitalized   $     $  
 
Mississippi Power
                                       
Interest rate derivatives
  $ (15 )   $     Interest expense, net of amounts capitalized   $     $  
 
Southern Power
                                       
Energy-related derivatives
  $     $ 3     Fuel   $     $  
Interest rate derivatives
              Interest expense, net of amounts capitalized     (3 )     (3 )
 
Total
  $     $ 3             $ (3 )   $ (3 )
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      For the nine months ended September 30, 2011 and September 30, 2010, the pre-tax effect of energy-related derivatives and interest rate derivatives designated as cash flow hedging instruments on the statements of income were as follows:
                                                
    Gain (Loss)        
    Recognized in OCI     Gain (Loss) Reclassified from Accumulated OCI into  
Derivatives in Cash Flow   on Derivative     Income (Effective Portion)  
Hedging Relationships   (Effective Portion)     Statements of Income Location   Amount  
    2011   2010           2011   2010
    (in millions)         (in millions)  
Southern Company
                                       
Energy-related derivatives
  $ 1     $ 4     Fuel   $     $  
Interest rate derivatives
    (23 )     (3 )   Interest expense, net of amounts capitalized     (10 )     (24 )
 
Total
  $ (22 )   $ 1             $ (10 )   $ (24 )
 
Alabama Power
                                       
Interest rate derivatives
  $ (8 )   $     Interest expense, net of amounts capitalized   $ 3     $ (1 )
 
Georgia Power
                                       
Interest rate derivatives
  $     $     Interest expense, net of amounts capitalized   $ (3 )   $ (13 )
 
Gulf Power
                                       
Interest rate derivatives
  $     $ (1 )   Interest expense, net of amounts capitalized   $ (1 )   $ (1 )
 
Mississippi Power
                                       
Interest rate derivatives
  $ (15 )   $     Interest expense, net of amounts capitalized   $     $  
 
Southern Power
                                       
Energy-related derivatives
  $ 1     $ 4     Fuel   $     $  
Interest rate derivatives
              Interest expense, net of amounts capitalized     (8 )     (8 )
 
Total
  $ 1     $ 4             $ (8 )   $ (8 )
 
There was no material ineffectiveness recorded in earnings for any registrant for any period presented.
For the three months and nine months ended September 30, 2011 and September 30, 2010, the pre-tax effects of energy-related derivatives not designated as hedging instruments on the statements of income were immaterial for all registrants.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Contingent Features
The registrants do not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. At September 30, 2011, the fair value of derivative liabilities with contingent features, by registrant, was as follows:
                                                 
    Southern   Alabama   Georgia   Gulf   Mississippi   Southern
    Company   Power   Power   Power   Power   Power
                    (in millions)                        
Derivative liabilities
  $ 32     $ 7     $ 16     $ 2     $ 5     $ 2  
At September 30, 2011, the registrants had no collateral posted with their derivative counterparties; however, because of the joint and several liability features underlying these derivatives, the maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, is $32 million for each registrant.
Currently, each of the registrants has investment grade credit ratings from the major rating agencies with respect to debt, preferred securities, preferred stock, and/or preference stock. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. For the traditional operating companies and Southern Power, included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (I)   SEGMENT AND RELATED INFORMATION
 
      Southern Company’s reportable business segments are the sale of electricity primarily in the Southeast by the four traditional operating companies and Southern Power. Revenues from sales by Southern Power to the traditional operating companies were $85 million and $239 million for the three and nine months ended September 30, 2011, respectively, and $93 million and $288 million for the three and nine months ended September 30, 2010, respectively. The “All Other” column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in telecommunications and leveraged lease projects. All other intersegment revenues are not material. Financial data for business segments and products and services was as follows:
                                                         
    Electric Utilities            
    Traditional                                
    Operating   Southern                   All        
    Companies   Power   Eliminations   Total   Other   Eliminations   Consolidated
    (in millions)  
Three Months Ended September 30, 2011:
                                                       
Operating revenues
  $ 5,145     $ 363     $ (97 )   $ 5,411     $ 38     $ (21 )   $ 5,428  
Segment net income (loss)*
    862       56             918             (2 )     916  
Nine Months Ended September 30, 2011:
                                                       
Operating revenues
  $ 13,246     $ 950     $ (288 )   $ 13,908     $ 114     $ (61 )   $ 13,961  
Segment net income (loss)*
    1,805       138             1,943       2       (3 )     1,942  
Total assets at
September 30, 2011
  $ 52,949     $ 3,757     $ (160 )   $ 56,546     $ 1,431     $ (634 )   $ 57,343  
 
 
                                                       
Three Months Ended September 30, 2010:
                                                       
Operating revenues
  $ 5,066     $ 357     $ (124 )   $ 5,299     $ 40     $ (19 )   $ 5,320  
Segment net income (loss)*
    756       63             819       (1 )     (1 )     817  
Nine Months Ended September 30, 2010:
                                                       
Operating revenues
  $ 13,127     $ 862     $ (367 )   $ 13,622     $ 122     $ (59 )   $ 13,685  
Segment net income (loss)*
    1,713       109             1,822       2       (2 )     1,822  
Total assets at
December 31, 2010
  $ 51,144     $ 3,438     $ (128 )   $ 54,454     $ 1,178     $ (600 )   $ 55,032  
 
* After dividends on preferred and preference stock of subsidiaries
Products and Services
                                 
    Electric Utilities’ Revenues
Period   Retail   Wholesale   Other   Total
            (in millions)        
Three Months Ended September 30, 2011
  $ 4,693     $ 557     $ 161     $ 5,411  
Three Months Ended September 30, 2010
    4,573       566       160       5,299  
Nine Months Ended September 30, 2011
  $ 11,931     $ 1,513     $ 464     $ 13,908  
Nine Months Ended September 30, 2010
    11,603       1,581       438       13,622  
 

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
      See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which the registrants are involved.
Item 1A. Risk Factors.
      See RISK FACTORS in Item 1A of the Form 10-K for a discussion of the risk factors of the registrants. There have been no material changes to these risk factors from those previously disclosed in the Form 10-K.

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Item 6.   Exhibits.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession
     
Mississippi Power
 
   
(e)1
- Assignment and Assumption Agreement dated as of October 20, 2011, between Mississippi Power and Juniper Capital L.P. (Designated in Form 8-K dated October 20, 2011, File No. 001-11229, as Exhibit 2.1.)
 
   
(e)2
- Bond Assumption and Exchange Agreement, dated as of October 20, 2011, by and among Mississippi Business Finance Corporation, Mississippi Power, and the bondholders parties thereto. (Designated in Form 8-K dated October 20, 2011, File No. 001-11229, as Exhibit 2.2.)
(4) Instruments Describing Rights of Security Holders, Including Indentures
     
Southern Company
 
   
(a)1
- Seventh Supplemental Indenture to Senior Notes Indenture dated as of August 23, 2011, providing for the issuance of the Series 2011A 1.95% Senior Notes due September 1, 2016. (Designated in Form 8-K dated August 16, 2011, File No. 001-03526, as Exhibit 4.2.)
 
   
Mississippi Power
 
   
(e)1
- Eleventh Supplemental Indenture to Senior Note Indenture dated as of October 19, 2011, providing for the issuance of the Series 2011A 2.35% Senior Notes due October 15, 2016. (Designated in Form 8-K dated October 11, 2011, File No. 001-11229, as Exhibit 4.2(a).)
 
   
(e)2
- Twelfth Supplemental Indenture to Senior Note Indenture dated as of October 19, 2011, providing for the issuance of the Series 2011B 4.75% Senior Notes due October 15, 2041. (Designated in Form 8-K dated October 11, 2011, File No. 001-11229, as Exhibit 4.2(b).)
 
   
Southern Power
 
   
(f)1
- Fourth Supplemental Indenture to Senior Note Indenture dated as of September 22, 2011, providing for the issuance of the Series 2011A 5.150% Senior Notes due September 15, 2041. (Designated in Form 8-K dated September 14, 2011, File No. 333-98553, as Exhibit 4.4.)
(12) Computation of Ratio of Earnings to Fixed Charges
     
Southern Company
 
   
(a)1
  Computation of ratio of earnings to fixed charges.
 
   
(a)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).
 
   
Alabama Power
 
   
(b)1
  Computation of ratio of earnings to fixed charges.
 
   
(b)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).

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Georgia Power
(c)1
  Computation of ratio of earnings to fixed charges.
 
   
(c)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).
 
   
Gulf Power
 
   
(d)1
  Computation of ratio of earnings to fixed charges.
 
   
(d)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).
 
   
Mississippi Power
 
   
(e)1
  Computation of ratio of earnings to fixed charges.
 
   
(e)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).
 
   
Southern Power
 
   
(f)1
  Computation of ratio of earnings to fixed charges.
 
   
(f)2
  Computation of ratio of earnings to fixed charges plus preferred dividend requirements (pre-income tax basis).
(24) Power of Attorney and Resolutions
     
Southern Company
 
   
(a)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 1-3526 as Exhibit 24(a) and incorporated herein by reference.)
 
   
Alabama Power
 
   
(b)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 1-3164 as Exhibit 24(b) and incorporated herein by reference.)
 
   
Georgia Power
 
   
(c)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 1-6468 as Exhibit 24(c) and incorporated herein by reference.)
 
   
Gulf Power
 
   
(d)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 001-31737 as Exhibit 24(d)1 and incorporated herein by reference.)
 
   
(d)2
- Power of Attorney Mark A. Crosswhite. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 001-31737 as Exhibit 24(d)2 and incorporated herein by reference.)

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Mississippi Power
 
   
(e)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.)
 
   
Southern Power
 
   
(f)1
- Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2010, File No. 333-98553 as Exhibit 24(f) and incorporated herein by reference.)
(31) Section 302 Certifications
     
Southern Company
 
   
(a)1
- Certificate of Southern Company’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(a)2
- Certificate of Southern Company’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Alabama Power
 
   
(b)1
- Certificate of Alabama Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(b)2
- Certificate of Alabama Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Georgia Power
 
   
(c)1
- Certificate of Georgia Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(c)2
- Certificate of Georgia Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Gulf Power
 
   
(d)1
- Certificate of Gulf Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(d)2
- Certificate of Gulf Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

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Mississippi Power
 
   
(e)1
- Certificate of Mississippi Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(e)2
- Certificate of Mississippi Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Southern Power
(f)1
- Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(f)2
- Certificate of Southern Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
(32) Section 906 Certifications
     
Southern Company
 
   
(a)
- Certificate of Southern Company’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Alabama Power
 
   
(b)
- Certificate of Alabama Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Georgia Power
 
   
(c)
- Certificate of Georgia Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Gulf Power
(d)
- Certificate of Gulf Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Mississippi Power
 
   
(e)
- Certificate of Mississippi Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Southern Power
 
   
(f)
- Certificate of Southern Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

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(101)       XBRL — Related Documents
INS
      XBRL Instance Document
SCH
      XBRL Taxonomy Extension Schema Document
CAL
      XBRL Taxonomy Calculation Linkbase Document
DEF
      XBRL Definition Linkbase Document
LAB
      XBRL Taxonomy Label Linkbase Document
PRE
      XBRL Taxonomy Presentation Linkbase Document

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THE SOUTHERN COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    THE SOUTHERN COMPANY
 
 
  By   Thomas A. Fanning    
    Chairman, President, and Chief Executive Officer   
    (Principal Executive Officer)   
 
  By   Art P. Beattie    
    Executive Vice President and Chief Financial Officer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen    
    (Melissa K. Caen, Attorney-in-fact)   
 
Date: November 7, 2011                    

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ALABAMA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    ALABAMA POWER COMPANY
 
 
  By   Charles D. McCrary    
    President and Chief Executive Officer   
    (Principal Executive Officer)   
     
  By   Philip C. Raymond    
    Executive Vice President, Chief Financial Officer, and Treasurer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen    
    (Melissa K. Caen, Attorney-in-fact)   
Date: November 7, 2011

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GEORGIA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    GEORGIA POWER COMPANY
 
 
  By   W. Paul Bowers    
    President and Chief Executive Officer   
    (Principal Executive Officer)   
     
  By   Ronnie R. Labrato    
    Executive Vice President, Chief Financial Officer, and Treasurer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen   
    (Melissa K. Caen, Attorney-in-fact)   
Date: November 7, 2011

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GULF POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    GULF POWER COMPANY
 
 
  By   Mark A. Crosswhite    
    President and Chief Executive Officer   
    (Principal Executive Officer)   
     
  By   Richard S. Teel    
    Vice President and Chief Financial Officer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen    
    (Melissa K. Caen, Attorney-in-fact)   
Date: November 7, 2011

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MISSISSIPPI POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    MISSISSIPPI POWER COMPANY
 
 
  By   Edward Day, VI    
    President and Chief Executive Officer   
    (Principal Executive Officer)   
     
  By   Moses H. Feagin    
    Vice President, Chief Financial Officer, and Treasurer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen    
    (Melissa K. Caen, Attorney-in-fact)   
Date: November 7, 2011

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SOUTHERN POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
         
    SOUTHERN POWER COMPANY
 
 
  By   Oscar C. Harper, IV    
    President and Chief Executive Officer   
    (Principal Executive Officer)   
     
  By   Michael W. Southern    
    Senior Vice President, Chief Financial Officer, and Treasurer   
    (Principal Financial Officer)   
     
  By   /s/ Melissa K. Caen    
    (Melissa K. Caen, Attorney-in-fact)   
     
Date: November 7, 2011

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